Are Corporations People (Redux)? Why Jack Welch Is Wrong

The "are corporations people?" debate returned to the public eye when Elizabeth Warren made it part of her speech to the Democratic National Convention in Charlotte, N.C. Warren has had an ongoing feud with Republican presidential candidate Mitt Romney on the topic, with Romney saying corporations are people and Warren saying they are not. Unfortunately, the debate really hasn't progressed beyond slogans.

The only substantive discussion of the topic was a recent article by Jack (and Suzy) Welch in The Wall Street Journal. They launched a broadside against those who say corporations aren't people, arguing that it was simply doublespeak, and that "when people say that corporations aren't people, what they really want to say is, "Business is evil."

I don't agree. Corporations are the foundation of wealth creation, innovation, jobs, markets and the economy in our society. Despite their flaws they have proven to be the most effective form of organization for such tasks. However, while corporations contain people, and are owned by people, they are not people per se. This is not to denigrate them, but to apply a bit of precision to the discussion.

This is not just an academic debate. Rather there are consequences for getting this issue wrong. I think Jack is mistaken in his analysis for a number of reasons.

To begin, he comes at the discussion from an asset point of view. He says what else could corporations be? Buildings? Machines?

But if you define a corporation by its assets, you won't conclude corporations are people. According to generally accepted accounting principles, people are not assets but are viewed as a "variable cost." Sure, some pundits admonish management to say "people are your most important assets." But such a folksy view is not consistent with the actual meaning of an asset.

An asset view of a corporation should lead Welch to conclude that corporations are tangible assets like buildings and equipment, intangible assets like goodwill and patents, and financial assets like accounts receivable and stocks. Not very satisfying.

Corporations are institutions, created by society to fulfill a purpose. There is much debate as to what that purpose is. Most CEOs and Corporate Boards will say their primary purpose is to "create shareholder value." For public corporations this means to make money and increase stock price.

Yes, some activists say corporations should have a broader purpose and goals. They argue for a stakeholder view of the corporation where firms exist to meet the needs of diverse groups such as employees, customers, business partners and the communities within which they operate. But sit on the board of directors of any major company and it's clear what the goal is -- "shareholder value." The compensation plans for virtually all corporate executives have to do with achieving growth and earnings targets. And people do what they are compensated to do.

While corporations may enjoy the benefits of being considered a person, they don't feel constrained by the responsibilities and obligations that most people feel. Most people, through social convention or enlightened self interest, usually care about the consequences of their actions on others. Many companies do not, or view such considerations as tangential. Throughout history they have (as economists call it) "externalized" many of their costs onto society. For example, they have spewed pollution and acted with no remorse. Indeed, when a company displays a particularly cruel manner and shows no regret at the human costs of its behavior, companies justify their actions by saying "it's just business."

Apple is a case in point. As arguably the world's most successful corporation, it has happy shareholders. Check. It also creates products that customers love. Check. But it has a bad environmental record. It participates in few community or societal partnerships. Although it has $100 billion in cash, it's a philanthropic miser,and its supply chain includes factories often described as akin to minimum security prisons.

Unlike people, companies can pop in and out of existence at will, and have the enormous advantage of their owners enjoying limited liability. Shareholders can form a company to achieve a goal, and then dissolve the company, thereby absolving themselves of any future responsibility. In the past we have seen companies inflict enormous damage on the environment, but citizens and government have no way of holding the guilty parties accountable if the offending company simply went out of business. Many companies go out of business specifically to minimize or completely sidestep legal obligations that may arise. Then the previous shareholders re-gather as another entity and inflict more damage.

Given corporate aggressiveness, competitiveness, lack of remorse and empathy critics point to the American Psychological Association definitions of pathological behavior and conclude that these are the characteristics of psychopathy.

But few companies exhibit extreme anti-social behavior of a psychopath. In the past this has been due to the good will of executives or Boards. Many of these people are good people with strong values and a personal sense of corporate responsibility. But when it comes to making decisions, material reality determines their consciousness. Potential bonuses or stock appreciation trump everything.

Of course there are exceptions. Companies such as rug maker Interface Inc., Nike, Johnson & Johnson, Pepsi, Google, Celestica and Kraft Foods have shown stellar behavior as corporate citizens.

For most it has been regulation and government constraints that have prevented them from extreme monopolist practices, overt environmental damage and other anti-social behavior. And when regulation is inadequate disaster can strike, such as the sub-prime mortgage crisis, where some Wall Street companies almost brought down the global capitalist system.

Further, when it comes to people, all people in corporations are not created equal. There is a fundamental difference between the people who run the corporation and the people who work for the corporation. The people at the top, especially the CEO, control the corporation and also grant themselves variable compensation for good performance that is typically disproportionate with any reasonable measure of their contribution. The controversy of the skyrocketing CEO compensation in the United States, illustrates the issue. While the wages and salaries of most "people" in corporations have declined, CEOs made 400 times more than average workers -- a ratio 20 times bigger than it was in 1965.

There are other problems, even dangers to thinking of corporations as people. Corporations want the advantage of being considered a person in the eyes of the law so they can enjoy the constitutional rights afforded persons, such as freedom of speech. In its now-famous Citizens United decision, the Supreme Court held 5-4 that corporations are people and enjoyed the protections of the first amendment, which meant companies could spend unlimited amounts of money promoting their ideas during elections. And this can be done without disclosing the source of the money. In the strong dissent, Justice Stevens wrote that "A democracy cannot function effectively when its constituent members believe laws are being bought and sold." In addition, he wrote that legal entities such as corporations are not "We the People" for whom the Constitution was established.

Corporations are going through profound changes that are affecting their strategies and business models. The Internet is dropping transaction costs, triggering deep and unprecedented changes in the deep structures and architecture of the firm. "People" who provide capability for firms can now be outside corporate boundaries. Companies participate in complex networks and can innovate through Ideagoras -- open markets for uniquely qualified minds. They can turn customers into producers or "prosumers." They can tap into vast peer production communities outside their boundaries like Linux. For corporations, there has never been a time of such turmoil.

One upshot is that corporations are increasingly behaving better. This is not because of tougher regulations but because of the digital revolution has introduced a powerful new force in the business world -- transparency. Firms are being scrutinized like never before and sunlight, it seems, is a great disinfectant. There is also evidence, Apple notwithstanding, that firms that take a stakeholder view, rather than a purely shareholder value view, actually perform better. So I'm optimistic that corporations will continue to improve their behavior.

The blanket assertion that corporations are people obfuscates the complex issues at play in the changing business world. Corporation are institutions. People are people.

Don Tapscott is the author of 14 books most recently (with Anthony D. Williams) Macrowikinomics: New Solutions for a Connected Planet. @dtapscott