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Re-designing the Corporation: Giving it a Conscience

Updated: Nov 6






By Robert C. Hinkley

2 October 2022


“If government is going to allow large commercial institutions to be created, it must design those institutions in a way that contains their ability to inflict severe harm on the environment or other elements of the public interest.”


My recent posts have focussed on how the Code for Corporate Citizenship (Code) would help alleviate the climate crisis. Today, I want to discuss why government is unable to protect humanity from a variety of severe harms inflicted by big corporations. In addition to addressing corporate harm to the environment, the Code addresses harms to human rights, the public health and safety, the dignity of employees, and the wellbeing of our communities.


The corporate law dedicates corporations to the pursuit of self-interest. It accomplishes this by requiring company directors to act in the interests of their company even when the company is discovered to be causing severe harm.


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, companies lobby government to allow them to continue.


They continue to emit large quantities of greenhouse gases. Tobacco companies continue to manufacture and market products which kill their customers at a rate of over 8 million 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.


Rendering Democracy Ineffective


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 caused by private actors (i.e., individuals and organizations). When they are unable to do so, people begin to lose hope.


Two things allow democracies to contain severe harm. Initially, 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 the 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 make the destruction stop.


Flash forward to the second half of the 19th century when the Industrial Revolution was beginning to take hold. Businessmen wanted the ability to raise capital without exposing their investors to lawsuits brought against the companies in which they invested. State legislatures came up with the modern corporation.


The corporate law they adopted dedicated companies to the unqualified pursuit of self-interest by imposing an obligation to pursue this goal on company directors. The new laws didn’t include any provision requiring directors to safeguard the environment or the interests of others.


If the legislators had thought about it, they should have realized that this made corporations less governable than people. Without a conscience or self-control, severe harm generated by big companies can only be stopped by legislation.


When passing legislation fails, the public interest gets harmed by institutions which government designed. This should never occur. Government should never participate in the creation of institutions capable of subverting the public interest. If it is going to allow large commercial institutions to be created, it must design those institutions in a way that contains their ability to inflict severe harm on the environment or other elements of the public interest.


Implanting a Conscience


The Code solves this problem by containing the power of the corporation to engage in severely harmful behaviour. 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.”


In one sense, the Code gives corporations a conscience. First, it demands they protect the public interest thereby making their companies better citizens. Secondly, it eliminates the justification directors now have under existing law to perpetuate their company’s destructive behaviour.


On the other hand, the Code goes further than merely giving companies a conscience. Conscience implies the exercise of free will to sacrifice one’s own interests for the benefit of others. The Code will do more than give company managers the ability to choose (when it suits them) to protect the public interest. It will require them to protect it from severe harm in all circumstances—even when the cost to the company is substantial.


While aimed mainly at big companies with the most power to harm the public interest severely, the Code imposes a risk on all companies. That risk is the substantial cost the company would incur if it were forced to change its business methods to avoid causing severe harm. These potential costs will discourage all companies from taking shortcuts which result in severe harm.


This risk should change the way corporate directors think. They 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 this risk, directors will force company personnel to pay more attention to their company’s effects on the public interest. Employees will be expected to identify the 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.


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 eventually be deprived of capital. Further, the Code should spur investment in new ideas designed to eliminate the harm companies are already inflicting (e.g., the emission of greenhouse gases).


Finally, the Code will change the way all people think about business and government. No longer will the prevailing mindset be that there is nothing more important than the economy or that the environment, human rights, the public health and safety, the dignity of employees, or the welfare of our communities should be sacrificed to protect it.


The Code makes it clear that there are some things which business must not severely harm. Environmental and other social activists will understand this. Employees will understand it. Instead of having to get laws passed after their interests have been violated, each will be empowered to speak up early to protect their interests before the harm becomes severe.


Conclusion


Government allows companies to exist and operate. It also establishes the rules pursuant to which they operate. Those rules should not encourage abuse of the public interest by requiring directors to pursue their company’s self-interest in all circumstances. This design has resulted in the most powerful citizens in our society becoming its worst citizens (able and willing to destroy the public interest with impunity).


Climate change provides an example of why preserving the status quo is no longer an option. Businesses destroying the public interest can no longer be tolerated. Nor should it be. Amending the corporate law to include the Code will enable mankind to move on to a better way of conducting commerce and a better way of living.


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