Time to Change the Corporation
Updated: Jan 13, 2022
By Robert C. Hinkley*
12 January 2022
I think I might scream. After talking about corporate reform for twenty plus years, most reformers are still hung up on an idea that won’t work. When are we going to stop hoping big companies become more socially responsible and do something to make them stop killing people and destroying the environment?
The conventional wisdom is that the problem with corporations is that they’re all about making money for their owners. Reformers call this “shareholder primacy.” They rationalize the way to eliminate corporate anti-social behaviour is to allow directors, the people who run corporations, the flexibility to consider the environment, employees, communities, and other constituencies (sometimes referred to as stakeholders), as well as shareholders.
There are at least two flaws in this analysis. First, shareholders provide the capital in capitalism. There’s nothing wrong with companies putting their interests first. Problems only arise when doing so harms the environment or others. Secondly, the environment, employees and the communities in which companies operate are not stakeholders. These constituencies aren’t looking to earn a return. They just don’t want to be hurt. It isn’t the job of directors to advance their interests, but it should be the duty of directors to not harm them.
Rather than advancing corporate reform, attacking shareholder primacy has stymied it. The problem isn’t who corporations serve. It’s how they do it.
Every day we dawdle trying to make stakeholder theory work is another day closer to climate Armageddon, another day when American employees are treated with little respect, another day of third world sweatshops, another day when more than 20,000 people die because of corporate manufactured and distributed tobacco.
I was a lone wolf more than 20 years ago when I first started writing about corporate reform. Now, everyone seems to be on board for improving corporate behaviour. The question is how.
Back then, there weren’t more than a handful of mutual funds marketing socially responsible investing. Today, this sector claims to have more than $30 trillion invested.
Back then, the job of directors, as enunciated by the American Business Roundtable, was simply to make money for shareholders. In 2019, the Roundtable changed its mind to require consideration for other stakeholders as well as shareholders.
Yet, little has been done to stop corporate abuse of the environment, human rights, the public health and safety, the dignity of employees (especially in the United States and the Third World), or the communities in which companies operate. It’s been mostly talk and very little action.
The reason for this is that the companies that do serious harm to the public interest have too much invested in the way they currently do business (at the expense of the public interest) to voluntarily change their behaviour.
There is another alternative to attacking shareholder primacy or promoting stakeholder theory. That alternative is to leave shareholder primacy in place but ensure that corporations never severely harm the public interest. Don’t change to whom the benefits of capitalism flow but ensure that those benefits are not earned at the expense of people’s lives or the destruction of the environment or our community.
Statutorily, reformers who want to change shareholder primacy suggest that we change the corporate law to give directors explicit permission to recognize the rights of other stakeholders. I am suggesting something very different. We should require corporations, from the day they are organized, to not kill people or ruin our planet or communities. That’s not too much to ask.
Remarkably, this result can be achieved by amending the corporate law duty of directors with just 28 words. I call these words, the Code for Corporate Citizenship (Code).
Instead of giving directors permission to recognize other stakeholders in the company’s pursuit of profit, the Code requires companies to respect the environment, employees, customers, and our communities.
King Midas thought he wanted everything he touched to turn to gold. To his regret, he found that this came with some adverse side effects.
We’ve now started to see that dedicating the corporation to the pursuit of its own self-interest has a similar problem. The unbridled pursuit of corporate profits has resulted in adverse side effects which are detrimental to human life and planet Earth.
These side effects are no longer desirable or acceptable. It’s time we stopped talking about corporate anti-social behaviour and started changing the law to make it stop.
Robert C. Hinkley is a corporate attorney, the originator of the Code, and the author of Time to Change Corporations: Closing the Citizenship Gap(available on Amazon.com). For more on the Code and how it should be enforced, see https://www.codeforcorporatecitizenship.com/post/enforcing-the-code-for-corporate-citizenship.