Corporate Citizenship--Oxymoron or Necessity

"America, America
God mend thine every flaw
Confirm thy soul in self-control,
Thy liberty in law."
-- America the Beautiful, Second verse

A little less than ten years ago, I had lunch with a friend and university professor. He was trying to get the CEOs of big companies to promote human rights in the workplace for their Asian subsidiaries. He asked me, "Why is it that when I speak to these guys, they don't seem interested? It's not that they are against it. They just don't think it's relevant."

As a corporate lawyer, the answer to this question was simple. His question, however, made me realize how much damage gets done by big corporations to human rights, the environment and other elements of the public interest without the law ever being violated. As a citizen, this concerned me. As a corporate lawyer, I realized what caused the problem and how to make it stop.

Compliance, corporate social responsibility and corporate citizenship are three types of corporate behavior. They can be viewed as occurring on a spectrum. At one end is compliance, doing what is necessary to obey the law. In the middle, is corporate social responsibility (CSR). Here companies engage in various acts that go beyond mere compliance and in some way benefit the public interest. Corporate citizenship goes beyond compliance and CSR. It involves a culture which results in behavior that, while pursuing the creation of shareholder value, always aims to protect the public interest as well. Under this definition, many say that corporate citizenship is today an oxymoron.

How our government does its job

Compliance, CSR and corporate citizenship all take place in response to a legal/political framework we call government. Government exists for one reason--to protect the public interest. Our system of government and that of the majority of developed countries around the world is called a liberal democracy.

This term does not mean a government that is left of center, the opposite of conservative. It is a system designed to protect the public interest without unduly restricting the freedom of those that it governs. The founders of this form of government thought that men and women could largely rule themselves. Based on this belief, they designed a form of government where all behavior was permitted unless the elected representatives of the people passed a law making it illegal (prohibited) and punishable by the state. This is from where we get the expressions, "Go ahead. There is no law against it" or "It's a free country."

The ability of the liberal democracy to protect the public interest is based on two assumptions:

First, it is not possible to inflict too much damage on the environment and other elements of the public interest before the behavior that causes the damage will be recognized and a new law prohibiting this behavior will be passed.

Secondly, those who are found to be behaving badly causing harm to the public interest will not continue their behavior once their involvement is exposed. They also will not get in the way of new legislation prohibiting the offending behavior in the future.

These assumptions were probably valid in the late 18th century when the liberal democracy was first conceived. In a society made up of mostly subsistence farmers and shopkeepers, individuals had little ability to do serious harm to the public interest. When they did, their conscience, shame, concern for the their reputation and public spiritedness of the times kept them from continuing their bad behavior and from trying to influence the government to delay or not pass laws that would prohibit them from behaving badly again. In other words, their "citizenship" intervened to safeguard the public interest just as the founders predicted it would. Without this citizenship, liberal democracy does not work because government cannot protect the public interest.

Capacity to harm

These two assumptions began to run into trouble nearly 100 years after the liberal democracy was originated. Introduced into our society in the late 19th century, the modern corporation cannot be counted upon to behave like the farmers, shopkeepers and patriots from before. The modern corporation has much greater capacity to harm the public interest and not nearly as much inclination to stop doing so when it is caught.

Much greater capacity, because its actions are the collective actions of hundreds, sometimes thousands, of people working together. Its collective actions are backed by millions, sometimes billions, of dollars in capital. In addition, advances in technology give it the means to destroy the public interest that could never ever been foreseen 200 years ago. The modern corporation can today (legally) do more damage to the public interest in one afternoon than the average human being can do in a lifetime.

These factors are all facts of life with which the modern liberal democracy must come to grips. There is little that can be done to change them. Trying to limit damage to the public interest by putting limits on the size of companies won't work. Technology cannot be un-invented. Nor can you put constraints on people's cooperation or creativity. Indeed, why would you?

Inclination to continue

Companies also have an inclination to continue harming the public interest when they are caught doing so that individuals do not. Herein lies the answer to the question my friend the professor asked me nearly ten years ago.

Corporations only exist because governments pass laws allowing them to exist and dictating a structure under which they can operate. That structure sets forth the legal relationships among the corporation, its owners and its management. In every jurisdiction, that relationship is set forth in the duty of managers to act in the best interests of the company (and, in some cases, its shareholders).

This is perfectly logical. Companies are owned by their shareholders. Managers work for the company directly and shareholders indirectly. Managers direct the actions and policies of the company. They no doubt should do so with a view to promoting the best interests of their employers.

This does not cause companies to go out looking for ways to make money at the expense of the public interest as some would claim. What it does, however, is cause managers to defend investments their companies have made in technologies, products and processes that are found to be harming the environment, human rights the public health and safety and other elements of the public interest. Pollution, global warming, premature deaths from tobacco, resistance to occupational health and safety legislation, companies moving to more business friendly jurisdictions and the maintenance of independent contractor owned sweatshops are all examples where companies have refused to stop even after the damage they were causing was exposed.

The reason companies behave this way is that, by the time their behavior is exposed, they already have huge amounts invested in doing business in the way that causes the harm. What should their directors do in this situation? Should they cease and desist, take massive write-offs and maybe even go out of business? Not likely when the corporate law tells them to protect their investment (and says nothing about the public interest). As a consequence, strategies are employed to allow the company to continue with business as usual. These strategies often include influencing our elected representatives to allow them to continue. Because they are the engines of our economy, they are incredibly successful in getting their way.

Not at the expense of

The modern corporation is the only citizen that the law dictates should pursue its own self-interest. As a consequence, the public interest is threatened to the point where government cannot fulfill the job for which it was created. We have been able to survive this self-inflicted paradox for nearly 100 years, but companies keep getting bigger and the damage that gets done keeps getting worse. Things like global warming show just how incompatible the modern corporation and the liberal democracy are.

All this begs the question, where is corporate self-restraint and respect for the public interest going to come from? More regulation? Corporate social responsibility? Triple bottom line accounting? Socially responsible investing? No. While each of these solutions helps a little bit, they treat the symptoms, but leave the cause in place. Something must be done to eliminate the cause.

The cause of the lack of corporate self-restraint is the duty of directors to act in the best interests of the corporation. This drives all corporate action that damages the public interest. This duty to act in the corporation's self-interest must be balanced with respect for the public interest.

Luckily, this is not that difficult. With regard to the duty of directors, the corporate law is the same the world over. A uniform change to the duty of managers to act in the best interests of the corporation will dramatically change corporate behavior everywhere.

Management experts will tell you changing the duty of directors is changing the corporation at its point of highest leverage. Here a small change that is easily understandable and appeals to people's highest standards can have the most effect.

This change must reflect the fact that profits and the public interest are not necessarily mutually exclusive. You can have both. In fact, the change to profits without damaging the public interest is likely in the long run to result in higher overall profits.

This change need not change the fundamental purpose of the corporation, that it earn a financial return for its owners. It also need not confuse the direction of the corporation so that corporate managers have more than one goal.

The way to make this change most effectively is to make it clear to corporate managers that their duty to act in the corporation's best interest has limits. When they find their company harming the environment and other elements of the public interest, they should cause it to stop. Their duty should be changed from simply pursuing the corporation's best interest to pursuing the corporation's best interests but not at the expense of the public interest.

Code for Corporate Citizenship

This change should in effect become a kind of corporate Hippocratic Oath, that management acts in a way that "first does no harm." This will cause companies to become respectful of the public interest. It will cause them to become better citizens.

The corporate law should be amended to change the duty of directors by adding 28 words that will protect five particular elements of the public interest. These words are:

"...but not at the expense of the environment, human rights, public health and safety, dignity of employees or the welfare of the communities in which the corporation operates."

I call these 28 words the Code for Corporate Citizenship. They are not set in concrete. Some will say that the dignity employees is not part of the public interest. Others will suggest one or more elements of the public interest which should be included. In addition, others will rightly point out that these words cannot be added on one day and become effective the next. A transition period will have to be included that will give today's corporations time to write-off investments in plant, technologies and processes that damage the public interest and invest in new plant, technologies and processes that are public interest benign.

The point of the Code is to tell corporations that we expect their behavior to be tempered by a healthy respect for the public interest. We expect them to behave like good citizens. This is not too much to ask. They are our most powerful citizens.

Whether the definition of good citizenship protects four, five or six elements of the public interest and whether their citizenship begins five, ten or fifteen years from now is not as important as the determination that their behavior should begin to change. Their citizenship has become a necessity.