Posted on 27-1-2002

Corporate Social Responsibility Oxymoron?
by Robert Hinkley, January/February 2002 issue of Business Ethics*

After 23 years as a corporate securities attorney-advising large
corporations on securities offerings and mergers and acquisitions-I left my
position as partner at Skadden, Arps, Slate, Meagher & Flom because I was
disturbed by the game. I realized that the many social ills created by
corporations stem directly from corporate law. It dawned on me that the
law, in its current form, actually inhibits executives and corporations
from being socially responsible. So in June 2000 I quit my job and decided
to devote the next phase of my life to making people aware of this problem.
My goal is to build consensus to change the law so it encourages good
corporate citizenship, rather than inhibiting it.

The provision in the law I am talking about is the one that says the
purpose of the corporation is simply to make money for shareholders. Every
jurisdiction where corporations operate has its own law of corporate
governance. But remarkably, the corporate design contained in hundreds of
corporate laws throughout the world is nearly identical. That design
creates a governing body to manage the corporation-usually a board of
directors-and dictates the duties of those directors. In short, the law
creates corporate purpose. That purpose is to operate in the interests of
shareholders. In Maine, where I live, this duty of directors is in Section
716 of the business corporation act, which reads: ...the directors and
officers of a corporation shall exercise their powers and discharge their
duties with a view to the interests of the corporation and of the
shareholders.... Although the wording of this provision differs from
jurisdiction to jurisdiction, its legal effect does not. This provision is
the motive behind all corporate actions everywhere in the world. Distilled
to its essence, it says that the people who run corporations have a legal
duty to shareholders, and that duty is to make money. Failing this duty can
leave directors and officers open to being sued by shareholders.

Obeying the law is simply a cost. Since it interferes with making money, it
must be minimized-using devices like lobbying, legal hairsplitting, and
jurisdiction shopping. Directors and officers give little thought to the
fact that these activities may damage the public interest. Lower-level
employees know their livelihoods depend upon satisfying superiors' demands
to make money. They have no incentive to offer ideas that would advance the
public interest unless they increase profits. Projects that would serve the
public interest--but at a financial cost to the corporation--are considered
naive.

Corporate law thus casts ethical and social concerns as irrelevant, or as
stumbling blocks to the corporation's fundamental mandate. That's the
effect the law has inside the corporation. Outside the corporation the
effect is more devastating. It is the law that leads corporations to
actively disregard harm to all interests other than those of shareholders.
When toxic chemicals are spilled, forests destroyed, employees left in
poverty, or communities devastated through plant shutdowns, corporations
view these as unimportant side effects outside their area of concern. But
when the company's stock price dips, that's a disaster. The reason is that,
in our legal framework, a low stock price leaves a company vulnerable to
takeover or means the CEO's job could be at risk. In the end, the natural
result is that corporate bottom line goes up, and the state of the public
good goes down. This is called privatizing the gain and externalizing the
cost.

This system design helps explain why the war against corporate abuse is
being lost, despite decades of effort by thousands of organizations. Until
now, tactics used to confront corporations have focused on where and how
much companies should be allowed to damage the public interest, rather than
eliminating the reason they do it. When public interest groups protest a
new power plant, mercury poisoning, or a new big box store, the groups
don't examine the corporations' motives. They only seek to limit where
damage is created (not in our back yard) and how much damage is created (a
little less, please). But the where-and-how-much approach is reactive, not
proactive. Even when corporations are defeated in particular battles, they
go on the next day, in other ways and other places, to pursue their own
private interests at the expense of the public. I believe the battle
against corporate abuse should be conducted in a more holistic way. We must
inquire why corporations behave as they do, and look for a way to change
these underlying motives. Once we have arrived at a viable systemic
solution, we should then dictate the terms of engagement to corporations,
not let them dictate terms to us.

Many activists cast the fundamental issue as one of "corporate greed," but
that's off the mark. Corporations are incapable of a human emotion like
greed. They are artificial beings created by law. The real question is why
corporations behave as if they are greedy. The answer is the design of
corporate law. We can change that design. We can make corporations more
responsible to the public good by amending the law that says the pursuit of
profit takes precedence over the public interest. I believe this can best
be achieved by changing corporate law to make directors personally
responsible for harms done.

Let me give you a sense of how director responsibility works in the current
system. Under federal securities laws, directors are held personally liable
for false and misleading statements made in prospectuses used to sell
securities. If a corporate prospectus contains a material falsehood and
investors suffer damage as a result, investors can sue each director
personally to recover the damage. Believe me, this provision grabs the
attention of company directors. They spend hours reviewing drafts of a
prospectus to ensure it complies with the law. Similarly, everyone who
works on the prospectus knows that directors' personal wealth is at stake,
so they too take great care with accuracy. That's an example of how
corporate behavior changes when directors are held personally responsible.
Everyone in the corporation improves their game to meet the challenge. The
law has what we call an in terrorem effect. Since the potential penalties
are so severe, directors err on the side of caution. While this has not
eliminated securities fraud, it has over the years reduced it to an
infinitesimal percentage of the total capital raised. I propose that
corporate law be changed in a similar manner--to make individuals
responsible for seeing that the pursuit of profit does not damage the
public interest.

Many would say such a code could never be enacted. But they're mistaken. I
take heart from a 2000 Business Week/Harris Poll that asked Americans which
of the following two propositions they support more strongly: Corporations
should have only one purpose--to make the most profit for their
shareholders--and pursuit of that goal will be best for America in the long
run. --or-- Corporations should have more than one purpose. They also owe
something to their workers and the communities in which they operate, and
they should sometimes sacrifice some profit for the sake of making things
better for their workers and communities. An overwhelming 95 percent of
Americans chose the second proposition. Clearly, this finding tells us that
our fate is not sealed. When 95 percent of the public supports a
proposition, enacting that proposition into law should not be impossible.

If business people resist the notion of legal change, we can remind them
that corporations exist only because laws allow them to exist. Without
these laws, owners would be fully responsible for debts incurred and
damages caused by their businesses. Because the public creates the law,
corporations owe their existence as much to the public as they do to
shareholders. They should have obligations to both. It simply makes no
sense that society's most powerful citizens have no concern for the public
good.

It also makes no sense to endlessly chase after individual instances of
corporate wrongdoing, when that wrongdoing is a natural result of the
system design. Corporations abuse the public interest because the law tells
them their only legal duty is to maximize profits for shareholders. Until
we change the law of corporate governance, the problem of corporate abuse
can never fully be solved.

*Robert Hinkley rchinkley@media2.hypernet.com
www.commondreams.org/views02/0119-04.htm