Published on Sunday, May 19, 2002 by CommonDreams.org
Neither Enron Nor Deregulation
by Robert C. Hinkley
Some dismiss Enron's bilking of California's electricity customers as just another bad deed by a company that could not tell right from wrong. Others say that the system of deregulation was at fault. Neither tells the full story. A big part of the problem is something most people never consider-- the way corporations are designed.
A big company like Enron making money at the expense of the public interest is nothing unusual. It happens all the time. Two ways they do this are price gouging and externalizing costs. Enron engaged in the former. The latter is more common. Cost externalization occurs anytime a company makes money while creating a cost that under existing law must be borne by the public (eg. damage to the environment, the public health or safety, or the welfare of our communities or violations of human rights or the dignity of employees).
The reason corporations are prone to price gouging and foisting their true costs on the public is that the corporate law establishes the corporation for solely one purpose--making money. Price gouging and externalizing costs serve this purpose. They increase profits.
Nothing in the corporate law balances this dedication of the corporation to the pursuit of self-interest with respect for the public interest. Historically, we have tried to offset this imbalance with business regulation. Environmental, workplace safety, anti-trust and other laws have all been enacted to stem corporate abuse of the public interest. Unfortunately, these laws only limit "where" and "how much" abuse of the public interest will be permitted. They do nothing to correct the underlying imbalance of the corporate law.
Probably one of the most infuriating things about Enron's rip off in California is that it might not even have been illegal. This too is not unusual. Most corporate violation of the public interest is conducted within the law. There are hundreds of examples of this, but just consider how much damage is done every year by tobacco companies killing our fellow citizens and the damage to our health and planet by auto manufacturers and electric utilities polluting our air.
Allowing corporations to profit at the expense of the public interest no longer makes sense (if it ever did). Corporations would not exist if state laws did not permit them to be created and to operate. They owe their existence as much to the public whose elected representatives passed those laws as they do to their shareholders.
Corporations should have obligations to the public as well as shareholders. Americans are generally uncomfortable with governments imposing obligations on them to protect the public interest, but there are important differences between people and corporations that dictate such obligations should be imposed.
The first difference is that corporations are institutions not people. They have no conscience, morals nor sense of right and wrong. They have no sense of living in community. They have none of the human traits and characteristics that restrain people in ways that laws cannot and make living in community possible.
Although corporations act only through people, these people are forced to play roles that in some ways make them more like machines than human beings. Every employee is aware that his or her job is only to help the company make money. Protecting the public interest is not part of their job description. Suggesting it is can be career threatening. In this environment, people working for a corporation regularly do things to damage the public interest that they would not do outside the corporation.
Another difference is that a large corporation's ability to damage the public interest is many times greater than that of an individual acting alone. Corporate action is often the action of thousands of employees working together backed by millions (sometimes billions) of dollars of capital. This can result in more damage to the environment or another element of the public interest in one afternoon than an individual can inflict in a lifetime. This difference alone is reason enough to impose duties on corporations that we do not impose on individuals.
The only thing unusual about Enron's abuse of the public interest in California is its hubris. Corporate abuse of the public interest is a common occurrence because its source is a design flaw in the corporate system. The best lesson we could learn from Enron would be to change the corporate law so that the pursuit of corporate profit no longer comes at the expense of the environment, human rights, the public health or safety, the welfare of our communities or the dignity of employees.
Robert C. Hinkley is a corporate securities lawyer and former partner with Skadden, Arps, Slate, Meagher & Flom LLP. He resides in Brooklin, Maine. His e-mail address is firstname.lastname@example.org.