“At its heart, the corporation is a paradox. How else would you describe institutions authorised by government which every day attack the citizens that government is supposed to protect?”
By Robert C. Hinkley
7 March 2022
Imagine a world with no government where people entirely govern themselves. Everyone treats everyone else as they would want to be treated. Initially, no one uses their freedom to infringe on others.
After a while, it is realized that some peoples’ better nature cannot always to be relied upon. Occasionally, a few will infringe on the rights of others to gain an advantage or some other reason.
A decision is made to form a government to contain this behaviour. The people choose a democracy, the form of government which infringes the least on their freedom.
They know that citizens mainly restrain their impulses to harm the environment, other people, and their communities. They reason they only need laws when that assumption is proven incorrect. When this happens, their elected representatives will pass laws to contain and punish the harmful behaviour.
Now assume a new class of citizen is introduced. These new citizens are really organizations formed to allow people to pool their resources in pursuit of profit. The Industrial Revolution is just taking hold. It needs expensive machinery, mass organization and the capital to fund both. The government passes a new law allowing for the formation and operation of the new organizations, modern corporations.
This seems like a good thing. Corporations are run by people whose goodwill can generally be relied upon. The technology of the time, though revolutionary then, is still very primitive and incapable of doing much harm. No one seems to notice that the law requires corporate managers to act in the best interests of their investors in all circumstances.
Many decades pass. Technology improves. Companies become successful, hire more employees, and get bigger. First millions and later billions are invested.
Then it is discovered (usually through advancement in technology) that an industry is causing severe harm to the environment, its customers, or employees. The citizens’ elected representatives try to pass laws to make it stop. Now what happens?
No one foresaw the extent of the damage when the decision to invest in the business was made. Now, however, huge amounts are invested. The law tells directors that they must protect that investment. The company’s survival instinct takes over.
This story explains where some businesses are today and how they got here. Big corporations are usually willing to be good citizens when it isn’t expensive, but when the cost of protecting the public becomes significant, they look out only for themselves. When proposed legislation would require their company to cease damaging the public interest, the most cost-effective solution is to delay and frustrate the legislative process.
Here, business and democracy run into conflict. The goal of business managers is to protect the company’s investment. The goal of government officials is to protect the public.
For far too long, we’ve merely accepted this conflict as part of life, as if it were created by God, like an earthquake, a hurricane, or a severe drought. We grudgingly accept that there’s nothing that can be done about it. We resign ourselves to the conclusion that most of the time business will be successful in getting our elected officials to listen to them. Business has the money and organization. Our elected officials will do their bidding. Business’s anti-social behaviour will continue.
An Example
A typical example of this pattern is the problem of global warming and climate change caused by, among other things, the emission of greenhouse gases (GHGs) by fossil fuel burning electric power generators. The science is clear, such emissions must be phased out and eventually stopped. Renewable sources of power are available.
However, the biggest emitters don’t want to stop. They have billions invested in the generating stations emitting GHGs. Phasing out those stations would involve writing off that investment. Their strategy, is to keep the debate going for as long as possible, thereby delaying new legislation which would require them to stop burning oil, gas, and coal.
Global conferences are held every two or three years to discuss the problem. Governments pledge to reduce emissions, but thanks to industry interference, they don’t have the political power necessary to pass laws that require it. Nothing gets done. No laws are passed requiring the emitters phase out their operations. As time runs on, the problem only gets worse.
Environmentalists vilify CEOs and big companies, but the recalcitrance of business managers isn’t entirely their fault. They’re bound by law to put the survival of the business ahead of any responsibility to the environment.
It’s time to re-evaluate that law. It doesn’t make sense for government to create and continue to sponsor a class of citizen which has all the rights of citizenship, but none of its obligations.
It may have made sense in the last half of the 19th century when technology was primitive, and companies were small. Back then, a company’s (or even an industry’s) capacity to severely harm the environment or another element of the public interest was non-existent.
In the 1800s a law that encouraged business managers to protect their company in all circumstances had little import. The unrecognized problem was that it lit a very long fuse on a bomb which would explode when companies did gain the capacity to cause severe harm. The essence of that law now stands for the proposition that the financial wellbeing of a few big companies takes priority over the wellbeing of humanity and the planet we live on.
Big GHG emitters have both the capacity to harm and the determination to continue. The capacity they built themselves. Their inclination to continue was implanted in them by laws enacted more than a century ago.
The development of new technology is a natural phenomenon, the product of human beings’ ingenuity. A law establishing the obligations of managers is different. It’s not inevitable. It can be changed when circumstances prove it is necessary.
The emission of GHGs is not the only example of corporate anti-social behaviour that this law protects and encourages. Sometimes that behaviour is the result of developments in technology, sometimes it’s a change in public opinion (e.g., the use of child labour and the operation of sweatshops) regarding what is acceptable. In both cases, democracy must find a solution. It’s much harder to do that when business is doing its best to frustrate and delay.
Starting Over
The heart of the corporation is its mission to act in its own best interest. We’re now learning the hard way that mission has no limits. Not even when the wellbeing of the planet and all that inhabit it are at stake. At its heart, the corporation is a paradox. How else would you describe institutions authorised by government which every day attack the wellbeing of citizens that government is supposed to protect?
This inconsistency hasn’t always been obvious. It’s taken over a century to come to light. Even now very few really understand how bad it is. Many want to treat business as if it is a wayward child--convince it of its wrongdoing and get it to promise to behave better.
Entire industries have grown up trying to get corporations to be more socially responsible. However, they focus on low hanging fruit. They make a living getting companies to behave more responsibly in relatively minor ways where the corporate investment is small.
They spend little effort trying to reform corporate behaviour where the damage most serious and the cost of reform more significant. How successful have they been in halting global warming or stopping the tobacco industry from killing millions of people annually? They know their efforts will fall on deaf ears here.
The Solution
The way to fix any bad law is to amend it. The corporate law isn’t part of nature. It can be changed.
Any change should make it clear that the survival of the planet and those who inhabit it is more important than the survival of the corporation. Corporations were originated to serve the interests of human beings, not the other way around.
Amended law should tell management they also have a duty to protect the public interest from severe harm. This duty co-exists with their duty to act in the best interests of the corporation. When the two duties come into conflict, the duty to the public has priority.
Some say the directors should owe a duty to advance the interests of both shareholders and other stakeholders (e.g., the environment or our communities). They would try to make the corporation an agent of society writ large. This idea is unworkable. No one can serve two masters. Yet, you can serve one while pledging to protect another.
Adding a few words to the duty of directors will achieve the desired result. The duty “to act in the best interests of the company” should be followed by the phrase “BUT NOT AT THE EXPENSE OF:
· The environment,
· Human rights,
· The public health and safety,
· The dignity of employees; and
· The welfare of the communities in which the company operates.”
These words, which I call the Code for Corporate Citizenship, will eliminate the conflict which sometimes arises under current law between business and the welfare of the planet and its inhabitants.
The Code will eliminate any conception that the company is more important than the public interest. It will eliminate the excuse corporate managers now have when their company causes severe damage to the environment, people, and our communities.
Typically, corporate decisions don’t immediately cause severe harm to the public interest. Such harm arises when, over an extended time, companies make many investments in a business which only later is found to be destructive. The Code will change the required response when this occurs. It will require managers to change their business practices (regardless of the expense) rather than lobby legislatures to allow their companies to continue the destruction.
The risk of ending up in this unenviable position will cause boards of directors to become more sensitive to the risks their company’s behaviour poses to the environment and other elements of the public interest. It will encourage them to be more vigilant and to take precautionary steps designed protect the public before the company has significant amounts invested.
By making better citizens out of all companies, the Code will eliminate the paradox which arises when institutions originated by government cause severe harm to the public interest. This will help restore the hope of democracy, that people can protect themselves with laws enacted by their elected representatives.