Bad Company

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 besides itself

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 Exxon stock.

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 exist.

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 it.

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 all.

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 process.

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 of well-being.

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 store?

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.

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