Taming the Corporate Beast
Even business leaders are now calling for corporate reform, but most of the measures on offer are little more than cosmetic.
This article is from Dollars & Sense: Real World Economics, available at http://www.dollarsandsense.org
This article is from the July/August 2014 issue.
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Corporate misconduct and abuse of power have reached such extremes that even leading thinkers of the business establishment are starting to express shock and dismay. Consider the scathing attack on corporations by founder and former dean of the business school at Oxford University, Colin Mayer:
The corporation is becoming a creature that threatens to consume us in its own avaricious ambitions. We need to address its failings as a matter of urgency, not only to avert its damaging effects on our prosperity, social cohesion, and the environment, but also because it offers the lifeline out of (today’s economic) constrictions.
Mayer, who also chaired the international business consulting firm Oxcera for many years, has been issuing dire warnings about the rapacious beast that the modern corporation, our dominant form of business organization, has become.
Business experts across the United States echo Mayer’s sentiments. Edward Lawler, a professor at USC’s Marshall School of Business, and Christopher Worley, a professor of management at Pepperdine University, write in the MIT Sloan Management Review: “For corporations to perform well financially, socially and environmentally ... they need a fundamental change in their goals and how they achieve them ... a DNA change that must begin at the top. [This means] major changes in how corporate boards are structured and operated.”
“America’s CEOs have staged a corporate coup d’état,” argues Robert A. G. Monks, a “Rockefeller Republican,” former corporate lawyer, venture capitalist, energy company executive, corporate director, and Reagan administration official (as summarized by the publisher of his recent book Citizens Disunited: Passive Investors, Drone CEOs, and the Corporate Capture of the American Dream). “Far too much of American business is being run for the personal enrichment and glorification of its manager-king ... Manager-kings, it turns out, are bad both for society and for business itself.”
Business gurus like these, worried about the stability and sustainability of the U.S. economy, paint an unnerving picture of the consequences if corporations are not dramatically restructured. Corporate managers are adamant that stock-market demands for ever-soaring returns are squelching their ability to invest in long-term research and training. Business owners and entrepreneurs are turning away from the traditional corporate form, for this reason and for protection from hostile take-over bids; the number of corporations listed on U.S. stock exchanges has dropped 25% since 2000.
Adding to the pressures on corporations, public outrage at corporate greed and political influence has created a crisis of confidence in the ability of government to defend the public interest. After the 2008 financial crisis, the BP oil spill, the Fukushima nuclear disaster, and more, it is no wonder that popular outrage toward corporations is intensifying. A 2013 Pew Research poll found that 80% of middle-class adults blamed large corporations, at least in part, for the difficulties facing the middle class. This is consistent with surveys finding that overwhelming majorities of Americans believe that corporations have too much power in Washington. A 2013 Gallup poll similarly found that “more than 60% of Americans are dissatisfied with the size and power or influence of major corporations and the federal government.”
The solutions that business experts offer, however, keep control of corporations firmly in the hands of owners and executives. Note that, for all their criticism of the ways corporations function, the sources above look to corporations for the solutions. Mayer sees better-functioning corporations as the “lifeline” from our current economic problems. Lawler and Worley look for change that “begin[s] at the top.” Monks thinks that an increase in shareholder voice on corporate boards will turn things around. Not surprisingly, most reform efforts coming from the ranks of business focus on convincing firms to voluntarily follow ethical guidelines.
The left, so far, has had little to say in this debate. True, unions and nonprofits are participating in initiatives for corporate reform. Several left-leaning groups, including the Green Party, are advocating the institution of a federal corporate charter, and a review of charters for large corporations on social and environmental criteria. But the left has not yet crafted an alternative vision—that of a new business form that would pave the way to more democratic control of production, stronger worker rights, and a deeper commitment to sustainability.
It may seem hard to believe, at a time when corporations have so much power, that the corporation is an embattled institution. Their dominance in the economic life of the nation is clear—just consider their impunity in the wake of catastrophic financial fraud, their success in blocking new public-interest regulation, their continued one-sided war on labor, or the recent Supreme Court decisions entrenching their political power. Far-sighted business experts, however, see these corporate outrages as a threat in the long run to the legitimacy and stability of the institution itself.
Now, as attempts to refashion the corporation are getting underway, is the time for the left to present the arguments for a fundamental restructuring of corporations that would institutionalize greater power for workers and communities.
The second part of this article (which will appear in the November/December issue of Dollars & Sense) will look at some of the more promising efforts at corporate restructuring, with a focus on those ensuring more democratic control. In this first part, we look at corporate reform efforts based on pressuring businesses to comply with “Environmental-Social-Governance” (or “ESG”) principles—a catch-all term for any obligations businesses might have beyond the bottom line.
Why Reform? The Business Perspective
The foremost concern of business experts urging corporate reform is the pressure put on management to achieve exceedingly high short-run returns. This is proving to be a serious impediment to the long-term competitive position of firms. U.S. corporations are investing less in long-term assets, including research and development, than are similar privately held companies. This has a negative effect on innovation. The June 2014 Harvard Business Review took up this problem with a special section titled, provocatively, “Are Investors Bad for Business?” The pressure for immediate results also tempts business to cut corners on regulatory compliance, to clamp down on growth of worker pay and benefits, and to buy low-cost imports without questioning the business practices of suppliers abroad.
Besides rejecting the constraints that the pressure for short-term profits imposes, some business experts are concerned about the legitimacy and sustainability of the economic system itself. They have turned their attention to broader issues like climate change, financial instability, and the loss of faith that government can effectively restrain business misbehavior. A basic goal of their reform efforts is to curb the worst abuses and misuses of corporate power, primarily through a voluntary commitment by corporations to a new business ethics. Some of the impetus for the reform efforts by this vocal minority comes from the capture of Washington by Wall Street and big business, and the resulting failure of Congress and federal agencies to curb even egregious instances of corporate excess. These reformers are by no means “anti-business.” But being pro-business, in their minds, means accepting that business should shoulder its responsibilities to the broader society.
Importantly, these reformers have achieved some success in building a consensus that “Environmental-Social-Governance” principles should inform ethical business practices today. They are behind the significant growth of shareholder resolutions, ESG investor groups, and business accords. Their campaigns are also developing broad networks and coalitions, including even labor and environmental groups.
On the other hand, a review of these efforts shows that they typically do not attempt to create institutionalized channels that employees and communities can use to hold firms accountable to the ESG principles they purport to espouse.
Business ESG Accords. Environmental-social-governance (ESG) campaigns urge businesses to agree to a code of conduct, such as that embodied in the ten principles of the U.N. Global Compact, or to join and work with one of the many nonprofits devoted to creating a commitment to sustainability and social justice in the business world.
The U.N. Global Compact is the world’s largest corporate citizenship and sustainability initiative. It has grown to more than 10,000 participants, including over 7,000 businesses in 145 countries around the world. The ten principles of the Compact to which signatories agree were developed through a six-year, multi-stakeholder consultative process involving businesses, governments, and civil society. Included among these principles are the right to collective bargaining, the right to non-discrimination in employment, and the need for a precautionary approach to environmental challenges. Most multinational corporations are aware of the ten principles and speak about them in positive terms. A few use the UN guidelines provided for assessing their business practices.
Over 1,200 investor groups, representing about $35 trillion in assets, have accepted the UN’s related Six Principles for Responsible Investment, which address the obligation to act in accord with, and promote, ESG principles. Shareholder and other groups at times refer to these commitments when challenging a firm’s practices, but there is no penalty for failure to comply.
In fact, firms that express commitment to UN ESG principles display mixed records. For example, scandal-ridden Halliburton (notorious for its role in the BP oil spill, profiteering from the Iraq War, sale of nuclear technology to Iran, and arms trafficking) highlighted the $1,885 it raised for the Nature Conservancy through a recycling program in its 2012 Corporate Sustainability Report. At the same time, it asked its shareholders to vote against a strongly worded shareholder resolution (put forward by the public employee union AFSCME) that would have required the company to assess its human rights record using UN guidelines. McDonalds, a signatory to the UN Global Compact, also asked its shareholders to vote against the AFSCME resolution—on the grounds that it would require too much unnecessary work. A commitment to social responsibility on paper, then, may not be sufficient to result in any form of internal accountability.
Investor Groups. Investor alliances promote sustainability and responsibility by urging investors to concentrate their funds in socially responsible companies. The Global Sustainable Investment Alliance is perhaps the largest investor group committed to social and environmental sustainability. It has members in Europe, North America, Asia, Africa, and Australia. The Alliance estimates that, in countries where it has members, about $13.6 trillion has been invested in professionally managed assets that incorporate ESG concerns into investment selection. This represents nearly 22% of total managed investments in those countries.
The Alliance’s U.S. member, the Social Investment Forum (SIF-US), reported in 2012 that $3.7 trillion in assets, or one of every nine dollars invested through a fund manager in the United States, were in assets complying with principles of social responsibility. An investment is considered socially responsible by the SIF if 1) it was screened for what they term “minimal standards of business practice,” 2) it is in clean energy or in businesses serving under-served communities, or 3) it fulfills specified ESG criteria in other ways.
At Nestlé, Corporate Responsibility Is Compatible with Child Slavery
It is not unusual for corporations to renege on agreements they have reached with prominent public-interest organizations to address ESG issues. For example, in 2001, after years of stonewalling, Nestlé and other chocolate producers reached an agreement with the International Labor Organization to eliminate the use of child slave labor by its cocoa suppliers. But, as recently as 2012, the problem remained, with children from several countries still being sent to the plantations from which the company purchases cocoa in Côte D’Ivoire and elsewhere.
In a statement on its website, the company acknowledged the problem: “In February 2012, Nestlé became the first company in the food industry to partner with the Fair Labor Association (FLA)... to improve working conditions in supply chains. We invited the FLA to examine our cocoa supply… [Its June 2012] report found that child labor is still a reality (on cocoa farms in Côte d’Ivoire).” In this same statement, rather than announcing strong steps to end this practice, Nestlé proposed to stop child slavery on its plantations “by raising awareness and training people to identify children at risk”! Former child slaves have filed a lawsuit, alleging horrific treatment, against Nestlé and other chocolate producers. The case is currently pending in California.
The Washington-based International Labor Rights Fund (ILRF) and Global Exchange, which is based in San Francisco, summarized the legal complaint of the former child slaves on the cocoa plantations as follows: “Plaintiffs, aged 12 to 14 when first forced to work as child slaves, had to work 12 to 14 hour days with no pay. They often worked with guns pointed at them, and were given only the bare minimum of food scraps. Plaintiffs were locked in small rooms at night with other child slaves so they could not escape the plantations. They were whipped and beaten by the guards and overseers when the guards felt they were not working quickly or adequately.”
ESG ratings are becoming commonplace, and—much like ratings of bonds—are influencing investor decisions and presumably encouraging more responsible business behavior. Private ratings firms range from global research firms, such as Governance Metrics International and Audit Integrity (GMI) (founded by Robert Monks), to smaller, more focused nonprofits such as B Lab. B Lab’s requirements for certification as a B company are much more rigorous than those required for a “socially responsible” rating from a firm like GMI. The growth of investment in firms with a positive ESG rating is striking. The phenomenon is drawing the attention of business people and researchers. Researchers make the argument that social responsibility is good for earnings: at least one study found that stocks in companies with higher ESG ratings outperformed stocks in companies with lower ratings. Another study found that firms in compliance with OSHA standards had lower labor compensation costs. Still, the competitive pressures these firms face would likely be reduced if greater social responsibility were required of all large businesses.
To be clear, however, ESG ratings do not convey a full picture of the impact of a firm on society and the environment. A firm’s lobbying efforts and their labor records, for example, are not typically taken into account. This is a serious drawback. Just as the pre-financial-crisis ratings given banks by Moody’s and Standard & Poor’s did not reflect the actual risk embedded in banks’ portfolios, ESG ratings currently do not provide an adequate account of the practices of the firms rated. Take the example of Nestlé (see box), which as of 2012 still reported child labor on the plantations that supply its cocoa. The international audit, tax and advisory firm KPMG ranked Nestlé no. 1 in corporate responsibility among food producers and among the top ten in all categories in 2013! This recognition, which emphasizes transparency in reporting, came just a few months after Nestlé was named the leading food products company in the Dow Jones Sustainability Index, and got the maximum score for the second year running in the Carbon Disclosure Project’s “Climate Disclosure Leadership Index.”
Shareholder Activism. Shareholder coalitions are passing resolutions demanding more sustainable and ethical practices by firms. Back in the 1960s, activist Saul Alinsky pioneered the shareholder- resolution tactic, waging a successful proxy battle at Kodak for a resolution that gained jobs for black workers in the Rochester area. Today, ESG shareholder resolutions are garnering more vote support than ever before, with a quarter of such resolutions receiving more than 30% of the shares voted, according to SIF-US’s 2012 report.
As a result of such shareholder activism, more than half of S&P 100 companies now disclose and require board oversight of their political spending with corporate funds. Shareholder resolutions have also addressed CEO pay; the impact of hydraulic fracturing on water supplies; sustainability reporting on water management, energy use, and emissions; and the business risks associated with climate change. These resolutions challenge firms to live up to ESG principles, typically in very specific instances. However, only one or two issues per year per company are addressed, and not all resolutions pass.
There are also initiatives underway, often proposed by publicly funded bodies, to grant shareholders more say in corporate governance (such as the European Union’s 2012 Action Plan for Corporate Governance). Greater shareholder voice at board meetings is a likely outcome. Some changes have already taken place. For example, in 2010, the Dodd-Frank act included a provision facilitating shareholder votes on nonbinding resolutions on executive pay.
Seasoned observers, including John Gillespie and David Zweig, the authors of the business bestseller Money for Nothing: How CEOs and Boards are Bankrupting America, and Robert Monks argue that shareholder control of the corporation is a myth. CEOs and corporate board members collude to advance their own interests to the detriment of the shareholders. Greater shareholder voice, they argue, is part of the answer to creating a socially responsible corporation. The U.S. Securities and Exchange Commission (SEC) recognizes that there is a need to improve representation of shareholder interests in corporate boards and occasionally sets new regulations with this goal in mind. For example, it has stated that the process for the inclusion of shareholder candidates on shareholder ballot materials needs to be expedited and is considering new regulations on the matter.
It is not clear, however, that facilitating shareholder involvement in corporate governance will, in and of itself, result in more socially responsible behavior. Many shareholders are focused on short-term gain and not all can be mobilized to vote in line with ESG principles; most shareholder resolutions motivated by ESG objectives, in fact, fail. Improvement in a few areas, such as oversight of CEO pay and political spending, is likely, but changes that would reduce shareholder returns might not receive much support. For example, addressing issues such as environmental protection, or employee compensation, and fair labor standards in supply chains could, indeed, raise costs and reduce returns (unless, for example, other steps were taken simultaneously to increase product demand, such as marketing campaigns directed at socially conscious consumers). Any drop in returns would certainly not sit well with some shareholders.
Ceres: Promise and Pitfalls. A look at Ceres, a prominent nonprofit devoted to building “a thriving, sustainable global economy,” lets us further explore the limitations of reform efforts like those discussed so far. Ceres boasts a list of over 300 members in its coalition of investors, companies, and public-interest groups. The list includes several Fortune 500 firms as well as unions, pension plans, and environmental and charitable nonprofits. Over 1,800 firms use its Global Reporting Initiative assessment tool for self-evaluation. Its members include, among many others, Allstate, Bank of America, Best Buy, Bloomberg, Citi, CocaCola, Ford, Gap, JP Morgan Chase, Nike, Time Warner, AFL-CIO, AFSCME, CWA/ITU Pension, CalPERS, Green America, Natural Resource Defense Council, Oxfam, SEIU, and the Sierra Club.
Ceres has chalked up several notable accomplishments. Working with the Interfaith Center on Corporate Responsibility, it was able to persuade 49 companies to drop their membership in the American Legislative Exchange Council (ALEC), because of the Council’s climate-change denial, denunciation of the Environmental Protection Agency as “waging war on the American standard of living,” and support for draconian anti-immigrant legislation.
The Ceres website includes a listing of shareholder resolutions filed by its members. The success rate appears to be fairly high, perhaps because of the strength of the Ceres coalition. In 2011 and 2012, for example, the AFL-CIO met with success in four of the ten shareholder resolutions it filed with oil and gas companies regarding accident risk mitigation. Three of the 10 were withdrawn when the companies involved agreed to address the problems cited; another resolution passed.
At the same time, many, if not most, of the firms with memberships in Ceres have ESG issues outstanding. For example, Coca-Cola faces ongoing litigation because of its failure to curb violence against union leaders and organizers, up to and including murder, in its plants in Latin America (see killercoke.org). Bank of America and JPMorgan Chase, both Ceres members, are among the banks whose risky behavior led to the financial crisis, with its fraudulent mortgage practices and surge in foreclosures. The Gap, which has clothing suppliers operating in Bangladesh, has so far refused to sign the Accord on Fire and Building Safety for that country.
It is not unusual for a company under fire for egregious wrongs to join an organization devoted to greater corporate responsibility and to agree to modest changes in a few areas. The bottom line is that, without a means of enforcement of ESG principles, progress is uncertain.
The Political Process. Frustration with the failure of the nation’s political process to address corporate wrongdoing is widespread. It is no secret that there will be powerful corporate interests opposed to any proposed piece of legislation aimed at ending corporate misbehavior. CorpWatch, a nonprofit organization that tracks corporations, follows Congressional bills directed at corporate abuse. One 2012 bill would have denied government contracts to firms engaging in human trafficking and forced labor. It was defeated. Other reform bills shared the same fate, including one requiring transparency in political spending, one ending subsidies to big oil, one improving arbitration fairness, and others designed to mitigate the effects of the Citizens United decision (which struck down limits on corporate campaign contributions). In 2013, no bill for corporate reform made it to the floor. Among those blocked at the committee level was H.R. 4452, which would have established a Corporate Crime Database to enable access to information about criminal and civil proceedings against corporations.
The ability to work through government agencies to address corporate misconduct is just as limited. The Securities and Exchange Commission (SEC), for example, enacts rules and regulations intended to carry out the intent of legislation. It solicits input from the public on proposed regulations. However, agency heads are often under pressure from members of Congress who have close ties to corporations. SEC officials have no obligation to respond to the public’s preferences and can be reluctant even to push for measures they believe are needed. Last year, for example, under pressure from the House Financial Services Committee Republicans, the SEC chair removed from consideration a regulation that would have required corporations to report political spending. This, despite the nearly 700,000 comments received by the agency (a record number), almost all in favor of such reporting. (A breakdown of the comments by position is available at the SEC website.)
The courts are also part of this process. Their rulings build on a history that tends to favor upholding the status quo. For example, a court struck down an SEC rule facilitating shareholders’ ability to have their proposed nominees for a corporation’s board of directors included in proxy materials.
Of course, the SEC is not the only federal agency affected by what is termed “regulatory capture.” Corporate lobbyists are very busy in D.C. and agency heads often go through the revolving doors between government and the corporate world.
Beautifying the Corporate Beast
The near-collapse of the financial system, the dangers of climate change, and the widening income divide—along with the public outrage these have provoked—have shaken many in the business world. Business experts are grappling with how to incorporate principles of social responsibility into corporate management. Business schools are re-examining the basic practices characterizing today’s corporations.
The soul-searching is bringing a wave of innovative approaches to corporate governance. The widespread emphasis on short-term gain is now in question. There is a growing sense that more effective regulation and better enforcement of current laws will not be enough to achieve the change needed. Many experts now believe that only a new corporate culture and a restructuring of corporate management can end the corporate behavior that causes or exacerbates so many of today’s social ills.
The reforms examined here, such as the adoption by corporations of the principles in the UN Global Compact, may beautify the corporate beast but will not tame it. While some corporations of their own initiative will take impressive steps towards the social and sustainability goals they have adopted, all firms remain constrained by their bottom line. A firm, after all, is set up to generate income for those who control it. There is no sign that the corporate elite, in particular, is willing to cede any of its power or wealth. Most cannot resist the siren call of higher profits—a goal that often appears attainable through lower employee compensation, weaker environmental standards, and cheaper imports produced under dubious conditions.
The creation of new business priorities through voluntary commitments, then, may not be achievable. Unleashing corporate talents and directing them toward solving social and environmental problems is a valid and lofty goal. But its attainment requires both greater corporate accountability to the public and an increased respect for worker rights and voice at the workplace. These are essential to closing the widening wealth gap and to redressing the imbalance of power between corporations and real people.
Greater democratic control over production, which requires a restructuring of corporations, is the only sure way of achieving social sustainability. Some of the organizations working for reform (discussed above) are mobilizing the grassroots and building political networks among labor, environmental, and human-rights groups. These coalitions have the potential to change current thinking about the rights of business versus the protection of the planet and human well-being. The work done by these coalitions can lay the foundation for a democratization of corporations and a gradual transformation of our economy to one that serves these broader needs. Part Two of this article (in the November/December issue) will look at some of the more promising proposals for corporate restructuring, including a few genuinely democratic approaches.