By Robert C. Hinkley
4 February 2024
"We have in our midst large institutions which can’t be kept from destroying the public interest. The law needs to be changed to eliminate that possibility."
Under existing law corporate directors everywhere are obligated to “act in the best interests of their company.” There’s an ongoing debate about what this means and whether it should be changed.
Some say it gives directors the leeway to spend money protecting the environment or other elements of the public interest even when other laws don’t require it. Others say it doesn’t give them that flexibility or, if it does, it shouldn’t. The second group want changes to the law to make it more difficult for directors to voluntarily protect the public interest. This would be a mistake. Indeed, in certain circumstances, directors should be required to do more (rather than less) to protect the public interest than they do now.
Corporations are citizens, not just in a legal sense as some courts have found, but in a practical sense. They are participants in our society. What they do can adversely affect the environment, people, and our communities.
Corporate behaviour involves the actions of hundreds sometimes thousands of employees working together. Big companies use modern technology and sometimes are backed by billions of capital. Together, this gives a few the ability to cause severe harm. The most pressing example of it today is global warming resulting from the emission of greenhouse gases (GHGs).
The debate over directors’ duties has to do with corporations’ inclination to harm. Most companies don’t initially set out to damage the environment or others. Only after advances are made in technology is the damage discovered. When that happens, the law regarding directors’ duties dictates how they should respond. Should they make the company curtail or eliminate the harm or should they allow it to continue?
Existing law reduces that question to what’s in the company’s best interests. How much is it going to cost the company to reduce the harm? If the company isn’t breaking the law and it’s going to cost a lot to remedy the problem, the duty of directors encourages them to find a way to avoid the cost. Often, the best way to do this is to lobby legislatures to keep them from enacting new laws which would require their company to stop the damage.
We’ve learned by now that this strategy is usually successful. Big companies use their rights as citizens to avoid the basic obligation of citizenship (not to severely harm the environment or others). One example is companies which lobby to be able to continue emitting significant quantities of GHGs. Another is the tobacco industry lobbying to frustrate the passage of new health laws restricting the distribution of their carcinogenic products. We’re starting to see social media companies engaging in lobbying for similar reasons.
This is a huge problem for mankind. We have in our midst large institutions which can’t be kept from destroying the public interest. The law needs to be changed to eliminate that possibility.
Existing law already tells directors to make money. Directors understand that. They know their continuing tenure as directors depends upon it. We don’t need to change the law to stop them from voluntarily protecting the environment and the public interest when they see fit. The law should encourage citizenship, not discourage it. This is doubly so when the citizens we’re talking about are the ones with the capacity to do the most harm.
Directors need to be told there are times when their duties to the company must take a back seat to their duties to the public. This sounds like a radical change, but it really isn’t. It can be limited to only stopping instances where big companies are inflicting severe harm. This will limit its application to only a small number of companies that are doing the most damage. The change can be accomplished by simply adding a few words to the duty that directors “act in the best interests of the corporation.” Those words are:
“but not at the expense of severe damage 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.”
It’s a simple change, but one which should be effective. I call it the Code for Corporate Citizenship. See: www.codeforcorporatecitizenship.com.