[Peace] (no subject)

[Robert Mendoza]

Here is an article from Common Dreams that goes to the heart of why 
corporations do not respond to human and community needs.
from Roberto Mendoza: roberto_raynaldo at hotmail.com


Published in the January/February 2002 issue of Business Ethics: Corporate 
Social Responsibility Report

How Corporate Law Inhibits Social Responsibility
A Corporate Attorney Proposes a ‘Code for Corporate Citizenship’ in State 
Law

by Robert Hinkley


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.

Section 716 dedicates the corporation to the pursuit of its own 
self-interest (and equates corporate self-interest with shareholder 
self-interest). No mention is made of responsibility to the public interest. 
Section 716 and its counterparts explain two things. First, they explain why 
corporations find social issues like human rights irrelevant--because they 
fall outside the corporation’s legal mandate. Second, these provisions 
explain why executives behave differently than they might as individual 
citizens, because the law says their only obligation in business is to make 
money.

This design has the unfortunate side effect of largely eliminating personal 
responsibility. Because corporate law generally regulates corporations but 
not executives, it leads executives to become inattentive to justice. They 
demand their subordinates "make the numbers," and pay little attention to 
how they do so. Directors and officers know their jobs, salaries, bonuses, 
and stock options depend on delivering profits for shareholders.

Companies believe their duty to the public interest consists of complying 
with the law. 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.

We must remember that corporations were invented to serve mankind. Mankind 
was not invented to serve corporations. Corporations in many ways have the 
rights of citizens, and those rights should be balanced by obligations to 
the public.

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.

To pave the way for such a change, we must challenge the myth that making 
profits and protecting the public interest are mutually exclusive goals. The 
same was once said about profits and product quality, before Japanese 
manufacturers taught us otherwise. If we force companies to respect the 
public interest while they make money, business people will figure out how 
to do both.

The specific change I suggest is simple: add 26 words to corporate law and 
thus create what I call the "Code for Corporate Citizenship." In Maine, this 
would mean amending section 716 to add the following clause. Directors and 
officers would still have a duty to make money for shareholders,

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

This simple amendment would effect a dramatic change in the underlying 
mechanism that drives corporate malfeasance. It would make individuals 
responsible for the damage companies cause to the public interest, and would 
be enforced much the same way as securities laws are now. Negligent failure 
to abide by the code would result in the corporation, its directors, and its 
officers being liable for the full amount of the damage they cause. In 
addition to civil liability, the attorney general would have the right to 
criminally prosecute intentional acts. Injunctive relief–which stops 
specific behaviors while the legal process proceeds–would also be available.

Compliance would be in the self-interest of both individuals and the 
company. No one wants to see personal assets subject to a lawsuit. Such a 
prospect would surely temper corporate managers’ willingness to make money 
at the expense of the public interest. Similarly, investors tend to shy away 
from companies with contingent liabilities, so companies that severely or 
repeatedly violate the Code for Corporate Citizenship might see their stock 
price fall or their access to capital dry up.

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 at media2.hypernet.com) lives in Brooklin, Maine.



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