How to civilize the corporation
by Jonathan Rowe
Dollars and Sense magazine, July / August 1998
If a council of wise elders were to recommend a design for
the basic business organization of this age, the current form
of corporation would not likely be their choice.
Today's version of the corporation evolved about 150 years
ago, at a time when space seemed vast and earth's resources even
vaster. The economic task was simple: cover the continent, exploit
its resources, build a muscular industrial machine equal to those
of Europe. It was simply to grow. Today the task is more complex.
The habitat can no longer absorb all the effluents of our striving-nor,
for that matter, can we. The noxious side effects of production
often loom larger than the supposed benefits; the factory that
employs hundreds may befoul the water that is used by millions.
The corporation is not responsible for all this harm, of course.
But it is the central engine of the economy for better or worse.
It wields the most resources, cuts the widest swath. If the economy
is to meet not just its age-old obligations to workers but its
newer challenge of treading more lightly upon the earth, a remade
corporation will have to play a central role.
As it stands, the corporation is not designed to deal with
the negative dimensions of its activities, the way a person can.
Like the 19th century economic assumptions it embodies, it has
little capacity to think beyond the boundaries of its own balance
sheet. The large "publicly traded" corporation-those
with shares of ownership traded on the stock exchanges-is especially
captive to its form. A CEO fails to maximize monetary return and
Wall Street analysts breathe fire. Shareholders can even sue if
the company doesn't fulfill its legally enshrined duty to gain
for them the greatest possible return.
Markets and corporations are whatever we choose to make them.
The corporation does not exist in nature; unlike real persons
it has no existence independent of the government that creates
it. And it is past time for the corporation to grow up. It is
a little like seeing the appetite of a 13-year-old in a body pushing
forty-19th century assumptions bumping up against a crowded world
on the threshold of the 21st. The corporation needs a broader
concept of the bottom line, and more ability to think about things
The strange part is that's pretty much where the corporation
started-a broader bottom line. The early corporations of Europe
were not businesses but literally embodiments of social stability
and cohesion-monasteries and universities, boroughs and guilds.
They reconciled individual behavior with larger social ends. Even
the early business corporations were defined largely by a public
purpose (by the lights of the era). Only in the last century did
this connection unravel.
To piece it together again, we need to understand that the
original business corporations in the United States grew out of
a bargain. Individual responsibility is a bedrock principle of
common law. Owners were once personally responsible for the activities
of the business, including the employees who toiled on their behalf
Your employee fouled a neighbor's well, the neighbor could sue
you. That principle endured for centuries, but it broke down as
business ventures grew in scale. When the British Crown sought
to explore the New World, for example, few would put up capital
if they could be personally on the line if something went wrong-a
shipwreck, say. In today's terms, it would be like getting sued
for the Valdez oil spill because you owned a hundred shares of
To resolve this impasse, the Crown established the principle
of limited liability for investor-owners. This new privilege could
not be dispensed willy-nilly. It went only to companies chartered
specifically to carry out a mission of state, such as the trading
companies which returned large revenues to the Crown. This was
the concept of the corporation which took root in the New Land.
The trading companies had come to embody all that American
colonists detested about British rule, and their suspicions regarding
legal agglomerations of all kinds. So the colonists kept the corporation
on a very tight leash. The colonial (and later state) legislatures
granted corporate charters one by one, to enterprises that served
a clearly public purpose, such as operating a toll road or a ferry
service. They loaded the charters with provisions to ensure that
the public interest was served. There were restrictions on how
large the corporation could become and even how long it could
During the nineteenth century this bargain unraveled. The
burgeoning enterprise of the era, the rise of factories and railroads,
and the national market the latter made possible, were simply
too much for the old restraints. First the states enacted "free
incorporation laws" which enabled anyone to form a corporation
to do just about anything they wanted. Historians have hailed
this as part of "Jacksonian Democracy," a blow for the
common folk against special privilege. There was that element;
the bestowal of charters had become a bastion of cronyism and
political deals. But the free incorporation laws led directly
to the huge industrial monopolies of the end of the century, and
scrapped the premise of the corporate arrangement. The corporation
kept its exemption from common law principles of responsibility,
but shed the inconvenient obligation to serve the public in return.
Even so, there were lingering echoes of the old bargain. For
example, many stases still imposed size limits; as late as 1890,
New York State permitted corporations to be no larger than $5
million in capital. (It was to evade such restrictions that John
D. Rockefeller put together the web of secret agreements that
became known as the Standard Oil Trust.)
But then a governor of New Jersey had a supply-side inspiration:
Lure enough corporations with weak, permissive laws and you could
collect enough revenue in incorporation fees to cut taxes substantially
for individuals. That set off a race to the bottom, in which the
states competed to enact the most permissive laws and thus attract
the most corporations. The eventual champ was Delaware, where
many of the nation's largest corporations exist today as files
in a lawyer's office in the state capital of Wilmington. The relationship
between the corporation and the states had turned upside down.
Once the creature of the states, the corporation was now the demanding
taskmaster which played them off against one another.
The Supreme Court contributed to this shift when in l886 it
declared, with no explanation, that the Fourteenth Amendment applied
to corporations. These legal "persons" now had all the
Constitutional protections that real people had; an amendment
intended to guarantee the rights of the most vulnerable in the
land was turned into a bill of rights for the most powerful. This
decision would shape permanently the legal context for regulation
and the nature of politics itself One of the Constitutional rights
now extended to corporations was freedom of speech. As things
now stand, business lobbies can buy all the time and space they
want to tell the public that global warming is not a problem.
Real people who lack that kind of money don't get any time or
space at all.
Eventually, the corporation could do whatever it wanted, grow
as big as it wanted; it could even live forever. In the case of
railroads, the first mega-corporations, they could take the vast
portions of the public (originally native American) domain-bestowed
on them by legislatures to help support rail service-and use these
gifts for their own gain instead. At the same time the corporation
shed most of the corresponding obligations that were built into
its organic structure. Instead of a creature of society, it became
the dominant institution in it besides the government (and some
would say including the government).
The result today is that the corporation is an anomaly. It
developed in a way that the seminal thinkers about democracy and
the economy could not have foreseen. When Adam Smith wrote The
Wealth of Nations ( 1776), for example, the modern corporation
did not exist. The corporation of his experience was a government
franchise along the lines of the East India Company, a form of
business he did not consider promising. In one of his less prescient
passages, Smith wrote that the corporation would never amount
to much in the international marketplace; it was too cumbersome
and bureaucratic, too lacking in the "dexterity and judgment"
of individual entrepreneurs who assuredly would run circles around
Thus it was possible for Smith to envision an economy of individual
shopkeepers and entrepreneurs whose atomistic strivings would
keep one another in check-and whose social affinities as members
of a community would tend to keep their enterprises on a tether
of community norms. Similarly with the Founding Fathers: The home-grown
corporations within their ken were local franchises that ran bridges
and the like. They were a state and local issue. Matters seemed
well in hand and it did not occur to most of the authors of the
Constitution to include the corporation within the scheme of checks
and balances by which they sought to restrain agglomerations of
power in the body politic.
This helps explain why the corporation has come to so dominate
the nation's politics and market. With the original bargain broken,
there is nothing in our institutional genetic coding to reconcile
the corporation with the larger whole. The odd part is that pollution
occupies a similar place in our economics. At the end of the 18th
century, when Adam Smith wrote, the earth still seemed immense.
It took six weeks to get a wagon from Smith's Edinburgh to London
and back. That there might be limits to the ability of the habitat
to absorb the effluents of human activity could seem remote. Remote
too was the possibility that commercial transactions might one
day have a greater effect upon the millions who aren't party to
them than upon those who are, thus upsetting the central calculus
of market economics.
Today economists try to deal with these environmental ripple
effects under the rubric of "externalities," a revealing
term. The toxic emissions from a smelter are not "external"
to the lives of the neighbors who must suffer them; they are so
only to the preconceptions of economists who regard the smelter
and its customers as the core reality, and everything besides
that as "external." The large literature on "externalities"
suggests that a central fact of modern economic life-degradation
of the habitat-fits awkwardly with a central assumption of the
discipline: that the center of the economic universe is still
an isolated transaction between a buyer and a seller.
There s a need for a new economics that integrates the toxic
impacts of economic activity into the core reality, and which
seeks to promote human well-being instead of just money-making
transactions. At the same time, there's a need to integrate the
most important part of the economy-the corporation-into economic
and political reality. In environmental terms, the corporation
is going to have to take more responsibility for its Impacts upon
others, just as we expect real people to do.
The most prominent corner in the environmental debate today
is called "market based" environmentalism. The basic
idea is to establish financial carrots and sticks instead of ordinary
regulation. Instead of mandating a smokestack scrubber, say, charge
the company heavily for what it emits and let it find the most
efficient way to clean up its discharges.
There's a tendentious quality to a lot of market-based environmentalism,
especially when its advocates dismiss ordinary regulation as "command
and control," with the Stalinist overtones of that phrase.
The fact is, there will always be a need for plain old regulation;
you can't let some people poison others just because they pay
a market price to do so.
Still, the market-basers have a point. If you can build environmental
and other concerns into a company's ordinary financial metabolism-make
them the warp and woof of the market calculus-then the need for
external regulation will be less. Very likely you will achieve
your goals in a more elegant and efficient way. The discussion
usually starts with taxes, which is where public policy affects
prices most directly. Tax petroleum and other fuels more heavily,
and you set up a dynamic in which companies strive to conserve
in order to save money. Less pollution should be the result. The
revenues could be used to cut the payroll tax on work. It is insane
to tax work heavily but the use of natural resources hardly at
But the tax system is just one way to use the infrastructure
of the market to prod corporations towards a broader bottom line.
The information system is another. Even in orthodox market theory,
buyers are supposed to have complete information about the implications
of their buying so they can make choices that express their values.
Today such information is in short supply. We have little idea
where the stuff we buy comes from, the conditions under which
it is made, or the effluents and other impacts created in the
Sixty years ago, in the midst of the Depression, Congress
established the Securities and Exchange Commission to require
rigorous financial reporting by corporations. The idea was that
informed investors would help avert another financial crash. Today
we need more environmental-impact reporting so that informed buyers
can help avert an environmental crash. The so-called Toxics Release
Inventory, enacted in the 1980s, requires plants to disclose to
their neighbors the toxic substances they use and emit. It has
been an environmental success story and a model for the way disclosure
can affect corporate behavior.
More broadly, there's a need for more and better indicators
of environmental well-being that establish a context of concern
about these matters. Today, readers of the daily papers find out
about the stock and bond markets and baseball standings in great
detail. About environmental conditions they learn very little.
If people seem indifferent to such matters as the emissions from
their sport utility vehicles, it is partly because there is little
in our daily cognitive environments to impress such a concern
upon us, and much advertising to make us want to buy the SUVs.
The nation's current index of economic progress, the Gross Domestic
Product or GDP, is perverse in this regard. It merely adds up
all economic activity-constructive or destructive. The more gas
we guzzle, the worse the air gets and the more medical problems
that result, the more the GDP goes up. Walk or ride a bike and
the GDP goes down because you are spending less money.
This is idiotic. The nation needs an index of economic well-being,
not just of money spent. Starting close to home, over 200 states
and localities around the country are developing their own indicators
Such steps could affect the context in which the corporation
operates. Eventually the corporation must change internally, through
new forms of ownership which embody environmental concerns so
they don't have to be injected from without. One example is local
ownership along the lines of the Green Bay Packers football team,
owned entirely by residents of Green Bay, Wisconsin. Local owners
are likely to think a little longer about fouling their own nest
(and about such things as moving their own or their neighbors'
jobs abroad). There is no guarantee, but at least the decision
takes on a personal dimension that is lacking now in the abstracted
Wall Street calculus.
Employee ownership can work in similar fashion, especially
regarding workplace environmental issues. There also should be
new corporate structures offering tax breaks and other advantages
in exchange for high levels of environmental performance. The
law offers special privileges for people who want to assemble
a real estate investment empire. Why not for people who want to
do environmental good?
There's also a need to revive the corporate charter as a genuine
agreement between the institution and society. Today it is little
more than a permissive carte blanche for management, and that
won't change as long as states must grovel to attract corporate
charter business. Early in the century, President Taft proposed
federal chartering for very large corporations. This is a good
Republican idea whose time has come. Global corporations should
operate under ground rules in proportion to their impact and scale,
and that means more than a file drawer in a law office in permissive
Delaware. The growing movement to reopen the corporate charter
debate at the state level could lead eventually in this direction
(see box); at the very least there needs to be a floor that limits
the ability of corporations to play states off against one another.
At the same time, the political impact of the corporation
needs to be brought back into scale with the rest of society.
If, as Congressional Republicans argue, labor unions should have
to get the consent of their members to make political contributions,
shouldn't corporations have to get the consent of their customers
who are the source of the corporation's political funds? At the
very least, shouldn't they have to inform their customers about
which politicians get a cut of the money shoppers spend at the
Ultimately the nation is going to have to revisit the question
of corporate personhood, which the Supreme Court declared but
never really justified. As long as corporations have the same
speech rights as individuals, they will have more such rights,
because they have so much more by way of money and resources to
make use of them. The next strict-constructionist Supreme Court
nominee should be asked to explain where precisely the Constitution
says that artificial persons should have the same rights and protections
that real people do.
Techno-futurists say the new information-based economy will
make most environmental concerns moot. But paper use has burgeoned
along with computers. Pressures on forests, offshore oil, and
mineral deposits have not abated. If some forms of physical pollution
have diminished in the United States, it is often because those
dirty industries do their business now in developing countries
instead. The frantic competitive pressures and centrifugal pulls
of the global market make the need to rework the corporation into
the larger social weave all the more important.
There is nothing strange or radical about the task. It is
a traditionalist agenda that would restore the corporation to
what it was supposed to be-a way to mobilize economic resources
to meet current human needs. It would correct an omission that
the framers of our guiding economic and political concepts could
not have foreseen. Unless one believes that history has basically
stopped, and all that remains is an expansion from an institutional
status quo-that is, unless one thinks like an economist-then the
kinds of government agencies and programs, corporations and the
rest are going to have to change, along with changing needs.
Jonathan Rowe is senior fellow at Redefining Progress in San
Francisco and contributing editor at the Washington Monthly.