Conscientious Capitalism? Not Likely.

As someone who has an interest in the connections between science and religion, I often look through the pages of Science and Theology News, a monthly magazine published, I believe by the Templeton Foundation. As its title suggests, it deals with controversies, discoveries, and research in the areas of moral philosophy that are (or ought to be) central to both science and religion. The cover story in the current (May, 2006) issue, for example deals with the ethical issues raised by the biotech revolution and how various scientific ethicists and moral philosophers interpret them.

On the op-ed page there is a related think-piece called “Conscientious Capitalism: Doing well while doing good,” that represents for me much of what is dangerous and wrongheaded in conventional thinking about the moral responsibilities of business corporations.It is written by an adjunct professor and director for Responsible Business in the Haas School of Business at the University of California, Berkley.

The piece begins, “The venerable economist Milt Friedman said in 1970 that ‘the business of business in business.’ The role of business managers is to make as much money for their shareholders as possible. Anything outside of this end-goal should not be done on company time or with company resources. In fact, Friedman alleged that managers who are doing so are violating their legal responsibilities to their shareholders.

“Although the majority of business leaders were most likely trained in business curricula that espouse Friedman’s philosophy, a growing number appear to have diverged from this theory.

“One need not look hard to find Web sites, mantras and proclamations of top companies today that include in their corporate lore such concepts as values, vision, community, social responsibility, compassion, citizenship, cooperation and engagement….

“There has been clear movement of firms operating not only inb the best interests of their shareholders but also in the best interests of multiple stakeholders—including society and the environment….

“Under the leadership of…corporate visionaries and because of pressure of values-driven employees, firms have worked to improve the conditions at their factories and to decrease the negative environmental impact of their manufacturing processes and their products…”

As anyone familiar with this kind of apologia could predict, the author goes on to place the blame for corporate irresponsibility and immorality on consumers, who “tend to be inconsistent at highlighting their values when purchasing goods and services. Instead, they demand price, quality and convenience first, and values and social responsibility second, once all else is equal.” “Where,” she wonders, “is the call for individual responsibility?”

It is difficult to know where to begin in responding to misconceptions, misrepresentations and plain ordinary errors of fact in this kind of business school fantasy. But here is an attempt, in about 1,500 words.

To begin with, there are many different kinds of corporations, everything from the mom-and-pop operation to the trans-national giants that rule the world’s markets. If we are considering these latter organizations, then it is simply a mistake to suggest that they have, or ever will, “put broader commitment to society before maximizing shareholder wealth.”

Milton Friedman was correct when he said, “the business of business is business.” This is a straightforward empirical and historical truth. The modern business corporation, which is widely owned by large numbers of shareholders and run by business management professionals, has no interest in the human interest. Its one and only concern is to maximize the value of the assets it controls, on behalf of its shareholders. This is its sole responsibility in both convention and the law. Of course, in those rare cases where the majority shareholder of a large enterprise is a single individual (typically, the founder), genuine altruism is possible, since it will presumably be serving the shareholder’s interest. But it is taken for granted in law and custom that where corporations are widely held the interest of the shareholders is strictly pecuniary—they want the maximum possible return on their money. This is most transparently obvious in those cases where a majority of a corporation’s shares are held by other corporations, the so-called institutional investors that today dominate the stock market.

It is well established in American jurisprudence that corporate “altruism” is permissible only insofar as it presents the prospect of either protecting or improving the bottom line. (See Dodge v. Ford Motor Co., 1916.) The operative principle was best stated by Lord Bowen, an English Chancery Court judge who ruled in an 1883 case that “Charity has no business to sit at boards of directors qua charity. There is, however, a kind of charitable dealing which is for the interest of those who practice it, and to that extent and in that garb (I admit not a very philanthropic garb) charity may sit at the board but for no other purpose.” This remains a guiding principle in corporate law.

There is no such thing as a good corporate citizen if by that we mean a virtuous citizen, and if we mean by corporation those giants that are widely held and professionally managed. These corporations have no concept of virtue. They are concerned, rather, with compliance with the law and good reputation. Their concerns in this regard are that getting caught breaking the law can lead to a reduction in profit through fines or other sanctions, or through loss of reputation. Genuinely virtuous behaviour is not concerned about reputation, in fact we normally admire most those virtuous acts which are performed anonymously and in total disregard of any potential reward.

It needs to be understood that corporations are nothing more nor less than machines for making money. The eighteenth century rationalist and Utilitarian thinkers who designed both the capitalist market and the modern business corporation (the classical and neo-classical economists) believed that the were creating a system of institutions that could create public virtue from private vice—namely the vice of greed, or self-interest. This was Adam Smith’s famous “invisible hand,” which he understood to be the hand of Divine providence at work through the market. The system depended for optimal performance, and therefore optimally virtuous outcomes, on the assumption that individuals were innately and incorrigibly self-interested—hence the successful demands to dismantle the Poor Law welfare system in Britain, which had injected an element of “irrational” altruism into the market. Altruism in the market was seen as counter-productive to the production of public welfare. These same primitive (and erroneous) assumptions are alive and well in current economic theory, as a glance into any college economics text will show.

The corporation is, and was deliberately designed to be, the ultimate rational economic being. Its role in the market is to pursue its own self-interest and in doing so, maximize the production of public welfare. It is invariably self-interested, and, what’s more, there is no limit to its avarice. Where people can become sated by material wealth, or succumb to the contempt of their fellows, the corporation has no such restraints.

What all of this means is that despite the best intentions of corporate managers, who in their private lives may be honorable and virtuous people, corporations will invariably choose self-interest over public interest whenever the choice arises. This is what they were designed to do and this is what law and custom expect them to do. Corporate leaders who fail to respect the imperative of profit above all else will be replaced. To pursue public welfare above profit as a corporate executive is to invite dismissal. And because profit is typically viewed in terms of quarters or, at best, annual returns, it is a rare CEO who is able to successfully argue with his Board that socially-conscious actions “will pay off in the long term.” In business, there is no long term. Or as Alfred Lord Keynes observed in this context, “in the long term we are all dead.”

In this sense, it is increasingly clear that modern business corporations govern the moral behaviour of their managers. Or, more broadly, corporations manage their managers in the corporate interest. The modern business corporation can thus be usefully viewed as an autonomous entity, a bureaucracy so complex that it might almost be granted the status of an artificial life-form. The analogy is more than trivially apposite. For more than a century American law has recognized corporations as “persons.” And in the past forty years corporate “persons” have leveraged this legal status into access to virtually the whole panoply of human rights protections offered by the Bill of Rights.

Corporations are not what they used to be, even prior to World War 2. They no longer work as adjuncts to the market, ostensibly creating public welfare—they now control the market. And being the single-mindedly self-interested creatures they are, they control the market not for the public good, but for their own good. It is vitally important that we understand this. If there was ever any truth too the mythology of the invisible hand of the market working on behalf of the public, it vanished with the rise to dominance in the last four decades of the modern corporate “person,” operating under the protection of our human rights codes.

The author claims that Gap and Nike, among others, “have put broader commitment to society before maximizing shareholder wealth.” I’m afraid that this is simply not the case, nor could it be without substantial revisions to corporate law. What has happened is that disclosure of the labour practices of their suppliers created a public outcry which threatened to reduce their profit. It was not altruism, but the need to protect profit, that caused them to act “virtuously.” And it was not virtue that was being pursued, but reputation.

If we wait upon corporations voluntarily to begin behaving virtuously, to begin acting as though they were concerned with the public interest in terms of social welfare, environmental health, or spiritual well-being, we will wait until hell freezes over. Their vaunted “codes of ethics” on closer examination invariably turn out to be either completely disingenuous or, more typically, simply codes of compliance which have nothing to do with morality and everything to do with financial prudence.

We need recognize that corporations are machines of our own creation, and to the extent that they are failing to do what we intended them to do—that is, serve human interests—then we need to go back to the drawing board for some serious re-design work. We might first look at the legal principle of corporate personhood, which has seriously perverted the initial purpose of the corporation as a simple provider of needed goods and services, and which no elected official has ever been asked to vote for or against. And the notion that corporate persons should have access to human rights protections is simply and obviously absurd.

In my view we ought to think of the modern business corporation in the way we think of the military. That is, as a necessary evil that needs to be kept on a short leash lest it mount a coup d’état. Sadly, the corporate coup seems already to have taken place and we are left with the more difficult task or restoring democratic institutions to their rightful position of power and control. The first step along that road is to recognize corporations for what they are—machines for making money, a Rationalist technology that has gone amok. We must stop romanticizing them as entities that possess moral sensibility either innately, or expressed somehow through their (morally impotent) managers. For the corporation, redemption is out of the question; careful, democratic oversight is not.

Finally, a few words in response to the author’s question, “Where is the call for individual responsibility?” The call is ubiquitous, and it exists in what we call conscience—the possession of which is chiefly what distinguishes the human from the corporate person. And the reason it is not acted upon more consistently is that the entire multi-trillion dollar marketing mechanism that undergirds corporate capitalism’s consumer culture is geared to drowning it out. One might even say that the main purpose of advertising is to disrupt our natural inclination to seek justice, equity, and moderation in our lives.

This is a long post, I know. But the subject is important and complex. Anyone interested in pursuing the subject in more detail can find a comprehensive critique of the modern business corporation and its moral position in my Greed, Inc.: Why Corporations Rule Our World. (New York, Arcade Publishers, 2006; Toronto, Thomas Allen Publishers, 2005). I’d also highly recommend Joel Bakan’s The Corporation, both the book and the documentary/TV series of the same name.