In most countries corporations have become entitled to the rights and
privileges of citizenship enjoyed by individuals. However, because the laws
under which corporations are created can be interpreted to require them to
be dedicated to the pursuit of profits, most corporate managers find the
duties and obligations of citizenship to be irrelevant to or incompatible
with the daily operations of their businesses.
Corporations are man-made. They exist because laws have been enacted that provide for their creation and give them a licence to operate. When these laws were enacted, no conscious decision was made to create organisations that would have none of the obligations of citizenship. At that time, most corporations were relatively small and their impact on society was insignificant. It was not as important that they be socially responsible. Today, the situation is much different. Corporations are now our most powerful citizens. However, being dedicated to their own self-interest, many are not very good citizens at all.
It does not bode well for a society when its most powerful citizens have little concern for the public interest (Saul 1995). Corporations were invented to serve mankind, not so mankind could serve them. This chapter explains why existing law makes it nearly impossible for corporations to be good citizens. In addition, it shows how this situation can be remedied, proposing a Code for Corporate Citizenship that will require corporations to start meeting the obligations of citizenship as well as enjoying its benefits. Although the chapter limits its discussion to corporations, its analysis could be applied just as well to the other business organisations created by law, such as partnerships, limited liability companies and business trusts.
BUSINESSES ARE DIFFERENT
Corporations differ dramatically from individuals. Individuals living in a community generally accept responsibility for their conduct and behave civilly. This involves more than just obeying the law. It involves contribution, cooperation and most of all sacrifice -- behaving in a manner that reflects conscience and self-regulatory acts and traits of character that no law can enforce (National Conference on Civic Renewal 1998). In the words of Thomas Jefferson:
Man was destined for society. His morality, therefore, was to be formed in this object. He was endowed with a sense of right and wrong, merely relative to this ... The moral sense, or conscience, is as much a part of man as his leg or arm. It is given to all human beings in a stronger or weaker degree ... It may be strengthened by exercise (Saul 1992: 10).
Corporations, on the other hand, are not endowed with moral standards, a sense of right and wrong or a conscience. They are legal fictions that have no physical presence or inherent human characteristics. The principal distinctions between human beings and corporations has been described by Jerry Mander in The Case Against the Global Economy:
Though corporations enjoy many 'human' rights, they are not required to abide by human responsibilities ... Lacking the sort of physical, organic reality that characterizes human beings, this entity, this concept, this collection of paperwork called a corporation is not capable of feelings such as shame or remorse. Instead corporations behave according to their own unique system of standards, rules, forms and objectives ...
The most basic rule of corporate behavior is that it must show a profit over time ... Corporations do not have feelings or morals. All their acts are in service to profit ... All other considerations are secondary, including the welfare of the community, the happiness of workers, the health of the planet, and even the general prosperity ... So human beings within the corporate structure are prevented from acting on their personal morals and feelings ...
In such a structure, human morality is anomalous. Because of this double standard -- one for real human beings and another for fictitious persons called corporations -- we sometimes see bizarre behavior from executives who presumably know what is right, yet behave in a contrary fashion ... (Mander and Goldsmith 1996: 136).
THE CORPORATE SYSTEM
The distinctions identified by Jerry Mander have a source. It is the corporate law, the law that establishes rules for the structure and operation of corporations. This law provides that directors, the people with ultimate management responsibility in corporations, have a fiduciary duty to use their best efforts to make money for their stockholders. The corporate law places no restrictions on directors in satisfying this duty and failure to satisfy it can result in them being personally liable to their stockholders.
The corporate law also recognises that directors usually are not involved in the daily operation of the business. The responsibility for day-to-day business management is delegated to executive officers appointed by and responsible to the board of directors. In addition, the corporate law provides a means by which executive officers can further delegate authority to subordinates who carry out most of the corporation's business operations.
In brief, stockholders invest in corporations in order to make money. The law imposes on directors a legal duty to use their best judgment to see that this goal is achieved. Everyone else in the corporation works to assist the directors in satisfying the duty to stockholders. As a result of this structure, the objective of stockholders -- making money -- becomes the duty of directors which, in turn, becomes the marching orders for the corporation's officers, managers and other employees.
This objective is enforced both by incentive compensation schemes and the threat of termination. It becomes amplified farther down in the hierarchy. Most of the day-to-day decisions are made by people who have little incentive to promote corporate citizenship or social responsibility (which in some measure requires corporate sacrifice) unless such promotion also can be shown to improve profitability. The hierarchical structure also results in an inability to assign individual responsibility for bad behaviour, increasing the likelihood that decisions will be made that pursue profits at the expense of social responsibility.
This is the corporate system today. It is a system that is dedicated to self-interest and devoid of disinterest. Nothing in the system encourages (let alone requires) corporations to be socially responsible or to contribute, cooperate or sacrifice for the benefit of the community or the common good (i.e. be a good citizen). Indeed, nothing in the system makes any provision for the public interest. Is it any wonder that corporations tend not to be exemplary citizens?
This is not to say that there are not corporations that sometimes behave in a manner that makes them appear to be good citizens. For example, many businesses engage in good works designed to improve their public relations. However, good marketing should not be confused with good citizenship, and a company's citizenship should not be dependent upon the size of its marketing budget.
There are also a limited number of corporations that have directors and officers who manage their companies to be good corporate citizens as well as make money. However, even this is not an example of corporate citizenship. It does not originate with the corporation. Rather, it occurs as the result of strong individuals overriding the dictates of the system, and it tends to last only as long as the individual(s) responsible. Individual citizenship is no substitute for corporate citizenship in a world of takeovers, mergers, downsising, reengineering and fast moving corporate executives.
The duty of directors to make money is the primary driver of all corporate action. To the extent there is any restraint on this force, it comes in the form of business regulation. However, government regulation of business presents corporate managers with a basic conflict of interest, how to comply with the regulation (which can increase their costs) while at the same time remaining primarily responsive to their duty to make money (which is generally thought to require reduced costs). The duty to make money usually takes precedence because it applies directly to directors who sit at the top of the corporate hierarchy. As a consequence, corporate managers generally resolve this conflict by continually trying to find ways to reduce the cost of regulatory compliance.
There are a number of ways in which this can be achieved, most of which weaken overall citizenship in society rather than strengthening it. For example, some managers take a minimalist approach to regulatory compliance, conducting their company's operations in a way that meets the law's requirements and no more. Others interpret the law as making permissible everything that it does not literally proscribe. These examples of legal hairsplitting often violate the spirit of the regulation if not its letter. Corporate managers have also learned that they can reduce the cost of legal compliance by lobbying in our state and national capitals. Private industry has become the world's most powerful special interest group, spending hundreds of millions of dollars each year in order to convert elected officials and civil servants to their private interests. In addition to the foregoing, corporations engage in jurisdiction shopping, playing governments off against each other in order to obtain the best deal for themselves.
Legal hairsplitting, the exercise of political power through extensive lobbying and jurisdiction shopping are three of the most common ways that corporations avoid and overcome government regulation. Each sets a powerfully bad example for the rest of society. In addition, there is a treadmill effect. Corporate attempts to circumvent government regulation result in new laws being proposed to plug the holes being utilised. This results in more lobbying, more laws and, ultimately, more holes (Howard 1994).
The overall ineffectiveness of government business regulation is quite clear, but nothing is done to address the cause of it. Most government regulation of business fails to create corporate citizenship or social responsibility because it does not recognise that corporations are not self-regulated by moral standards, a sense of right and wrong or human consciences. Such regulation often attempts to achieve its goals by threatening organisations that are legal fictions and are as incapable of being threatened as they are of being remorseful or shamed.
W. Edwards Deming, the management wizard who brought quality to Japanese industry after World War Two and for whom the most valued prize in Japanese manufacturing (the Deming Prize) is named, was fond of saying that 94% of all business problems are systems problems and only 6% are people problems. In other words, it is unlikely that business performance will be improved by encouraging, exhorting or threatening the people that work in business. This is because the lack of performance is usually not the people's fault. It is the fault of the system in which the people are participating. On its own, the existing method of regulation will never create corporate citizenship because it does nothing to change the corporate system that is dedicated to self-interest.
CHANGING THE SYSTEM
In his management best seller The Fifth Discipline: The Art & Practice of The Learning Organization, Peter Senge of The Sloan Graduate School of Business at The Massachusetts Institute of Technology says that the best way to change a system is to make the change at the point of highest leverage. This means that any change should be made at the point where the maximum results can be attained relative to the amount of the change being caused to the system. By making relatively small change in the right place in the system, the greatest personnel commitment to change and the greatest improvement in performance can be achieved (Senge 1990).
The duty of directors to make money drives all corporate action. This makes it the point of highest leverage. Corporations will take on the obligations of citizenship only when the duty to make money becomes balanced by something that simulates the human conscience. The word 'simulates' is used here because a legal fiction cannot actually have a conscience. However, by balancing the duty of directors to make money with obligations to the public interest, it is possible to alter corporate behaviour to the point where it will appear that corporations are, in some measure, guided by a conscience.
Following the advice of Professor Senge, this simulated conscience should be implanted in a manner that causes the least change to the way corporations currently conduct business. In other words, such conscience should temper the drive of corporations to achieve profits -- not destroy it.
A CODE FOR CORPORATE CITIZENSHIP
The following suggests six basic obligations of citizenship that should be part of the simulated corporate conscience. These obligations, which I have characterised as A Code for Corporate Citizenship(CCC), would be added to that portion of the corporate law dealing with the duty of directors. The CCC would amend the corporate law by simply adding the following 46 words to the existing duty of directors to make money:
"but not at the expense of the environment, human rights, public safety, the communities in which the corporation operates, or the dignity of its employees. In meeting this duty, the corporation's directors shall foster respect for the spirit of the law as well as its letter."
The CCC would thus set boundaries on the pursuit of profits with regard to: (i) the environment, (ii) human rights, (iii) public safety, (iv) relationship to the community, (v) labour relations and (vi) respect for the law. The proposed boundaries are designed to make it clear to directors that there are limits on their duty to make money and that they have obligations to the public interest that are just as important as their obligations to their investors. This is not unreasonable. Corporations owe their existence as much to the public (which passed the law under which they are formed) as they do to their stockholders.
For purposes of examining how the CCC would be implemented, it is useful to look at how 'but not at the expense of the environment' will affect business under the corporate system. When corporations were first conceived, no-one stopped to consider the effect they would have on the environment. Today, pollution and destruction of the environment are probably the greatest problems mankind faces and most of these problems are created by corporations. If the king who granted the charter for the first corporation could have seen the damage that subsequent corporations would do to the planet, it is probably safe to assume that he would have included a 'but not at the expense of the environment' clause in that charter. Today, we stand in a similar position to that king.
Adding the words 'but not at the expense of the environment' will change the corporate system's respect for the environment in a way that will build true corporate citizenship. First of all, placing responsibility for not damaging the environment with directors will require them to give the environment equal weight with financial returns in their deliberations. Making money will have to be accomplished in a manner that is pollution free.
Secondly, this responsibility should filter through the management hierarchy in the same manner as the duty to seek profits has in the past. Operating managers will quickly come to recognise that, when they make presentations to their boards of directors, protecting the environment will be as important as making money. Just as credit is accorded managers who make money for their corporations, blame can be expected to be assessed to those whose actions damage the environment. It will not be long before the goal of eliminating pollution will become second nature to everyone in the corporate system.
Imposing similar boundaries concerning human rights, the public safety, community and employee relations and respect for the law will make it clear to corporate managers that their companies have obligations in these areas that are just as important as their obligations to investors. Such boundaries should foster improved corporate citizenship and social responsibility in the same manner as 'but not at the expense of the environment' will with respect to the environment.
The lack of citizenship that is currently exhibited by most corporations is easily explained. It is built into a legal system that says the sole duty of corporate directors is to make money for investors.
Corporations owe their existence to the laws under which they are created. These laws are man-made. They were enacted so that corporations could serve mankind, not so mankind could serve corporations. Making money, being a good citizen and being socially responsible are not mutually exclusive for individuals, nor should they be for corporations.
Buckminster Fuller believed that mankind would be called upon to take its 'final exams' sometime near the change of the millennium. By this he meant that soon the human race would have to make a choice between continuing on its present path -- where progress is achieved in the form of fallout from greed -- or evolving to the point where progress is planned in advance and avoids the damage to our civilisation that has accompanied it to date (pollution, child labor, community unrest, etc.). Fuller characterised this evolutionary step as going from doing the right things for the wrong reason to doing the right things for the right reasons. Most importantly, he believed that this change could occur only by individual human beings taking responsibility for their futures and the future of their planet (Fuller 1992).
The key to creating corporate citizenship and social responsibility is to amend the laws that create corporations in a manner that changes the corporate system. The best place to make such a change is at the point of highest leverage. Archimedes said, 'Give me a lever long enough ... and single-handed I can move the world'. Changing the corporate law to put boundaries on the unqualified pursuit of self-interest represents such a lever. It is the responsibility of each of us to create that lever. Adopting the CCC is an example of how this can be done.
Fuller R.B (1992) Cosmography: A Posthumous Scenario for the Future of Humanity, New York: Macmillan.
Howard P.K (1994) The Death of Common Sense: How Law is Suffocating America, New York: Warner Books.
Mander J & Goldsmith E (1996) The Case Against the Global Economy, San Francisco: Sierra Club Books.
National Commission on Civic Renewal (1998) Final Report of the National Conference on Civic Renewal: A Nation of Spectators -- How Civic Disengagement Weakens America and What We Can Do About It, College Park, Maryland.
Saul J.R (1992) Voltaire's Bastards: The Dictatorship of Reason in the West, New York: The Free Press.
Saul J.R (1995) The Unconscious Civilization, Toronto: House of Anansi Press.
Senge P (1990) The Fifth Discipline: The Art and Practice of the Learning Organization, New York: Doubleday.