Corporations in a Lorax State

03/07/2012 03:31 pm ET | Updated May 07, 2012

Dr. Seuss' The Lorax debuted to much fanfare last Friday, raking in a cool $70.7 million at the box office this weekend. The genius of The Lorax is that Seuss was able to weave an enchanting children's tale of resource mismanagement as told through the dialogue of the two main characters -- the adorable Lorax and the "dirty old" Once-ler. Dr. Seuss' The Lorax is most commonly described as being a story about the preservation of the environment. While the environment does play a central role in Seuss' tale, an underlying tension in the book, which links directly to our current economic woes, is the tension between short-term profit seeking activities, and long-term value creation and sustainability.

As the story goes, one day the Once-ler arrives in the fantastical land where the Lorax and his friends live -- Brown Bar-ba-Loots, Swomee Swans and Humming Fish. They spend their days blissfully romping around and frolicking among Truffula trees, or in the case of the Humming Fish, happily swimming in crystal clear water. The Once-ler starts chopping down the Truffula trees at an alarming rate in order to make Thneeds -- a garment which "everyone needs." The Once-ler's Thneed enterprise has some externalities, such as depriving the Bar-ba-loots of food (they ate Truffula fruit), "glumping" the Humming Fish's pond, and creating "smogulous smoke" which led to respiratory difficulties for the Swomee Swans. Despite the Lorax's constant protests and admonitions, the Once-ler chooses short-term profits over sustainability and does not stop chopping the trees until there are all depleted. With the land completely ravaged, the Thneed factories are forced to close, and an exasperated Lorax lifts himself up and disappears though a hole in the smog, leaving a rock inscribed with one word: UNLESS.

At this point, most commentators fill in the "unless," with something about the environment. For example, "Unless, we stop ravaging the Earth and save our planet... " However, speaking from a corporate law professor's perspective, I would like to offer three other "Unless-es."

First, unless shareholders and corporations resist the temptation to engage in short-termism, we run the risk of foregoing long-term sustainability and value creation. By short-termism I mean the tendency to choose immediate gain or reward while discounting outcomes that occur seemingly far in the future. The effects of short-termism in The Lorax are abundantly clear -- the Once-ler chose to maximize his profit in the short-term while discounting the effects of his actions in the long-run, all to the detriment of his Thneed business and the community of which this business was a part. Examples of short-termism behavior in today's corporate world include shareholders' insistence that management deliver quarterly growth, the practice of compensating executives based on stock price or current year earnings, and the practice of weekly analysts calls. When shareholders and corporations focus too heavily on the short-term, they do so at the sacrifice of the future. As any good wealth manager will tell you, successfully planning for the future often requires foregoing immediate gratification.

Second, unless an ethos of corporate social responsibility (CSR) truly becomes engrained in a for-profit corporation's mission and purpose, that corporation runs the risk of becoming obsolete. The idea that corporations should be socially responsible has been around for decades, but it is increasingly becoming more of a mandate with the growth of socially responsible investors, and savvy consumers who demand that businesses behave ethically and be good citizens. Had the dirty old Once-ler been CSR savvy, he would have heeded the Lorax's pleas. He could have implemented such measures as replanting a new Truffula sapling for each tree that he chopped rather than choosing to decimate the Lorax's environment. For sure, implementing CSR measures would probably have reduced the Once-ler's short-term profits, but had he implemented these measures the Lorax and the Thneed factory may just have continued to co-exist.

Third, unless corporations adopt a more expansive view of what their purpose is in society (beyond profit maximization and enhancing shareholder value), we could be heading down the path of the Lorax. There is a popular belief that the purpose of the corporation is to maximize profit for shareholders. This, however, is not what U.S. corporate law requires. The only time that corporate law requires management to maximize profit is when the corporation is for sale. In all other instances, so long as management is properly exercising their business judgment, management is free to pursue whatever course of action they see fit, including creating environmentally friendly products, improving employee morale, and giving back to the community. Thus, a relentless pursuit of profit is a choice and not a legal mandate. Moreover, it can be a dangerous choice because continuously striving to maximize shareholder profit may come at the expense of other interests, such as the near extinction of species, as was the case in The Lorax.

To be sure, there are some people who will say that The Lorax is a simple tale and I am reading way too deeply into it. This, however, is exactly the beauty of the story. As Dr. Seuss himself said: "I like nonsense, it wakes up the brain cells. Fantasy is a necessary ingredient in living. It's a way of looking at life through the wrong end of a telescope."

It has been a little more than forty years since The Lorax was first published and judging from the strong showing at the box office this weekend, the message of The Lorax still resonates with many. But what will we do with this message? As we listen to all the stories of corporate greed maybe it is time for us to adopt a more expansive vision of what corporations should be about. Maybe we need a new perspective, or in the words of Seuss, maybe we should try "looking... through the wrong end of [the] telescope."