By Robert C. Hinkley
26 February 2023
Why is democratic government unable to protect us from a variety of severe harms inflicted by big corporations? It may surprise you to know that part of the answer lies in the way corporations are structured—by government.
The corporate law requires directors, the people responsible for managing corporations, to act in the best interests of their company. This dedicates corporations to the pursuit of self-interest. It applies in all circumstances, even when the company is causing severe harm. [1]
The corporate social responsibility and ESG movements have shown that companies are often willing to stop their abusive behaviour when the cost is small, or the public relations effect is beneficial. However, these movements are ineffective when the cost is substantial. Rather than incur the expense of changing their behaviour, companies lobby government to allow them to continue.
For example, some continue to emit large quantities of greenhouse gases. Tobacco companies continue to mass manufacture and market products which kill their customers at a rate of over 8 million people a year. Employers continue to fail to pay their workers a living wage and interfere with their efforts to unionize. Social media companies continue to use business models which generate destructive conflict in our communities.
In addition to being highly destructive, these behaviours all strike at the heart of democracy. Democratic governments are formed to contain damage to the public interest, including damage caused by business corporations. When government doesn’t do its job, the public interest can be destroyed, and people begin to lose hope.
Two things allow democratic government to contain severe harm. First, they rely on the self-control (i.e., conscience or good citizenship) of the governed. Failing that, the people’s elected representatives pass laws which prohibit destructive behaviour.
The American founding fathers designed the first modern liberal democracy nearly a hundred years before the modern corporation was conceived. They could not have foreseen the day coming when big companies would engage in highly destructive behaviour and the government would be unable to pass laws to make them stop.
Flash forward to the second half of the 19th century when the Industrial Revolution was beginning to take hold. Businessmen wanted more flexibility in running their companies. State legislatures designed the modern corporation.
The corporate law they adopted didn’t include any balancing provision (i.e, a conscience) to safeguard the environment or the interests of others. This meant that the destructive behaviour of big companies could only be stopped by legislation. When passing legislation fails, the public interest continues to be harmed by institutions which government designed and licensed to operate. This should never occur.
Experience has taught, that imposing restraints on corporate behaviour by enacting new laws is not always possible. If government is going to allow large commercial institutions to be created, it must design them in a way that constrains their ability to inflict severe harm. This limitation must apply from the day they are organized, not have to rely on government imposing it later.
The Code for Corporate Citizenship (Code) will solve this problem by constraining the power of the corporation. In effect, it says that no company formed under the corporate law may severely harm the public interest (even though the behaviour is not otherwise prohibited by law). If a company is discovered causing severe harm, the Code requires its directors to make it stop.
The way it works is that the Code amends current law requiring directors to “serve their company’s best interest” by adding the following phrase:
“but not at the expense of severe harm to the environment, human rights, the public health and safety, the dignity of employees or the wellbeing of the communities in which the company operates.”
The Code will not just encourage company managers to choose to protect the public interest as the corporate social responsibility and ESG movements do now. It will legally require them to protect it from severe harm in all circumstances—even when the cost to the company is substantial. The Code will also eliminate the justification directors now have under existing law to perpetuate destructive behaviour.
While aimed mainly at big companies which possess the power to harm the public interest severely, the Code will have a beneficial effect on all corporate behaviour by changing the way directors think. Directors will begin to understand that business which destroys the public interest is no longer acceptable and that they must proceed with caution when making decisions which could result in severe harm.
To manage the risk that the company may be forced to close operations which are discovered to be causing severe harm, directors, managers, and other personnel will pay more attention to the company’s behaviour. Managers will be expected to look out for potential harm and help find ways to mitigate it rather than help cover it up (as they are prone to do now). This will result in companies addressing the potential risk before they have huge amounts invested in facilities, technology, or products. In short, the corporation will begin to behave as if it has a conscience.
The Code will also change the way investors think. They will require the companies in which they invest to be aware of and take steps to mitigate the risk imposed by the Code. Those companies which fail to mitigate will be deprived of capital. Further, the Code should spur investment in new ideas designed to eliminate anti-social corporate behaviour. In effect, it will make all corporate investments socially responsible.
Conclusion
Government grants corporations the licenses they need to exist. It also establishes the rules pursuant to which they operate. The design encapsulated in existing law has resulted in the most powerful in our society becoming its worst citizens (able and willing to destroy the public interest with impunity).
This sets a bad example for all citizens and should no longer be tolerated.
The Code will put a stop to the most destructive corporate behaviour and encourage all corporate directors to be more socially responsible. It is a good first step towards stopping all corporate abuse of the public interest and once again allowing democracy to be effective.
[1] Robert C. Hinkley is a retired corporate lawyer and former partner is one of America’s most respected law firms, Skadden, Arps, Slate, Meagher & Flom. He is a graduate of Fordham University (BS Finance) and Fordham Law School (JD). He is the originator of the Code for Corporate Citizenship and been writing about improving corporate behaviour for nearly 25 years. His book, Time to Change Corporations: Closing the Citizenship Gap was published in 2011 and is available at https://www.amazon.com/Time-Change-Corporations-Robert-Hinkley-ebook/dp/B006T0C1HK/ref=sr_1_1?crid=22Q6HEN2MJXTG&keywords=robert+C.+Hinkley&qid=1677401902&sprefix=robert+c.+hinkle%2Caps%2C306&sr=8-1.