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  • Robert Hinkley

Why Not?

“Intuitions come first, so anything we can do to cultivate more positive social connections, will alter institutions and thus downstream reasoning and behaviour.”—Jonathan Haidt, The Righteous Mind: Why good People Are Divided by Politics and Religion (2012)

By Robert C. Hinkley

5 September 2022

Liberal democracy works by constraining destructive behaviour. Everything is legal until a new law specifically makes it illegal. When a legal act causes significant damage to the public interest, government relies on two things to maintain order and contain harm. First, conscience or concern for reputation may cause the actor to stop voluntarily. Secondly, a law is passed prohibiting such acts in the future and imposing penalties for those who violate it.

There is at least one place[1] where liberal democracy doesn't work: When an industry has huge amounts invested and it cannot change its behaviour without incurring great cost. In this situation, companies act to protect their investment. They don’t stop on their own. Instead, they lobby to frustrate proposed legislation which would require them to stop. This interference with democracy allows them to continue the destruction.

Company directors are empowered by the corporate law to direct management, employees, and agents. The law says directors “must act in the best interests of the corporation.” This directive tells directors their first thought should always be to protect their company’s interests even when the company is causing severe harm to the environment or another element of the public interest.

Put yourself in the shoes of a director. You've worked very hard your entire life. You've always been a good citizen. You’ve built a reputation for trustworthiness. Now you’re a director of a large company that has just been discovered to be severely harming the public interest.

At the next board meeting, the unpleasant discovery is discussed. The company's CEO advises that management has a plan to deal with the matter. A public relations (and lobbying) firm has been hired. The adverse publicity will be managed. Attempts to pass new legislation to keep the company from continuing its business will be confronted, delayed, and frustrated.

The company issues a series of press releases. At first, it denies the problem exists and questions the science. Later, it will “play the economy card” and threaten the loss of thousands of local jobs if government comes down too hard.

You, as an individual, think the destruction of the public interest should be stopped, but no one in management seems to agree. Silently, you question the morality of the company’s position, but you realize the company is not doing anything illegal. Legal counsel advises that closing a profitable division can’t be in the company’s best interests.

The unqualified duty to pursue the financial interests of shareholders negates each director’s concern for the environment, human beings, and our communities. You and your fellow directors reconcile yourselves to management’s position, say nothing, and continue to serve. You take comfort that your competitors, which face the same problem, are following a similar strategy.

No harm comes to your reputation because the world expects nothing more. Everyone expects you and your fellow directors will, despite the damage, do what’s in the best interest of the company. That, after all, is what the law requires. It’s the way business is expected to behave.

Why Not?

Doing business as a corporation shouldn’t result in the wilful continuation of destruction of the environment or other elements of the public interest. Corporations wouldn’t exist if government didn’t provide for their organization and give them a license to operate. Government’s job is to protect the public interest, not license entities which destroy it.

In the past two decades, business has recognized that protecting the environment, customers, employees, and our communities is important.[2] This can be seen in the tremendous growth in the socially responsible investing, corporate social responsibility, and ESG movements.

These movements have been only partially successful. The reason they sometimes fall short is that they are all voluntary. Directors ignore them when it will cost the company large amounts of money.

Robert F. Kennedy once said, “There are those that look at things the way they are and ask why? I dream of things that never were, and ask why not?”

When it is found their company is causing severe harm, why not require directors to pause their company’s pursuit of self-interest? People, individually, have the capacity to do this. Corporate directors currently do not.

This is a problem for democracy. The law shouldn’t impose a duty on good citizens (directors) that makes them behave like poor citizens. When it does, our most powerful citizens (corporations) become our worst. They set a bad example for everyone.

I’ve proposed an amendment to the legal duty of directors which I call the Code for Corporate Citizenship (Code). It would change corporate behaviour in a profound way. The Code would impose obligations on directors to make them always safeguard the public interest from severe harm (even when the cost is great).

Adding the Code to the law would be incredibly simple. Company directors would continue to be required to serve the best interests of their company. The only change would be to ensure that their service did not come at the expense of severe damage to the environment, human rights, the public health and safety, the dignity of employees or the welfare of the communities in which the company operates. When such damage is discovered, directors would be required to take steps to ensure it stops.

The vast majority of companies do not cause severe harm. The directors of these companies are already in compliance with the Code. For them, the impact of the Code will be merely to encourage them to manage a risk that could cost the company dearly in the future. Keeping a watchful eye on the company’s impact on the public interest should prevent that contingency from arising.

For the few companies which are already causing severe harm, their directors would be required to adopt a plan to make the destruction stop. A one-time transition period (say five years from the date of the change) could make it easier for companies to switch.

It's said that the best time to plant a tree was 20 years ago, but the second-best time is today. Corporations should have been changed at least 20 years ago.

Imagine where we would be if the Code had been enacted then and, from that point forward, directors had a duty to stop the emission of greenhouse gases? How many more people would still be alive if tobacco companies hadn’t killed millions of people each year over this period?

From then on, the expectation would have been that business should be a good citizen and protect the environment, people, and our communities. If and when directors became aware their companies were destroying the public interest, they would have been expected to make it stop—not lobby for the next two decades to allow it to continue.

In his book, The Righteous Mind, Jonathan Haidt of the NYU Stern School of Business, argues that that anything which can be done to encourage more positive social connection, will alter institutions and their downstream reasoning and behaviour. The Code does just that. It will improve how business thinks about the public interest and what the public thinks about business. It will strengthen the connection between both.

Making this small change to the corporate law 20 years ago would have made all companies better citizens. It would have stopped encouraging directors to continue abusing the public interest and required them to stop it.

Failing that, the best time to enact the Code and make the change is now.

[1] Another may be terrorism where terrorists have no fear of legal punishment because they expect to die violating the law. [2] In August 2019, the American Business Roundtable went so far to reject its previous position on the purpose of the corporation (which was simply to serve shareholders). One hundred and eighty-two CEOs of America’s largest companies signed on to the proposition that corporations should consider not just the interests of shareholders but others as well, including the environment, employees, and customers.

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