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by Robert C Hinkley

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.

Corporations, on the other hand, exist only because laws have been enacted that provide for their creation and give them a license to operate. When these laws were enacted, no attempt was made to endow corporations with the characteristics of individuals that make living in society possible. At that time, most corporations were small and their impact on society was insignificant. It was not as important that they be socially responsible. Today, corporations are our most powerful citizens and it is no longer tenable that they be entitled to all the benefits of citizenship, but have none of the responsibilities.

The corporate law establishes rules for the structure and operation of corporation . The keystone of this structure is the duty of directors to preserve and enhance shareholder value--to make money. Under this structure, the objective of stockholders -- making money -- becomes the duty of directors which, in turn, becomes the marching orders for the corporation.

As officers, managers and other employees. This objective is promoted both by incentive compensation schemes and the threat of termination. It becomes amplified the further down the chain of command you go. Most corporate 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 corporate system is therefore one 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.

This is not to say that there are not corporations that sometimes behave in a manner that makes them appear to be good citizens. However, good marketing should not be confused with good citizenship and a company. As citizenship should not be dependent upon the size of its marketing budget. There are also corporations that have managers who manage their companies to be good corporate citizens as well as make money. However, this tends to last only as long as the individual(s) responsible. In a world of takeovers, mergers, and fast moving corporate executives, it can be extremely short lived. To the extent there is any restraint on the duty of directors to make money, it comes in the form of government regulation. This 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). Too often corporate managers resolve this conflict by legal hairsplitting, lobbying and playing governments off against each other. Each in some way corrupts our system of government and sets a bad example for the rest of society.

W. Edwards Deming, the American management wizard most known for his work in improving the quality of Japanese manufacturing after World War II, was fond of saying that 94% of all business problems are systems problems and only 6% are people problems. This is because the lack of performance is usually not the fault of the people working within the system. It is the fault of the system. When the system is the problem, you cannot enhance performance by threatening the people who work within the system. Performance can only be increased by changing the system.

Peter Senge of The Sloan Graduate School of Business at MIT 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. 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. This balancing factor should be implanted in corporations in a manner that tempers their drive to achieve profits -- not destroys it. I would suggest five basic obligations of citizenship that should be included in the make up of every corporation. This can be attained by amending the corporate law by adding the following 28 words to the existing duty of directors to make money:

"but not at the expense of the environment, human rights, the public safety, the communities in which the corporation conducts its operations, or the dignity of its employees."
These boundaries on the duty of directors are designed to make it clear that directors 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. The corporate law was enacted so that corporations could serve mankind, not the other way around. It is time to amend the corporate law to encourage corporations to be good citizens as well as make money.

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