LIMITS TO THE SOCIAL RESPONSIBILITY OF BUSINESS

PCDForum Article #19 Release Date June 1, 1996

by David C. Korten

A well known quotation appears on the back of each issue of the journal of an association of progressive business executives seeking a responsible role for business in society. It reads in part:

Business has become, in the last half century, the most powerful institution on the planet. The dominant institution in any society needs to take responsibility for the whole. . . . Every decision that is made, every action that is taken, must be viewed in light of that kind of responsibility.

It is true that business has become the most powerful institution on the planet. Consider the statistics. The world's 500 largest industrial corporations, which employ only 0.05 of 1 percent of the world's population, control 25 percent of the world's economic output. The top 300 transnationals, excluding financial institutions, own some 25 percent of the world's productive assets. Of the world's 100 largest economies, 50 are now corporations—not including banking and financial institutions. The combined assets of the world's 50 largest commercial banks and diversified financial companies amount to nearly 60 percent of the world's $20 trillion stock of productive capital. In the world's international currency markets alone more than $1 trillion changes hands each day seeking instant profits unrelated to the production or trade of real goods and services.

Concentration of control over markets is proceeding apace. The Economist recently reported that in the consumer durables, automotive, airline, aerospace, electronic components, electrical and electronics, and steel industries the top five firms control more than 50 percent of the global market.

The fact of corporate power is clear. However, calls for corporate executives to use that power responsibility all too often side step a number of important questions.

  • Do the managers of public corporations have the option of managing them in the public interest?
  • Should we assume that a person who happens to head a powerful corporation has the wisdom and the motivation to make decisions for the whole?
  • Do global corporations, their chief executives, or their owners have a natural right to hold such power over the rest of society?
  • Is rule by corporations desirable? Is it inevitable?

With regard to the first question, consider the following two cases.

The Stride Rite Corporation, a shoe company, was known for a number of years for its policy of locating plants and distribution facilities in some of America's most depressed inner cities and rural communities to revitalize them and provide secure, well- paying jobs for minorities. Arnold Hiatt, Stride Rite's CEO, had a strong personal commitment to this policy. In 1984 competitive pressures caused the company to experience a 68 percent drop in income, its first drop in thirteen years. Over Hiatt's strong objection, the board decided that the company could remain competitive only by contracting out production abroad to low wage countries—as their competitors were doing. The board reasoned, probably correctly, that if they did not move production abroad, the company would be subject to a hostile takeover by a buyer who saw an opportunity to reap significant profits by taking that step. Hiatt resigned and production was moved to China.

Family owned Pacific Lumber Company for years pioneered the development of sustainable logging practices on its substantial holdings of ancient redwood timber stands in California. It also provided generous benefits to its employees, fully funded its pension fund, and maintained a no layoffs policy during downturns in the timber market. This made it a good citizen in the local community. It also made it a prime takeover target. Corporate raider Charles Hurwitz gained control in a hostile takeover. He immediately doubled the cutting rate of the company's holding of thousand-year- old trees, reaming a mile and a half corridor into the middle of the forest that he jeeringly named "Our wildlife-biologist study trail." He then drained $55 million from the company's $93 million pension fund and invested the remaining $38 million in annuities of the Executive Life Insurance Company—which had financed the junk bonds used to make the purchase and subsequently failed.

In the absence of government oversight, corporations are formally accountable only to their owners, which in our present day means global financial markets. Here we confront the implications of how the world's financial system has transformed itself. With the growth of mutual funds and retirement funds, most investment funds are now entrusted to professional investment managers whose performance may be measured by the daily results posted in the world's leading newspapers. In response to pressures for instant returns, the portfolios of these funds tend to have a high rate of turnover as fund managers speculate in the short-term price movements of stocks and other financial instruments. Focused on short-term price fluctuations, traders become increasingly detached from the real world of people, nature, and productive activity. The social and environmental consequences of their actions never register on their computer screens. Theirs is purely a world of money.

This is the system to which contemporary corporate managers are accountable. They in turn are under enormous pressure to produce instant financial results. And the surest way to produce the immediate results that the financial markets demand is to externalize as many of the firm's costs as possible onto the community. The system ejects an Arnold Hiatt who truly seeks to manage in the community interest. It rewards and elevates a Charles Hurwitz who is willing to sacrifice the community interest in whatever way may produce a profit for himself. One need only read the business press to see the adulation heaped on those managers who are willing to fire thousands of workers in the blink of an eye to sharpen up the bottom line on the current year's financial statement.

Is it possible to manage a modern corporation responsibly in the larger public interest and survive? Only within definite limits or in specialized market niches. Should we assume that those who rise to the pinnacles of corporate power are driven by social motives? Some are, but social motives are not the determinant of corporate success. Do corporations hold their power by some natural right? Divine right— whether of kings or corporate CEOs is incompatible with democracy. Is corporate rule desirable? As corrupt and self-aggrandizing as our politicians may be, they do at least have to face the electorate and stand for election from time to time. Most of us really do not want to leave it to the executives of Philip Morris to decide how best to reduce teenage smoking. Is corporate rule inevitable? Only if the laws we chose to put into place allow it. Citizens have the right to change those law's whenever they chose to do so.

The matter of business responsibility requires some basic rethinking. Yes, we should expect and demand that corporate executives maintain high ethical standards and be accountable to the community for the consequences of their actions. But it would be foolish to turn over responsibility for the good of the whole to corporate executives with the expectation that they will be good and honest kings when the system in which they work gives its most lucrative rewards to those who are not good and honest. Rather than concentrating our attention on reforming corporate executives—among whom there are already a goodly number of Arnold Hiatt's struggling against the odds to do the right thing—we should concentrate on fixing the system within which managers work.

Political reform to get corporations out of politics would be an important first step. Corporations are public bodies created by public charter to serve a public interest. It is their proper role to follow the rules, not make them. If those rules restrict the freedom of corporate action, that is one of their essential purposes. If corporations have more power than democratically elected governments, the appropriate response for citizens is not to abandon democracy. It is to reclaim that power and restore democracy.

Citizens, acting through their governments, must reassert their right to set the rules for those who do business within their political jurisdiction. They must reclaim the authority to revoke the charters of corpora tions that break the law or even simply fail to serve the public interest as citizens chose to define it. They must demand that anti-trust be rigorously enforced to break up corporations that acquire monopolistic powers. And they must create through regulation, fees, penalties, and tax policies a system that rewards firms that internalize their costs and penalizes those that do not.

If we are serious about business responsibility, then we must create a system of business that rewards those firms that are responsible in the eyes of the broader community and eliminates the irresponsible—a system almost the mirror opposite of what we now have.

_______________

David C. Korten is president of the People-Centered Development Forum and author of When Corporations Rule the World published by Kumarian Press and Berrett-Koehler Publishers. This article was produced and distributed by the PCDForum.

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