Monday, 19 September 2005

The Corporation

I have just finished reading The Corporation by Joel Bakan. In it, Bakan writes about the history and current state of large companies.

Nowadays, many corporations have a “social responsibility” department. Are these departments genuinely concerned with their impact on society or they there for PR purposes?

In most countries, corporations have a legal responsibility to one group of people: their shareholders. If shareholders demand higher profits (and they usually do), that is what corporations must deliver. Therefore, any socially responsible acts cannot undermine the need to maximise profits. If corporations have a choice between being more profitable and being socially responsible, they must legally choose to be more profitable.

The US law courts endorsed this rationale many years ago. The Ford Motor Company (when under Henry Ford) was successfully prosecuted when it acted against this doctrine. Ford had this quixotic notion that companies should make a reasonable profit, that it should not be too excessive.

Of course, corporations cannot break the law. Or rather, they should not break the law. As it happens some corporations regularly flout certain (e.g. environmental) legislation. They do this because the cost of being successfully prosecuted is less than the gain of breaking the law.

General Motors were prosecuted by someone whose car caught fire after someone went into the back of it. It turned out that GM moved the petrol tank closer to the back because it reduced the production costs. GM made the calculation that the few fatalities were, for them, an acceptable price to pay for the increase in profits. The original decision against GM was upheld on appeal. GM are appealing again.

One way that companies try to reduce costs is by “externalising” them. This is a roundabout way of saying that they make society pay for their costs. For example, if a government has decided that people need to earn £6 an hour to meet basic needs and a company pays £4 an hour, there is a shortfall. Who makes up that shortfall? In many European countries, governments, i.e. taxpayers, make up the shortfall. If companies pollute rivers, governments clean them up: the taxpayer foots the bill – not the polluter. To prevent this, companies could bear the costs themselves (“internalise” them). To maximise profits, companies do not voluntarily internalise costs. That is why self-regulation tends not to work.

In the personal domain, there is a recognition that self-regulation does not work. When it comes to individual behaviour (murder, theft), societies have laws, which are enforced.

In the early twentieth century, much regulation was introduced to make corporations act responsibly. However, the late twentieth century saw governments removing laws via deregulation and letting corporations regulate themselves.

Deregulation, if it means self-regulation, can result in social irresponsibility. Bakan gives several examples of corporations repeatedly breaking laws. They perform a cost/benefit analysis and decide that it’s more cost effective to, say, pollute a river.

Removing or weakening environmental legislation, say, is not the only way of reducing costs for corporations. Certain recent governments (e.g. US) have reduced the budgets of enforcement agencies so that they can’t do their jobs effectively.

One way to ensure that corporations don’t transfer their costs to society is to ensure that appropriate legislation exists and that there are agencies sufficiently well funded to effectively enforce the legislation. There should also be a strong enough deterrence to prevent corporations repeatedly breaking the law.

You can discuss the issues raised by the book here.


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