I just saw an interesting film, The Corporation, that suggests that many corporations (which legally have the same status as “persons” in the USA) could be clinically diagnosed as psychopaths. While I felt the film was a bit heavy-handed, there were many points that were quite thought-provoking. For example, one point the film made was that many corporations are now global, but governments are national, and thus many corporations are out of the jurisdiction of any governing body. Furthermore, the film makes the point that because corporations are motivated only to maximize shareholder value, they have no incentive to be “responsible persons” in society, and in fact, they have every incentive to try to “externalize” costs by cutting corners, offloading problems and waste onto the public, and cheating if they can get away with it. So rather than obeying laws and being good citizens out of some sense of morality or ethics, they do so only if and when the risk of getting caught is greater than the chance of getting away with it. There are also some interesting stories in the film about some organizations and how they are attempting to change to become more sustainable. In any case, I think this film is worth seeing — it certainly informs the debate and is highly thought-provoking.
Seeing this film reminded me of a blog posting I wrote last year, On the Separation of Corporation and State. Perhaps this concept should be proposed as a new Constitutional Amendment? The question is how could it be structured so as to be effective and not merely symbolic? Another question I’ve been thinking about: Is there a way to add feedback to corporate revenues such that they benefit or suffer due to additional factors such as their environmental impact, social impact, etc.? For example, could corporations be rewarded or penalized financially by an independent body for various good or bad behaviors? To some extent governments have attempted to do this with various taxes and tax-credits. But for the most part, I’m not sure the effect has been pronounced enough. Ultimately it has to be a strong enough effect that investors will start to worry about these factors and consider them when making investment decisions. They should think “Is this company good to the environment?” not just because it’s a warm fuzzy thought but because it could really impact the value of the company’s stock in the future! The problem is how to administer such a penalty-reward system, and also all the potential legal challenges that might arise? It may simply be impractical.
Still, there is a problem that everyone recognizes — large multinational corporations answer to nobody yet affect everybody. They are not democracies — neither their employees nor the people in the communities and biospheres they impact have significant voting power over their behavior. Even their shareholders don’t have equal voting power — only the large shareholders really have impact on decision-making. It’s strange that America is both the champion of Democracy and Capitalism — because while these two systems support one another, corporations are anything but democratic in structure! That may have been tolerable in earlier times when corporate influence was much smaller. But today, corporations are perhaps more powerful than democratic governments. Is it time to take another look at this issue?
Democracy and capitalism are both in the process of breaking. Democracy is breaking because it was not designed to handle such large populations (in other words the Electoral College system, and much of the rest of our present form of Democracy, are obsolete in the face of larger populations — the effect that an individual can have is less than before in my opinion when it was practical for everyone to speak directly with their Representatives), and because it was not designed to withstand corporate influences (modern day independent capitalist corporations with legal status as “persons” did not exist when our republic was designed). Capitalism is broken because it lacks checks and balances such that it will destroy the marketplace if left unchained. We can already see this taking place, for example in the drastic depletion of global fisheries due to unrestrained over-fishing. This will happen not just with fish, but with every natural resource, given enough time. Capitalism is simply not designed to be sustainable — that was never considered to be a risk when capitalism was originally conceived of — back then the world seemed to be a very big place with virtually unlimited resources. Today as the world becomes smaller and populations become larger, resource constraints are an increasingly important issue.
While individual corporations may realize their livelihoods depend on certain resources and may control their behavior accordingly, they cannot control what other corporations, perhaps in entirely different industries with different goals, do. Thus corporation A may need resource X and take care to preserve it, but that may not stop corporation B from destroying or damaging resource X in the process of working with resource Y. Since corporation B is only interested in resource Y, it has no incentive to preserve resource X, and in fact, if destroying resource X makes it able to leverage resource Y more cost-effectively it will do so. This is a fundamental “bug” in the way capitalist systems are designed presently. It really needs to be fixed.
There does not seem to be an effective feedback loop — there is nothing to really balance these organizations anymore, yet they are increasingly powerful. The simplistic hope that “the market will sort it out” has not led to a solution and doesn’t show any sign of doing so — in fact we just see Tragedy of the Commons taking place on a global scale. Of course we could get rid of the Tragedy of the Commons by simply making everything into private property — but I wouldn’t want to live in such a world. Rather than take such drastic measures, why not find a way to moderate the behavior of corporations instead? Then we can have a Commons, something which I think is essential to a free society.
Given that governments are becoming weaker than global corporations, we have two choices. One would be to somehow try to restore the balance of power between governments and corporations (with what, a world government? And who would be its citizens — corporations, nations, or individuals, or all of the above? And if so, who would have the voting power in such a structure?); the other option would be to acknowledge that a fundamental shift has taken place — maybe corporations ARE the new governments?
But if that is the case, then we may need to transform corporations into democracies and provide democratic rights and freedoms to their stakeholders (not just their shareholders, but all stakeholders — like employees and people in communities that are affected by the corporations, etc.). I wonder how this could be made to work on a practical level? For example, who would actually get to vote on what types of decisions? Would the workers in the sweatshop in Mexico making jeans for Giant Company X get to vote on its corporate decisions? What about the people in the town where the factory is? Where would the line be drawn? Maybe the way to start would first be to make corporations internally democratic such that everyone getting paid by the corporation would have a vote (so, now not just shareholders but also all forms of employees would have a vote).
Perhaps the way this could be done would be to give employees voting shares proportional to the percent of annual income represented by their annual wage, or better yet, in proportion to the number of hours they work for the corporation (on the assumption that everyone’s time is equally precious and entitles them to equal say per unit of time worked). Thus the sweatshop workers who earn less could actually have significant voting power because of the massive hours they rack up. These voting shares might not be redeemable or saleable for cash, but would allow for votes on key decisions. The second step would be to open up more decisons to the voters — not just board appointments and so forth, but perhaps increasing numbers of corporate decisions. Ideally the corporation could run as democratically as possible on an internal level. The next step would be to issue voting shares to communities in which the corporation does business — whether it has a store there or a factory there for example — in proportion to the amount of business done in that community. And perhaps voting shares could also be offered to customers too, in proportion to how much they buy. As voting shares were issued to stakeholder who were not receiving money from the corporation but were somehow affected by it’s work it would become “externally democratic.”
I wonder whether a “democratic corporation” or what I call a “corpocracy” would be more or less successful over the long-term compared to non-democratic corporations? Would it be in better synch with its internal and external environments through linking them to feedback channels that could really affect decision-making at the top-level? Would they have happier, more loyal employees and customers? Would their partners, suppliers and the communities they work in be more supportive? Would they be more beneficial to the world as opposed to just plundering it? I would like to see some experiements along these lines — can anyone design and test a truly democratic corporation? It would have to be done so as to be fair to the parties providing capital, but also to those doing the work, buying its products, and living in areas that supply it with resources, etc.
This is the next frontier in the evolution of the corporation — the evolution of democratic organizations that actually are self-aware enough to benefit the world (because they realize how this benefits them as businesses, but also because they inherit the positive motivations of the people that comprise them). I look forward to seeing corporations arise that measure their performance and value to investors in more than just financial terms. I look forward to seeing this tied to the stock price by the marketplace so that there is a true feedback loop.
Perhaps one way to bring this change about would be to find a way to correlate a corporation’s non-financial performance with its financial performance. In other words, its environmental and social record could be measured and linked predictively to financial performance. This information could then be shared with investors such that they could make investments based on these factors. Assuming that it turns out that organizations that are “good” on these non-financial dimensions are also more profitable over the long-term, this would give investors a way to choose their investments based on this — and this would cause investors to favor such organizations. As more investment thus moved to organizations that scored highly on these dimensions, other organizations would have to compete by increasing their score on these dimensions as well and to accomplish this they would have to evolve to be better citizens as well. So ultimately since “money talks,” let’s use money to be the force of natural selection that causes organizations to self-organize and evolve to become better “persons” (and more democratic organizations, by necessity I believe).
The problem is basically an evolutionary problem — how to get organizations to evolve in a certain direction. The solution is to change the “force of natural selection” to favor the direction of evolution we desire. Corporations do what the market rewards them for — just like politicians lead by the polls. If we can tune the market so that it rewards more evolved corporations — because it can be proved that such corporations are better investments — then we’ve literally changed the world. Ultimately, by providing a smarter way to measure organizations — one that is capable of quantifying, normalizing and comparing these “non-financial” dimensions of organizational behavior — this changes the “force of natural selection” by causing investors to flock to the organizations that are more evolved. Like magic, a new generation of more evolved corporations will naturally evolve to fit these new selective criteria. It’s only a matter of time. No external regulatory pressure needs to be applied — the organizations will transform of their own volition because it enables them to do better in the marketplace. Those that fail to will lose investors and ultimately will die off. Ultimately the “non-democratic corporation” will become extinct. The more evolved “democratic corporations” will be all that remains.
The change can also be ushered along internally within organizations, by helping decision-makers learn how they can actually improve the bottom-line in the short-term and long-term by adopting more democratic, sustainable policies — and by ultimately making their organizations into better “global citizens.” The key is that this must be tied ultimately to financial performance which is the primary motivating factor of corporations, no matter what anyone says. Unless these changes in behavior can be linked empirically to better financial performance, they will not be truly adopted and retained by organizations. Ultimately, organizations only do what they think is “best for them.” They are selfish. So we have to show them that altruistic behaviors can actually further their selfish goals. We cannot expect for-profit organizations to ever become unselfish — that is not their charter. All we can do is use their selfishness to drive them to evolve to be selfish in a more sustainable, healthier manner. In other words, we can use their selfishness to cure them of being “psychopaths” and rehabilitate them into good members of their local and global communities and biospheres.
In any event, we have to do something. The regulatory approach is one — but I think it is too hard to manage and won’t work. A better approach is the evolutionary approach that I suggest above. This gets the organizations and investors to naturally come to favor more evolved organizational behavior. In any event, do not believe that we can or should wait for corporations to become “good citizens” on their own without any motivation — that is like asking wolves to stop eating sheep. Wolves will still eat the sheep even if you ask them nicely not to. Even if the wolves are given the task of guarding the sheep, or farming the sheep, they will still eat the sheep. If you don’t want them to eat all the sheep you have to somehow link their survival to the surival of at least some of the sheep. This prevents the Tragedy of the Commons. Next, you have to enable the wolves to compete such that those who do the best job of stewarding the sheep will be most successful. That is the way to bring about an optimal relationship between the wolves and sheep. I am not suggesting that we try to make the wolves into vegetarians — that is unlikely to happen — instead, I am suggesting we can use evolutionary algorithms to evolve a better, more sustainable, relationship between the wolves and the sheep. This depends on feedback — by improving the ability of the wolves to measure the impact that their behavior towards the sheep has on their own success, the wolves can begin to modify their behavior to optimize that relationship.
The current status quo in which governments don’t interfere with corporations unless they have to, or blindly simply trust them to police themselves, is just letting the wolves run the farm. That’s not the solution. Forcing corporations to conform to some set of principles is also not the solution — they will find a way around these rules. The only way to change corporations is to convince them and their investors that change is beneficial to them on a financial level.
I’m not sure how to solve this, but it is interesting that corporations are not democracies. Maybe they should be. I believe that this is a first step towards making organizations that are more able to change. So the first move in the game is to show organizations why adopting more democratic control structures will result in better long-term profitability. Similarly, by providing better feedback to the marketplace (and to organizations) about the effect that their organizational behavior has on their own (and one anothers’) financial performance, investors can be used to drive the evolution of organizations in a better direction.
I believe the above points are sufficient, but notwithstanding any of them, there is one final point that is worth considering: if corporations really are the new governments, if they are now the most powerful organizing forces of our societies and cultures, then shouldn’t they be democracies as a matter of principle? If in fact corporations have become more influential than governments, should we not evaluate them with the same standards that we apply to our governments? What kinds of corporations do you want to be governed by?
An interesting critique of my ideas above was blogged by Jay but of course I disagree with his characterization of my position, as well as his main points. First of all, Jay suggests that “customer feedback” is all that is needed to cause corporate change. Yeah, well if that is the case, then why haven’t corporations changed yet? Either there is not enough customer feedback, or customers don’t care, or corporations don’t really listen to their customers, or (d) all of the above! The point is that when you are shopping for a PC you don’t sit there and research the environmental record of the manufacturer, let alone every component manufacturer within it — indeed that would be impractical — and let’s say you found out that the combined environmental record of all those parties was not great, but that it was still $1000 cheaper than the competing brand provided by a group with a higher environmental record. Which one are you going to buy? Customers choose based on brand and price. Everything else is secondary or irrelevant. If it were really practical for customers to research this data about every company before buying their products, that would not guarantee that customers would behave differently — price is the ultimate arbiter. Therefore, again, the feedback must be tied to money — either the revenues of the corporation or the price of its products. Without that it is simply idealistic to hope that somehow the masses will finally place higher values ahead of price when making buying decisions. While some minority may care enough to do that, and be willing to sacrifice, most won’t, and thus no real change will be affected by this approach. Another point that Jay suggests is that employees might “vote” by simply refusing to work for “evil” companies. Well, if that were the case, why are there so many fully-staffed evil companies today. These arguments prove that Jay is an idealist. I am a realist on the other hand. I think human nature (at least in its common delluded form) is basically selfish. Sure we are all Buddhas at heart and if we could see that we would all be saints, but most humans just aren’t operating at that selfless level yet. Sorry about that Jay, I too wish they were. In answer to Jay’s other crits: Certainly modern day corporations with legal rights of “persons” did not exist in America when it was founded, or elsewhere in European history. The modern day corporation is quite a different animal, and has a lot more power, than precursors of the past. By the way, as the film points out, in the past corporations were usually chartered by the government for a specific purpose — they were not nearly as independent as those of today. Finally Jay’s point that “private property” is the solution to the Tragedy of the Commons is valid — but I didn’t claim that we should abolish private property — I simply said that another solution to the Tragedy of the Commons (that also has the added benefit of requiring us to make every public resource into a privately owned thing) is to evolve more responsible, intelligent, considerate corporations. That seems to me to be better — there can still be a “Commons” that way — something that is essential to a Democracy in my opinion, but it can be protected by keeping corporate appetites in check.