Corporations are not working for the 99 percent. But this wasn’t always the case. In a special five-part AlterNet series, William Lazonick, professor at UMass, president of the Academic-Industry Research Network, and a leading expert on the business corporation, along with journalist Ken Jacobson and AlterNet’s Lynn Parramore, will examine the foundations, history and purpose of the corporation to answer this vital question: How can the public take control of the business corporation and make it work for the real economy?
Historically, corporations were understood to be responsible to a complex web of constituencies, including employees, communities, society at large, suppliers, and shareholders. But in the era of deregulation, the interests of shareholders began to trump all the others. How can we get corporations to recognize their responsibilities beyond this narrow focus? It begins in remembering that the philosophy of putting shareholder profits over all else is a matter of ideology which is not grounded in American law or tradition. In fact, it is no more than a dangerous fad.
The Myth of Profit Maximizing
“It is literally – literally – malfeasance for a corporation not to do everything it legally can to maximize its profits. That’s a corporation’s duty to its shareholders.”
Since this sentiment is so familiar, it may come as a surprise that it is factually incorrect: In reality, there is nothing in any U.S. statute, federal or state, that requires corporations to maximize their profits. More surprising still is that, in this instance, the untruth was not uttered as propaganda by a corporate lobbyist but presented as a fact of life by one of the leading lights of the Democratic Party’s progressive wing, Sen. Al Franken. Considering its source, Franken’s statement says less about the nature of a U.S. business corporation’s legal obligations – about which it simply misses the boat – than it does about the point to which laissez-faire ideology has wormed its way into the American mind.
The notion that the law imposes a duty to “maximize shareholder value” – a phrase capturing the notion that profits are mandatory and it is the shareholders who are entitled to them – is so readily accepted these days because it jibes perfectly with assumptions about economic life that constantly come down to us from business and political leaders, from academia, and from the preponderance of the media. It is unlikely to occur to anyone under the age of 40 to question this idea – or the idea that the highest, or even sole, purpose of a corporation is to make a profit – because they have rarely if ever been exposed to an alternative view. Those in middle age or beyond may have trouble remembering a time when the corporation’s focus on shareholders’ interests to the exclusion of all other constituencies –customers, employees, suppliers, creditors, the communities in which it operates, and the nation – did not seem second nature.
This narrow conception of corporate purpose has become predominant only in recent decades, however, and it flies in the face of a longer tradition in modern America that regards the responsibilities of a corporation as extending far beyond its shareholders. Owen D. Young, twice chairman of General Electric (1922-'40, 1942-'45) and 1930 Time magazine Man of the Year, told an audience at Harvard Business School in 1927 that the purpose of a corporation was to provide a good life in both material and cultural terms not only to its owners but also to its employees, and thereby to serve the larger goals of the nation:
“Here in America, we have raised the standard of political equality. Shall we be able to add to that, full equality in economic opportunity? No man is wholly free until he is both politically and economically free. No man with an uneconomic and failing business is free. He is unable to meet his obligations to his family, to society, and to himself. No man with an inadequate wage is free. He is unable to meet his obligations to his family, to society, and to himself. No man is free who can provide only for physical needs. He must also be in a position to take advantage of cultural opportunities. Business, as the process of coordinating men’s capital and effort in all fields of activity, will not have accomplished its full service until it shall have provided the opportunity for all men to be economically free.”
This holistic declaration was echoed, albeit in more specific and practical terms, by the chairman of another massive US corporation, Johnson & Johnson, during World War II. In his 1943 “Credo,” a somewhat modified version of which can be found on the company’s Web site today, Robert Wood Johnson II identified five distinct constituencies and established an order of priority in which they would be served by his firm. Johnson & Johnson’s “first responsibility,” he wrote, was to its customers: “the doctors, nurses, hospitals, mothers, and all others who use our products.” In second place came employees; in third, management; and in fourth, “the communities in which we live.” The interests of the stockholders, the corporation’s “fifth and last responsibility,” appear subordinate in his mind both to the firm’s sound operation, which depends on attention to the interests of the other constituencies, and to its long-term welfare:
“Business must make a sound profit. Reserves must be created, research must be carried on, adventurous programs developed, and mistakes paid for. Adverse times must be provided for, adequate taxes paid, new machines purchased, new plants built, new products launched, and new sales plans developed. We must experiment with new ideas. When these things have been done the stockholder should receive a fair return.”
A Shift in Accountability
By 1978 the era of deregulation had begun and signs had appeared that corporate attitudes were shifting. In that year another GE chief executive, Reginald H. Jones, wrote that the “central principle of the present system is that a director’s accountability is to the owners of the enterprise.” Having set aside the broader visions of corporate duty held by his GE predecessor Young and by Johnson, Jones in effect moved the firm’s responsibility to its shareholders from last on the list to first: “If this principle is abandoned, if other corporate constituencies are placed on a plane with shareowners, if directors are required to represent directly the interests of nonshareowner groups…there will be no clear measure of directors’ responsibility because there will be no clear consensus on primary corporate goals.”
His personal preferences aside, however, Jones realized that Americans were not yet ready to accept firms’ turning their backs on the general good, and that he and his fellow executives had something to gain from being accommodating:
“If the concern is social responsiveness, or ‘public accountability,’ the short answer is that in this country at this time, no large corporate enterprise can afford to be perceived as oblivious or contemptuous of matters of genuine social or public concern. These enterprises have to earn from the general public and their political representatives – and earn from year to year – the right to continue to function without radical new governmental constraints.”
The dawn of Ronald Reagan’s presidency found the corporate community on the fence. The “Statement on Corporate Responsibility” issued in October 1981 by the Business Roundtable, which groups the CEOs of the largest US firms, recognizes six constituencies – customers, employees, communities, society at large, suppliers, and shareholders – as forming the “web of complex, often competing relationships” within which corporations operate. It accepts the idea that “shareholders have a special relationship to the corporation” but doesn’t allow their interests to trump all others:
“Balancing the shareholder’s expectations of maximum return against other priorities is one of the fundamental problems confronting corporate management. The shareholders must receive a good return but the legitimate concerns of other constituencies also must have appropriate attention. Striking the appropriate balance, some leading managers have come to believe that the primary role of corporations is to help meet society’s legitimate needs for goods and services and to earn a reasonable return for the shareholders in the process. They are aware that this must be done in a socially acceptable manner. They believe that by giving enlightened consideration to balancing the legitimate claims of all its constituents, a corporation will best serve the interest of the shareholders.”
Even after eight years of Reagan and amid the burgeoning of free-market ideology, the Business Roundtable remained reluctant to place shareholders first, affirming in 1990 that “corporations are chartered to serve both their shareholders and society as a whole” and adding creditors to the 1981 list of constituencies, which it otherwise retained intact. It was only in 1997, in a new statement whose title substituted “Corporate Governance” for “Corporate Responsibility,” that it renounced attempts to balance the interests of corporate constituents and, having reversed its view, argued that taking care of shareholders was the best way to take care of the remaining stakeholders, rather than the other way around:
“In the Business Roundtable’s view, the paramount duty of management and of boards of directors is to the corporation’s stockholders; the interests of other stakeholders are relevant as a derivative of the duty to stockholders. The notion that the board must somehow balance the interests of stockholders against the interests of other stakeholders fundamentally misconstrues the role of directors.”
This doctrine, known as “shareholder primacy,” now reigns in the corporate world today, and it has so increased the power of those whom it has benefited that it will not be easy to dislodge. Those who propagate it believe, or would have us believe, that it is based in law; in fact, it is supported by no more than ideology. They believe, or would have us believe, that it reflects incontrovertible and eternal truths; in fact, it is an expression of transient self-interest. They believe, or would have us believe, that it honors long precedent – but, as we have seen, its ascendency is recent, and, rather than honor it undermines precedent. Yet despite these contradictions, corporations and their allies have been exceedingly successful at selling their viewpoint to the American people.
An important step toward countering their influence can come in refusing to accept the legitimacy of shareholder primacy. Up to now, this fad has had the power to neutralize opposition in part because it has obscured the tool needed to challenge it: a clear understanding of the economic realities. For this reason, we must learn what contributions all stakeholders – not just the shareholders, but all the others as well – make to the corporation, and the extent of the risks and rewards those contributions truly entail. We must learn about the interrelation of business and government in all its complexity, going far beyond the headlines about taxes and regulation to discover who needs whom for what, and who does what for whom. And we must learn what rights corporations legitimately hold, what privileges they enjoy, and what duties they are obliged to carry out.
Without this effort, without this knowledge, we are in danger of continuing to be held captive by a fad.
Ever since we invented civilization, humans have recognized that there are good and bad ways to make money. Today, "good and bad" are being replaced by "legal and illegal". (If you don't believe that good and legal are very different things, go read up on slavery.) It's funny that the GOP claims to be the moral party, yet it's leading this charge to replace morality with paperwork, and it's doing this for a constituency that isn't suffering in any way, shape, or form: corporate "people".
In this day and age, words like that will never occur because the very next day Wall Street analysts, hedge fund managers and outraged stockholders would descend en masse on the corporate headquarters to tar and feather the guilty parties.
This outcome seems more like the result of carefully manipulated legislation and information. Not what I would call a "fad".
The relationship of corporations to American society has changed over time. In colonial times it was not so good, at least vis a vis the British East India Co., nor were many corporations civic minded in the era of brutal sweatshops and "I owe my soul to the company store". But there have also been times of better balance between private profit and overall fortunes of the nation and its people.
NOW, if we could do the same thing towards corporations that behave in unethical ways, such as mass outsourcing, mass unnecessary layoffs, tax dodging, forcing good qualified employees into early retirement or part time work, taking away or exorbitantly jacking up the price of benefits, paying way below average wages for certain jobs, and much more. Everyone united, together saying "We will not do business with you any longer until you change what you are doing."
WE HAVE THE POWER, IF WE CHOOSE TO USE IT! RISE UP! BE AWARE! MAKE YOUR VOICES HEARD! Yesterday BofA fees, today, pink slime, tomorrow corporate greed and excess. We want corporations that look out for their country and it's citizens! We can make them hear us, we can make them change.
If a business is serving it's customers well and respects it's employees it will make a profit for the owner or shareholders.
Within Academia, I witnessed the fundamental ideological shift you discussed.
I used to teach Management courses, and never accepted the notion that a complex organization should maximize one variable for one interest group. Beneficial corporate outcomes should be shared among all interelated interest groups.
Shareholder Wealth Maximization has been pushed heavily by financially oriented economists. It's now a mainstream doctrine within America's large, powerful corporations. It ignores the collegiality of interest groups. The ideology may also be enhancing wealth at upper income levels, because extravagant compensation of professional managers is linked with incentive bonuses and stock options.
Today, when I converse with owners of small family businesses, I find that many are intuitively Stakeholder oriented. Indeed, lacking corporate bargaining power, small business owners seem to recognize that satisfying diverse Stakeholders (customers, employees, suppliers, creditors, community groups, etc.) is essential for long-term survival and superior profits.
"Power corrupts, and absolute power corrupts absolutely." (Lord Acton)
I'd say you have the reading ability of an 11th grader, but that would be insulting to 11th graders.
Michael Kittredge Did you not read the examples, quotes from CEOs of yesteryear, extolling the virtues of corporate responsibility to the people, to the communities, to the country?
I'd say you have the reading ability of an 11th grader, but that would be insulting to 11th graders.
- To which I reply - You ignored my points instead of answering them, and descended to an ad hominem attack. What were you doing when you should have been reading your American History textbook, Michael?
http://en.wikipedia.org/wiki/Standard_Oil
http://docs.fdrlibrary.marist.edu/od2ndst.html
http://en.wikipedia.org/wiki/Upton_Sinclair
Maximizing profits and society do not necessarily clash. Corporations provide a management structure to provide services to consumers. They raise money either through debt or equity. I really do not see much a problem with companies being beholden to their shareholders (perhaps shareholders may be too greedy and push companies into making foolish decisions). People seem to think "profit" is an evil word. They dream up childish (and meaningless) terms like "excess profits", "mega profits" "super profits" etc.
If you do not like the situation tax capital gains as regular income and use government to fund transfers to XYZ cause. Trying to get capitalists to act like Buddhists is a fools errand.
Make money, make tons of it. Just make sure you remember, corporations, you're a part of this country, and should behave ethically. If corporations are considered people now, they should act as good neighbors.
"Make money, make tons of it. Just make sure you remember, corporations, you're a part of this country, and should behave ethically. If corporations are considered people now, they should act as good neighbors. "
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Prove how it is not collectivism. I believe it is.
When Henry Ford payed his employees enough that they could afford the cars they were building was he guilty of "collectivism"? Was he doing it wrong, in your view?
Ford would not be an example of collectivism.