Mission Possible: Transforming the Corporation

Friday, 09 November 2012 00:00 By James Gustave Speth, Truthout | Book Excerpt
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Looking up at buildings and rain clouds(Photo: mugley)This is an excerpt from James Gustave Speth's America the Possible: Manifesto for a New Economy (New Haven: Yale University Press, 2012), pp. 107-119.

In the ongoing tug-of-war between corporate power and citizen power, Speth spells out a variety of winning strategies and tactics for citizens who are currently on the losing end.

Like Caesar, today's corporations bestride the narrow world like a colossus. In 1970 there were 7,000 multinationals; by 2007 there were at least 65,000 that together contributed a quarter of gross world product. Despite the rise of other national economies, international mergers and footloose companies, the United States is still the capital of the corporate world. A third of the world's 300 largest companies are US corporations, and corporations account for about 85 percent of US business revenue.

Everyone knows there is a tug-of-war between corporate power and citizen power, and in the day-to-day world of politics, it is hardly an equal match. First, business leaders can exert great power directly in the political process through lobbying and campaign contributions. In 1968 there were fewer than a thousand lobbyists in Washington. Today there are well over 10,000 registered lobbyists. Corporate political action committee (PAC) spending increased almost 15-fold over the past three decades, from $15 million in 1974 to $222 million in 2005. Of the 100 largest lobbying efforts in Washington between 1998 and 2004, 92 were corporations and their trade associations. The US Chamber of Commerce was the largest.

Second, corporations can shape the debate. Business owns the media, and even public broadcasting depends significantly on corporate donations. Expensive issue advertising, support for conservative think tanks and well-funded studies are all tools of the corporate trade. Business leaders sit on nonprofit boards and contribute to their fundraising efforts. Business supports university and other research. Its influence can be strong or subtle, but it is there.

Third, labor can strike, but so can capital. It can leave an area, or refuse to invest there if the "business climate" is not right. As long as regions and nations are hell-bent on attracting investment and growth, and competing with each other in the absence of uniform standards, corporate interests will be served. And those interests usually coincide across companies and industries on core issues. "[Despite] highly visible policy conflicts among rival corporate leaders," William Domhoff argues in the fifth edition of his well-known and provocative book "Who Rules America?," that "the corporate community is cohesive on the policy issues that affect its general welfare, which is often at stake when political challenges are made by organized workers, liberals or strong environmentalists.... [The] combination of economic power, policy expertise, and continuing political success makes the corporate owners and executives a dominant class, not in the sense of complete and absolute power, but in the sense that they have the power to shape the economic and political frameworks within which other groups and classes must operate."

Finally, economic globalization and the rise of the global corporation have both increased corporate power and weakened the ability to control it.

As corporations are at the center of today's political economy and its negative consequences, their transformation must be at the center of building the new operating system needed for a sustaining economy. Fundamental here is revisiting basic issues of corporate purpose and design. A 19th century institution must be transformed to meet 21st century needs.

How should we envision the corporate sector we urgently need? Two major and complementary efforts [that] have been undertaken recently addressed to this question. One has been led by the Tellus Institute and its Corporation 20/20 project. In their 2007 paper "Corporate Design: The Missing Business and Public Policy Issue of Our Time," Marjorie Kelly and Allen White identified six new principles of corporate design:

Principle 1. "The purpose of the corporation is to harness private interests to serve the public interest. "Under this principle, the corporation may be launched to serve private interests, but when those interests conflict with the public interest, the public good will come first and prevail.

Principle 2. "Corporations shall accrue fair returns for shareholders, but not at the expense of the legitimate interests of other stakeholders." Here, shareholder gains will not be achieved by shifting costs of production onto other stakeholders such as employees, communities, the environment and future generations.

Principle 3. "Corporations shall operate sustainably, meeting the needs of the present generation without compromising the ability of future generations to meet their needs." This principle will call into play measures to defeat the severe "short-termism" that today leads to such bad decisions and bad behavior.

Principle 4. "Corporations shall distribute their wealth equitably among those who contribute to wealth creation." Today's profits are seen as accruing to the corporation's owners, but with an equitable distribution of earnings envisioned here, profits will be shared among employees, the community and others that directly or indirectly contribute to wealth generation, including society in general.

Principle 5. "Corporations shall be governed in a manner that is participatory, transparent, ethical and accountable." Participatory governance will require meaningful engagement of all stakeholders in the leadership and management of the corporation, including membership on corporate boards. In Germany and Sweden, for example, employees now select from a third to half of the board members of the larger corporations.

Principle 6. "Corporations shall not infringe on the right of natural persons to govern themselves, nor infringe on other universal human rights." Here, corporations will accept the proposition that government is accountable to the people and the democratic process and will embrace the separation of corporation and state. They will thus support strict regulation of lobbying and campaign finance and protection of human rights at home and abroad.

The other exercise in envisioning the corporation of the future also came to fruition in 2007, when a community of individuals and groups advocating for change issued a remarkable but undernoticed report, "Strategic Corporate Initiative: Toward a Global Citizens' Movement to Bring Corporations Back Under Control." While the Corporation 20/20 effort focused mainly on the internal design of the corporation, the "Strategic Corporate Initiative" placed greater emphasis on the external context in which corporations will operate in the future. Here are some excerpts from its vision of a transformed corporate world:

• Political involvement: "In 20 years, we envision a profound shift in political and civic culture. People will once again put their faith in government as an instrument of community and collective self-governance. Corporations will be driven out of key areas of public life where they currently operate or wield significant and illegitimate influence, including elections, essential services, and other essential functions of government.... The 'separation of corporation and state' will be nearly as sacrosanct as the 'separation of church and state.' Corporate rights of speech, equal protection and due process will have been severely restricted through court decisions. The line between corporations and government will be carefully drawn to prohibit any direct or indirect financial influence on elections or state and local initiatives. Lobbying at the local, state, and federal levels will be limited to invitation only by government bodies."

• Protection of the commons: "Within 20 years, in order to enhance local, national and global commons, roughly a third to a half of all economic activity on earth would be declared 'no go' zones for global corporations. These zones would cover the ecological commons, community commons like roads, and cultural commons like music and science. In these zones, ownership of the commons would be by hundreds of inspiring public and private institutions, from the local to the global level. In addition, new rules at local, national and global levels, would force corporations to internalize the costs they have historically externalized. To move from an exploited or degraded commons to a healthy society, we must reclaim our commons, give it standing and protect it. We must change our consciousness to be able to see the commons - and cultivate a 'commons sensibility' that takes offense when it is encroached upon."

• Stakeholder primacy: "The public discourse on economics will no longer be dominated by free market fundamentalism. It will include talk about fair dealing, a moral bottom line and a moral economy. Building on these values, the nation will address the structural issues keeping corporations tied to short-termism. It will be considered bad form to pay CEOs outsized compensation. It will be considered a violation of fundamental human rights to aggressively fight unions. Corporate boards will have worker and public interest directors, and company purpose will be legally broadened to include fair treatment of employees, the environment and the community.... But stakeholder concerns will no longer be left to voluntary initiatives. Instead, stakeholder well-being will be imbedded in social reports and pay tied to social metrics. It will also be enforced by external mechanism, including social rating used in government purchasing guidelines and capital investment policies, municipal ordinances, capital gains taxes on short-term trades and periodic corporate charter review."

• Innovative corporate forms: "There will be growing recognition that corporate design - in law, charters, ownership and governance - is a powerful tool for transforming corporate purpose. A movement for hybrid, community-friendly stakeholder enterprises will take off, with exciting experimentation.... Employee ownership will be as widespread as home ownership, thanks to government-chartered financing institutions. Such companies will be seen as representing a new sector beyond government, business and nonprofits - a 'Fourth Sector' equaling 20 to 30 percent of the business sector.... Meanwhile, community-oriented companies ... will continue to grow, providing new, democratically accountable forms of community development that will increasingly displace corporations.... The debate will shift from a strict focus on market rules and [antitrust] policies to considerations about the proper role of markets, where markets must be limited and the shape of the broader political economy. This will open the door to broader concerns about privatization, community-based ownership and other democratic forms of economic governance. As a result, economic efficiency will become a secondary consideration to the protection of community rights, respect for environmental limits and protection of the commons. Natural monopolies might even be accepted, so long as they are managed transparently and in the public interest (e.g. municipal utilities) under strict governmental oversight and regulation."

• Tough rating system: "Our vision is that in 20 years, governments at the local, state, and national levels will provide strong procurement incentives, as well as tax and regulatory incentives, to give an advantage to companies with high social and environmental ratings and disadvantage those with poor ratings. Social and environmental ratings will be embraced culturally as a new measure of risk and sustainability. As a result, all major pension funds, socially responsible investment funds, foundations and a large percentage of mutual funds will invest primarily in companies that are highly rated socially, in much the same way they now invest in bonds that are highly rated. This rating system would be based on a reliable, respected process which integrates the UN Principles for Responsible Investment - the best existing internationally recognized rating schemes - as well as new civil society ratings schemes currently in development."

Implicit in the "Strategic Corporate Initiative" report's prescriptions is a pincer approach to corporate change: a top-down strategy to rein in giant corporations while simultaneously building from the bottom up a new world of innovative, public purpose, locally rooted corporate entities that can grow to become the norm.

Regarding the top-down approach, some important proposals mentioned in the "Strategic Corporate Initiative" report have since been further developed and elaborated. One involves strengthening communities to push back against corporate power. The Community Environmental Legal Defense Fund has helped communities with this effort, so that today in Pennsylvania, CELDF's home state, 10 percent of the municipalities have adopted ordinances restricting corporate control of local land, water and other resources.

Another worthy idea is the chartering of large corporations at both the national and international levels. For America's first hundred years, states issued charters to corporations to achieve specific public purposes. These charters often contained strict limitations on what could be done by the corporations, and charters were for limited duration, so periodic review and renewal were necessary. By contrast, issuing corporate charters today is so lax and easily done that an advocacy group in Virginia, a tobacco state, successfully incorporated a business named "License to Kill Inc.,"whose business was stated to be marketing tobacco products in a way that would kill 400,000 Americans annually.

Proposals to revive the chartering process as a means of public control have been urged repeatedly in American history, including proposals such as that made by Theodore Roosevelt to create a federal charter to help regulate the trusts of his day. Charles Cray notes that between 1915 and 1932, at least eight bills related to federal chartering were introduced into Congress. In a 2007 paper for the Tellus Institute, Cray argues that "chartering is one of the best ways to hold corporations directly accountable to the public interest."

Federal charters could be required of all large US corporations, or the process could focus on firms in sectors of high public interest, such as the defense industry, banking and finance, national auditing and bond rating firms and industries that rely principally on natural resources of the commons, such as water, energy and broadcasting. Typical charter mandates could include requirements for transparency and disclosure, board of directors approval for all campaign finance and lobbying initiatives, broad stakeholder participation on corporate boards, enhanced shareholder rights, holding directors and top management personally liable for gross negligence and other major failings, as well as a general requirement to serve the public interest. Charters would have sunset provisions, which would prompt periodic reviews in which the public would have a right to participate. Charters could be revoked.

The chartering concept should be extended to the international level, as urged by Allen White in another Tellus Institute paper, "When the World Rules Corporations: Pathway to a Global Corporate Charter." International charters make good sense in light of the rise of global corporations and their global-scale impacts and the incongruence of such transnational entities being licensed to operate at the national, and in the United States even the state, level. Many important issues, such as international norms, accountability, and corporate governance, could be addressed in this context. The United Nations Center for Transnational Corporations proposed an allied idea in the mid-1970s, a Code of Conduct for transnationals, but the agency was subsequently abolished in part due to the ensuing corporate backlash. Ultimately, the global corporation requires international standards protecting labor and the environment, and the various United Nations bodies now struggling with this effort need encouragement and support.

An attractive idea complementary to chartering is offered in Richard Rosen's proposal to apply the model of state public utility regulation beyond the power and water sectors where such regulation is now commonplace. In "How Should the Economy Be Regulated?" Rosen notes that state public utility commissions have the power to approve firm investments, and not merely to set rates, and his proposal focuses on public review and approval of proposed investments: "The focus of each [Industrial Regulatory Board] should be to ensure that appropriate financial investments are made by each industry in a way that mutually reinforces the need to achieve key social and environmental goals over the coming decades, with mitigating climate change chief among these goals.... The IRB/PUC model would work in the following way. Whenever a business of significant size wanted to invest more than a specified minimum sum of money (e.g., $10 million) in a new production facility for an existing product type, or to create a new product or service, they would apply to their industry IRB for approval of this investment.... If the investment proposal was large and/or controversial, the IRB would determine that formal hearings should be held. This would involve a full-scale review of the evidentiary and policy issues relevant to whether or not the proposal should be approved, with or without modification. It is important to note here that generally the initiative to invest would come from either the relevant private or public corporation, and not from the regulatory body or the government. Thus, typically, no agency of the government would require that any new investment be made by corporations. However, in other situations, a particular industry IRB might have certain legal responsibilities to achieve certain social goals, such as keeping the electricity system reliable. In such a case, the IRB might need to find an existing public or private corporation that would be willing to make the relevant investments needed to achieve that social goal. If no existing corporation was willing to do so, a new public corporation might need to be established with government financial support to enable this social goal to be achieved.... Finally, whether or not major new investments or new products and services are broadly in the 'public interest' should be the guiding 'bottom-line' criterion on which all regulatory decisions are ultimately based."

What about the other approach, the need to build a new corporate sector from the bottom up? Whereas many of the ideas for fundamental change in the nature and operation of existing large corporations must await the political transformation discussed in Part IV, building the new corporate sector has already begun in earnest:

• The American Sustainable Business Council (ASBC), a coalition of business networks and businesses committed to building "a vibrant, just and sustainable economy [through] innovative solutions that will transform our economy and society," brings together more than 150,000 business professionals and 30 business networks and organizations.

• The Business Alliance for Local Living Economies, one of the most successful of the ASBC members, convenes over 80 community networks in the United States and Canada representing more than 22,000 independent business members. BALLE's mission is to build and strengthen locally-owned independent businesses that function in harmony with local ecosystems, meet the basic needs of all people, support social justice and democracy and foster strong community life.

• The B-Corporation program ("B" for social benefit) includes a certification scheme for companies that meet high environmental, social and public accountability standards. As of 2011 there were 422 certified B-Corporations with about $2 billion in annual revenues. By 2011, Maryland, Vermont, New Jersey and Virginia had adopted Benefit Corporation legislation of the type urged by B-Corporation for corporate charters. Companies incorporating as Benefit Corporations are required to produce social as well as shareholder benefit; to consider how decisions affect their employees, communities, and the environment; and to publicly report their performance using third-party standards.

• The Fourth Sector Network now works to encourage and support the development of new business models - including public-private and for-profit/not-for-profit hybrid organizations - that bring together aspects of the private, public and nonprofit sectors. These new corporate forms are proliferating rapidly, including hundreds of "social enterprises" that deploy their profits for environmental, social and community goals.

A common theme in these efforts to build a new corporate sector is the promotion of new patterns of ownership and governance, a key aspect of the democratization of capital discussed previously. Gar Alperovitz and his colleagues at the Democracy Collaborative at the University of Maryland cite the Evergreen Cooperatives in Cleveland as pointing the way: "The Evergreen Cooperatives are linked through a nonprofit corporation, a revolving loan fund and the common goal of rebuilding the economically devastated Greater University Circle neighborhoods. A thoroughly green industrial-scale laundry, a solar installation company and a soon-to-be-opened large-scale commercial greenhouse (capable of producing about 5 million heads of lettuce a year) make up the first of a group of linked co-ops projected to expand in years to come." The Democracy Collaborative also urges the continued growth of community development corporations. There are already more than 4,500 such not-for-profit corporations providing community services like affordable housing, and there are almost 500 US community development financial institutions now serving markets not well-served by conventional private finance.

Marjorie Kelly, author of "The Divine Right of Capital," has explored several innovative ways that new corporations can achieve these objectives. She points out that ownership, governance, capitalization and compensation structures can be designed to "seamlessly blend a central social mission with profitable operation ... It is this design," she says, "that enables companies to escape the pressure to maximize short-term profits and instead to fulfill a more fundamental purpose of economic activity: to meet human needs and be of benefit to life. "She sees three promising models emerging: "Stakeholder-Owned Companies, which put ownership in the hands of nonfinancial stakeholders; Mission-Controlled Companies, which separate ownership and profits from control and organizational directions; and Public-Private Hybrids, where profit-driven and mission-driven design elements are combined to create unique structures."

Cooperatives are the leading examples of stakeholder-owned companies. It is often noted that a large number of Americans own stock shares, but even more Americans are members of co-ops. Mission-controlled companies can survive, even if they are large and publicly owned, by having a dual-class share structure with super-voting shares irrevocably in the hands of the keepers of the mission. And in public-private hybrids, a profit-making entity is typically controlled by a government, a not-for-profit organization or a foundation with a public service mission.

In sum, numerous paths to transformation of the corporation can already be seen, and others will surely come into view. The corporation that offers the best hope for the future is one that prioritizes public benefit over private profit, that is locally rooted and faithful to its employees and its communities, and that ensures these objectives will be met through more democratic patterns of ownership and management. The ownership of capital that is most likely to sustain the world we want for our children and grandchildren is ownership that must live daily with the local consequences of its decisions. Importantly, progress down these paths will be increasingly attractive and necessary as changes and forces discussed elsewhere in this book come more and more to the fore. What becomes of today's corporations, for example, when growth is no longer a priority, when the bloom fades on consumerism's rose, when energy prices require a shift toward localization, and when the demand that corporations cease being part of the problem and become part of the solution becomes irresistible?

This piece was reprinted by Truthout with permission or license. It may not be reproduced in any form without permission or license from the source.

James Gustave Speth

James Gustave Speth teaches at Vermont Law School. He is the author of The Bridge at the Edge of the World. His article in this issue, the first of a two-part series, is based on his forthcoming book from Yale University Press, America the Possible: Roadmap to a New Economy.

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