The Best Interests of the Corporation

by Robert C. Hinkley

Every day legal corporate behavior causes much more damage to the commons than corporate illegal behavior.  Electricity generators do not break the law when they emit billions of tons of carbon into the atmosphere every year warming the Earth to dangerous levels.  No law is broken when automobile manufacturers put out millions of vehicles that contribute to the same problem.  Tobacco companies do not break the law when their products kill nearly 5 million people a year.  Consumer goods companies are within the law when they buy from third world suppliers who operate sweatshops and use child labor.  Employers operate within the law when they pay the minimum, but not a living wage.  Manufacturers do not break the law when they threaten communities or leave them for dead when they move their operations overseas. 

The problem is not that every once in a while corporation accidentally does something that harms the public interest. Corporate abuse of the commons is a daily ongoing event.  At least in theory, those that direct the company have the power to make it stop.  It continues as the result of conscious decisions made by company managers.

Think about it.  If all modern corporations were good citizens, there would be no corporate abuse of the commons.  As corporate damage to the public interest became evident, the directors of the company would simply close or modify the company's operations to eliminate the behavior or product that was causing the damage. 

This of course doesn't happen.  Instead, directors choose to allow their companies to plow on legally destroying the commons.  "There's no law against it.  Citizenship be damned."

Companies do not set out to make money at the expense of the public interest.   Not once in my thirty years of helping companies raise money for new business enterprises have I had a client come to me with a proposal to raise money for a new venture which, though legal, would result in harm to the public interest. 

Rather, founders of new companies set out to make money with a business plan that seems perfectly harmless.  Then years, maybe decades, later it is discovered that their company is causing great harm.   This is when the citizenship of the company is tested.

Some have suggested the common source of all intentional corporate abuse of the environment, human rights and other elements of the public interest is the personal greed of company directors.    In other words, the relatively little remuneration they earn each year means more to company directors than the lives of the people their companies are killing or the harm otherwise being caused to our planet and communities.  This notion is preposterous. Greed this excessive is not that uniform in the population--even among corporate directors.  

Greed may cause a few unscrupulous managers to steal from their companies, but it does not cause directors to uniformly cause their companies to continue harming the public interest.  At best it is a minor factor in keeping big companies from choosing the good citizen option.  If corporate abuse of the commons can be traced back to an emotion (which I don't think it can), it is not greed.  It is fear.   

Director's duties

The question for directors when their company is discovered to be harming the public interest becomes what are they going to do? Despite the fact that all companies these days want to claim the mantle of being a "good citizen", the decision before them now is not that simple. 

Directors are answerable to shareholders.  They are expected to manage in a manner that fulfills the investors' expectations.  The corporate law ensures this by imposing a legal duty on directors to "act in the best interests of the corporation". 

This duty has two parts.  First, directors have an obligation to manage the company in a way that optimizes shareholder value by making money.  Secondly, directors have a duty to protect the company when its survival is threatened.  Together, these duties add up to a duty to protect and enhance shareholder value. 

This duty is not just words.  It is legally enforceable.  Shareholders are entitled to bring a lawsuit against directors if they think the directors have not acted in their company's best interests.  Such lawsuits can result in directors becoming personally liable to shareholders for losses the shareholders incur.  It is this part of the corporate law (not some human emotion) that is the source of all continual corporate abuse of the public interest.

The company may have huge amounts of money tied up in plant, equipment and processes.  Pursuing the good citizen option by modifying or shutting down the offending operations may involve writing off billions of dollars of the company's assets and eliminating thousands of jobs.  It may even threaten the survival of the company.  How can this be in "the best interests of the corporation?" 

Rights and duties

When companies don't stop on their own, it is government's job to make them stop.  This is achieved by new laws being adopted that effectively prohibit the offensive behavior.  If government doesn't enact such laws, the status quo is preserved and the anti-social behavior (and the damage that comes with it) can continue.

When government is about to change the law in a way that threatens corporate profitability, modern companies can take the good citizen option and acquiesce or they can take the political option and fight to preserve the status quo.  The good citizen option is about fulfilling the duties of a citizen.  The political option is about using the rights of a citizen to influence government and preserve the company's existing freedom to harm the public interest.  

When people are discovered to be abusing the public interest, Congress and state legislatures are quick to respond by passing laws prohibiting the abusive behavior in the future.  Examples of these laws include laws against illegal drugs, littering, loitering and not cleaning up after your dog. 

No individual has a compelling need to keep harming the commons. No one depends on it to survive.  Most are concerned about their reputations.  When they are caught damaging the public interest, this concern usually makes them think about the consequences of what they are doing and stop. 

It is relatively easy to pass laws keeping individuals from engaging in the abuse in the future.  Individuals generally don't defend their anti-social behavior before national or local legislatures arguing it should be allowed to continue.

For big corporations on the other hand, the situation is different.   Their only purpose is to pursue financial gain.  If they are only achieving this goal by damaging the public interest, they have an interest in being allowed to continue.  Faced with huge costs and risks (and possibly no obvious alternative), this interest can be compelling.   

In this situation, being a good citizen and passively accepting new regulation for the benefit of the public interest is not really an option. The company's behavior up to now has been perfectly legal.  Its logical course of action is to try to preserve the status quo-use its considerable political might to keep government from cutting off its ability to harm the public interest.  In this, they have become remarkably successful.

Democracy at work

Some will say that the inability of government to pass new laws protecting the commons is simply democracy at work.  They will argue that freedom should not be infringed upon until a majority of the people's elected representatives determine that a new law is necessary.  On its face, this argument has some appeal.  However, it doesn't take much to scratch beneath its surface and see how flawed it is. 

The extent of the destruction is not in doubt.  Our planet is being destroyed.  Millions of people are being killed.  Tens of millions are having their human rights violated.  Hundreds of millions are being treated without dignity.  Every year more of our communities are being used and left for dead. 

While it is true that the liberal democracy was designed to be weak in its ability to impinge on personal freedom, it was not supposed to be so weak as to not be able to protect the public interest altogether.   The very purpose of government is to prevent abuses of this nature from happening.  If government is incapable of passing laws that put to an end destruction of these magnitudes, then we must ask ourselves "what good is it?" 

Outside Constitution Hall in Philadelphia in 1787 Benjamin Franklin was asked by a passerby, "What form of government had been decided upon?"  He replied. "It's a republic, if you can keep it." These words reflected Franklin's fear that the new government would later become corrupted by those who would abuse the public interest for their own benefit. 

Franklin saw a potential weakness in the design of the new government.  He was concerned that private wealth might be used to convert elected officials from pursuing the public interest to pursuing the private interests of the wealthy.  If that occurred, he feared America would become ruled by a domestic aristocracy little better than the foreign one the American colonists had just defeated. 

Franklin's fears have been proved justified.  Our government of the people, by the people and for the people has become a government of the corporations, by the corporations and for the corporations.  In all important matters the economy and the interests of big business come first.  This has occurred without the people (for whose benefit government was designed) even recognizing it let alone agreeing to it.

It is nothing short of a travesty that the people's elected representatives have been converted to become the representatives of big business. We are now ruled by an aristocracy of corporations. 

Conclusion

In a liberal democracy everything is legal until a validly enacted law makes it illegal.  This leaves the public interest exposed to corporate behavior that is legal but harmful and immoral.  The corporate law dictates that directors of a company found legally harming the public interest should put the company's interests above even the public interest.  As a consequence, companies exercise their rights of citizenship to continue avoiding its obligations.  The public interest remains exposed and the damage mounts up.

The question is what can be done about it?  Fundamentally, there are only two answers.  Either government must be strengthened to give it more power to rein in corporate abuse of the commons or the law that requires the modern corporation to go on wantonly harming the public interest must be changed.