Friday, May 23, 2014

If a Corporation is a Person, Can a Corporation become Enlightened?

I've taken a break from writing for a few weeks and this article is a non-sequitur, something my goofy mind threw up to me from below. I made the mistake of catching it and chewing on it, so now I have to spit it out. So, here goes.

I believe I've read somewhere that the first corporations in western history were formed around exploration and commerce, viz., the East India Company and its Dutch equivalent. I believe these, like Sir Walter Raleigh, were given a royal charter or permission to trade in the name of and with the protection of their respective governments (in return for wealth and favor, of course!).

In any case, I know enough about state-chartered corporations to know that corporations exist as creatures of law by the various state legislatures. Corporations are deemed "persons" who can be sued and can sue in turn and do various other "corporeal" acts otherwise reserved for human beings.

Our capitalist culture has some of its philosophical roots in Adam Smith's hypothesis that individual self-interest operates for the good of all. From this comes the idea that competition is a good and efficient mechanism for the allocation of goods, services and scarce resources. An entire genre of behavioral philosophy, culture and psychology was given birth from this premise which was given a mighty push by precepts derived from evolutionary biology, aka, "survival of the fittest." Class warfare and, in general, materialism as the greatest good for the greatest number all owe their social legitimacy to the basic idea that struggle and competition bestow benefits of economic efficiency and prosperity upon society.

Not long ago (2010) there was a United State Supreme Court ruling that more or less lifted the limits previously imposed upon corporations in respect to their contributions to political campaigns. I think it was a free speech question but I assume it is predicated on the legal premise that corporations, are "persons" (and thus entitled to free speech).

Many sincere people around the world are concerned that corporations, especially those that operate in the global sphere, are in a position to outwit the various governments in whose jurisdictions such corporations conduct business. Some larger than many governments and are far more sophisticated, as they can hide resources by moving them around the globe. Many people and groups with whom I have a natural philosophical affinity accuse global corporations of all manner of deceptive practices and environmental neglect. I am not prepared to comment on any specifics and even if I did I would be quoting other people for I have no personal experience or expertise in these matters. In any case, for my point here today, it's not necessary.

What occurs to me is to reflect that the very existence of the corporate form stems from the social contract: which is to to say, from government "fiat." Without the laws that permit these creatures to even exist, they, well, wouldn't exist and wouldn't "enjoy" the benefits of various legal protections, as you and I do.

If therefore we in society are concerned that corporations have gotten too large and too powerful relative to their historical overseer -- the various levels of government -- then we should modify their privileges. We don't need to argue whether corporations are a person or have rights of free speech. We can perhaps reform their capitalist heart in the following manner:

Their power lies in their ability to raise capital on the stock exchanges around the world. Adam Smith's idea of "self-interest" was, I believe, never intended to encourage or praise rapacious or exploitative behavior. No intelligent person of goodwill would have espoused greed an an instrument of social goodwill!

As a man of the Age of Reason (and Enlightenment), I assume he meant (or should have!) "enlightened" self-interest! I think many corporations, at least in America and Europe, try to hold their corporate employees to a decent standard of integrity and enlightened self-interest; some, presumably, only pay lip service to such ideals. (I'm not in a position to know or say more or less than this.)

Local, state, and federal government agencies don't seem to have enough "police" and economic power to balance the global muscle of some of these corporations. Besides, I, for one, would hesitate to give government more power both in principle and for the fact that "buying" of politicians is one of the key forms of abuse of corporate power. I think that in exchange for having access to the capital markets, these self-same corporations can be made to expand their own, internal decision making to include their natural constituencies. Let me explain:

An economic enterprise utilizes capital, natural resources, and labor. (I added resources to the traditional explanation.) Such an enterprise makes an impact upon society and upon the environment as a result of its commercial activities. To pass an ever increasing number and complexity of laws to regulate a corporation's social and environmental behavior seems, to me at least, to operate under the law of diminishing returns.

But what if the very management of that corporation included persons who represented the interests of employees, vendors, the environment, and the consumer? They need not be given shares of stock because they can, by virtue of the regulatory requirements of the capital markets, be given a voting place on the Board of Directors of each corporation. There's no requirement that a member of a board of directors has to own stock in the company.

The agency overseeing the exchange where the corporation seeks to be listed would have to oversee the selection and behavior of the non-shareholder members of the board, but that seems far less onerous and feasible than passing more laws and giving more police power over such corporations, especially when they conduct activities in other countries beyond the reach of our laws.

What if the board of directors of such a corporation were required to have one-third of their number elected by shareholders in the traditional way; one-third elected by a combination of employees (including so-called contract employees otherwise barred from employee status) and vendors (excluding vendors effectively controlled by the corporation); and, one-third representing social interests such as the environment and consumers? (Government is by necessity a regulator. It is not appropriate to have board representation.)

The employee group of directors together with the shareholder-elected board members would appoint the social group. The stock exchange could set standards for the qualifications and relative make-up for the social group and for the process through which employees and vendors are represented. In some corporations environmental concerns are few while others such concerns are great. For some corporations (exporters or financial entities) there may be few real "consumers." A degree of finesse would be required.

Non-shareholder board members would be required to submit annual reports (publicly available) to the stock exchange that discloses their voting record, their investigative and oversight efforts, and their summary of the corporation's success in its relations and impact upon the groups and interests represented. The corporation would be required by the exchange to make some reasonable allowance for the costs of the oversight by these board members (including suitable staff and access to data), just as allowance is provided for the cost of outside financial auditors. (But more than just auditors are needed for, decade after decade, financial auditors have proven themselves ineffective.)

But what about a director's fiduciary responsibility to look after the interests of the corporation? Well, good question! Remember our definition of "self-interest" (the enlightened version, that is)? The "best interests" of the corporation are achieved when the interests of all stakeholders are taken into account and balanced appropriately. Indeed, the support, approval, and goodwill of employees, vendors, and consumers and the health and well-being of neighbors and the environment help ensure the long-term survival and success of the venture. Naturally, compliance with all just laws is a given, though only a baseline, insufficient in itself, for success.

Up until now I believe outside interest groups (like environmentalists) either make a lot of noise with boycotts and media to crash the party of shareholder meetings or they have to acquire blocks of stock (or both). It takes a lot of "noise" to make anything happen in such an adversarial environment. But with this approach as I propose it, each major corporation will be empowered to consider the greater impact of its actions. Bottom line, short-term profits are no profits at all if they amount to thievery of a sophisticated kind. Rewarding a long-term view stabilizes the economy and society as well.

You might object that such otherwise competing interests might paralyze decision making. Yes, that possibility exists but there are some of us who believe that such corporations are already too large and cumbersome. Enlarging the scope of their interests might exacerbate the slowness of decision making and response, but such is the price for due consideration of legitimate interests in a large and publicly held institution of any kind. Let the race go to the swift. It does now, anyway, doesn't it? Innovation seems to come primarily from the lone wolves and small operators. The one has immense resources (and commensurate responsibilities), the other, flexibility, creativity, and swiftness! (Economically, they need each other.)

What about our concept of "private property." Would such a proposal rob shareholders of their financial interests? Why? It is common for corporations to enlist the counsel of all manner of public figures or esteemed business associates to guide them. There's no requirement that board members or officers be shareholders. Such boards in reflecting a wider scope of interests would be in a better position to resist the pressure to reward officers with obscenely high salaries. (While a separate proposal and subject, I don't see why the privilege of access to capital markets doesn't also justify some basic limits on the ratio of officer salaries to rank and file.)

I would imagine that financial exchanges in Europe would be even more inclined in this direction (if they've not done so already). Perhaps also, Japan. China remains a feral nation (why do we pretend, otherwise?), so I doubt they would do anything more than superficial. Nonetheless, the American financial markets alone are substantial enough still to weather this en-lightening-up.

What I am essentially saying is proposing a broader standard of what constitutes success and what constitutes self-interest. The time is nigh. A corporation that takes a balanced and fair approach to considering the well-being of all of those segments of society (employees, vendors, consumers) and the environment it affects is far more likely to survive, flourish and grow. Substituting long-term success for mere short-term profits, profits, as it were, everyone, including the corporate shareholders who stick with it. The line between speculation and investment lies, in no small measure, on the timeline of one's holding period.

Well, that's as much time and effort as I am willing to put into this subject. Perhaps you'll agree or think it's interesting, or goofy, or even a good idea.

Sayonara dear friends and on to more meditative subjects.....

Nayaswami Hriman, CPA