Putting the public interest first (Part 2)

Corporations can and should be made socially responsible
February 1, 2009

Read Part 1

What benefits could a government expect by amending corporate charters to include the public interest?

Because of the wide spectrum of corporate activity, some of it benign to the public interest by nature, many corporations could already operate easily and profitably within a Social Corporate Charter (SCC). Such corporations would be like an enlightened forestry company that promptly received FSC certification and soon started to collect the ethical premium. Corporations that could easily operate within an SCC would also receive an ethical premium because their known adherence to corporate law to enforce better public interest practices would be rewarded by investors. Those corporations would actively promote their ethical credentials for the same reasons FSC-certified companies promote theirs.

If a government were to impose SCCs on all its subject corporations, they would fall into one of three categories: 1) those that already met the new charter; 2) those needing to adjust their practices to meet the requirements of the charter; and 3) those unable or unwilling to meet the charter’s standards, who would then either leave the jurisdiction or shut down.

All three cases would generate a lot of publicity that would be heard by outside consumer markets, investors, and corporate managers. The jurisdiction would become well known in other jurisdictions as one requiring ethical business practices by all its corporations.

Criticism of the jurisdiction from corporations forced to leave because they couldn’t or wouldn’t operate within the SCC environment would be offset by the implication that such corporations had failed to meet good social and ethical operating standards.

Conversely, corporations willing to stay and operate under an SCC would enthusiastically promote their adherence to the charter because they would wish to cash in on the ethical market premium that compliance would confer on them.

In this way, the image of the jurisdiction would become much more positive than negative, and this tendency would be amplified as it attracted more corporations willing to advance the public interest and fewer of those that weren’t.

Would corporations that leave deprive the SCC jurisdiction of economic benefits?

Corporations could certainly leave the jurisdiction to relocate elsewhere, and some may do so, but they might later wish they had stayed. Leaving would be an implicit admission that their practices were less than favourable to the public interest, and other jurisdictions would be put on notice of this fact. Inasmuch as there could be a trend towards other governments adopting this new charter, harmful corporations would become concentrated in the decreasing number of jurisdictions that would not enforce SCCs. Those corporations would eventually find themselves unwelcome in all but a few remaining non-SCC jurisdictions, which would lose public respect for their lax corporate standards. Of course, if the corporations that left came to see the economic benefits of improving their practices, they would be welcomed back. (It is significant that nearly all of B.C.’s major forest operators eventually came around to acquiring FSC certification.)

Harmful corporations relocating to less regulated jurisdictions might seem at first to bestow an economic advantage on their new non-SCC homes, but this might be offset by a tendency toward protectionism by the SCC jurisdictions. Within SCC jurisdictions, in order for their legislation to be logically consistent, foreign corporations offering the same services but using better practices would necessarily be favoured over those that used worse practices. Indeed, the CoC concept would be a critical element in this economic environment.

Discrimination against non-SCC corporations could be effected by tax-disincentives, (tax shifting), or other legislative methods, and this would effectively extend the influence of the SCC jurisdiction beyond its borders. Outside the jurisdiction, however, there would be no justifiable reason to deny markets to the ethically produced products from the SCC jurisdiction; on the contrary, the demand for such products could be expected to rise. So this kind of discrimination would tend to result in only a one-way restriction of trade in favour of the SCC producers. As the concept of society as a corporate stakeholder became better established, the stigma of poor practices would follow the products of harmful corporations everywhere, and they would have few defenders.

Leaving an SCC jurisdiction to avoid compliance would thus probably have negative consequences for a corporation, and careful analysis of this situation could be a decisive factor for its managers and shareholders when contemplating the choice between improving practices or relocating elsewhere.

How could governments justify this change to the corporate charter?

Governments could mount a compelling case for this legislation and a robust defence against criticism. In fact, this amendment of the corporate mandate would be extremely hard for anyone to argue against. Who could make a reasonable case that any corporation, or any social entity, should not be at least neutral to the public interest?

If one jurisdiction included society as a stakeholder in its corporate charter, it would be setting a standard that other governments would eventually follow because of pressure from their electorates. Presumably, an educated electorate can recognize the difference between good and bad social practices. This is already well demonstrated in the explosion of demand for FSC-certified forest products. Given the reality of being a corporate stakeholder, society, through its advocates and activists, is certain to pursue its own interests.

In a democratic society, the public rewards and punishes government according to its perceived performance and attention to public concerns. This mechanism already exists to some degree for corporations in the marketplace, but it would be significantly enhanced through the transparency that would be required of corporations if the public became a legislated stakeholder. This would not necessarily create an adversarial relationship between the public and corporations. While guarding against corporate harm, the public would also be active in supporting and rewarding the benefits socially progressive corporations could offer society, just as they do now.

How would the charter change affect the environment?

It is becoming clear that the public interest is very closely related to environmental health, so environmental practices would improve to the extent the public interest was realized. According to recent polling in Canada, this country is ready to support serious government action that will protect the environment. With a well-conducted educational campaign, the public should be receptive to viewing the SCC as the instrument for a profound improvement in environmental practices.

How could this change be enforced and monitored?

Legal enforcement of the new corporate charter would take some time to find a balance point, but since the SCC would actually dictate important parts of the corporations’ internal law -- by necessarily guiding the articles and by-laws governing corporate operations -- the management would to a great extent share common cause with the jurisdiction’s governing and legal authorities.

Meaningful SCC legislation would require diligent government oversight provisions. Corporate practices would also need to be independently assessed. Frameworks for this oversight are already well developed, both through certification organizations, which prescribe practices, and SRI programs, which use established ethical screening methods to find ethical investments. Much of the debate has already taken place within these two fields. Public debate, however, would continue to be a large part of the oversight process. There would naturally be a great deal of debate about what constitutes the public interest, but again, certification organizations and SRIs have already done much of the groundwork, and have the experience to set the agenda. Since the independent development of these fields by NGOs and SRIs seems to have been a necessary precursor to government action in improving practices, it seems practical that they should continue to expand their roles in this ongoing process.

As the above examination of certification organizations has shown, the public and many corporations are already in significant agreement concerning what they perceive to be the public good. They trust the solutions offered by certification organizations. The experience of these organizations is an obvious place to turn in the drafting of SCCs. At the same time, these organizations are well placed to perform oversight and independently assess the effectiveness of the kinds of standards proposed for SCCs.

The recent state of corporate practices has been described as “a race to the bottom,” a reality that seems to be an inevitable outcome of the single-minded pursuit of profits. If corporate managers knew their activities were to be well scrutinized and transparent, while at the same time being freed of their primary legal obligation to maximize profit, adoption of the SCCs could result in “a race to the top.”

In other words, SCCs would tend to be self-enforcing, just as FCC certification is now, and, in the long run, with the evolution of a different corporate culture based significantly on public interest considerations, the perception from both sides would be that corporations would become a true partner in the public interest, rather than as an adversary to it, as they are now often seen to be.

Another existing oversight mechanism worthy of investigation is the social audit, which has been voluntarily undertaken by some corporations, especially in India.

From a strictly legal point of view, the only laws that can ever be effectively enforced are those that have public support, or at least acquiescence. Enforcers of laws that defend the public interest could therefore expect widespread support and relative ease of execution.

How would corporations change over time?

At present, corporations are required by their charters and their internal articles and bylaws to follow their self-interest, even in spite of the public interest. With the SCC, the requirement to exclusively serve the shareholders’ interest would no longer exist. Corporate CEOs would no longer be legally liable for not doing so, as they are today. Corporate culture is dependent on corporate goals and operating principles, and so would change in character with a change in the corporate charter. A different management philosophy would be both needed and promoted.

How would the corporations benefit from the new charter?

Just as in the FSC example, SCC corporations would attract shareholders who are looking for good practices and ethical investment opportunities. The SRI is an important and growing segment of the investment market, especially in Canada, where it grew eightfold between 2004 and 2006, with the environment being especially important within that sector. The SRI is attractive to corporations for several reasons, particularly the market access it offers, but also for reasons of public perception. With a change in charters, these advantages would enrich enlightened corporations that are already following good practices, and offset losses for those which would have to spend more or make sacrifices to improve their practices.

SRI investors have better screening skills than other investors when it concerns the social nature of the investment under consideration, and they may be more able to discern practices harmful to the public interest sooner, since social responsibility is an important factor in their investment goal. As one example, the recent American sub-prime meltdown was recognized and avoided by SRI investors well in advance of losses.

Since the SCC would inculcate genuine concern with the public interest as a new attribute of corporations, they would begin to be subject to new political judgments, starting with whether or not they embraced their new role, or relocated to avoid it, and progressing through degrees of commitment to the spirit of the new corporate law. Corporations already obligated to the public interest would naturally be sensitive to their public image, and would compete on that basis. Of course, this kind of competition is already important, but the difference would be that now their practices would necessarily be fully transparent. For example, “green washing” would no longer be an effective strategy.

Corporations are now bound by a charter that legally forces them to actions that enlightened managers would not otherwise choose. For example, many corporations today may have managers who are concerned about global warming but are legally bound to restrict their activities to enriching their shareholders, even when they know they may be worsening the climate problem. The SCC would give management far greater flexibility in addressing all concerns, instead of only a concern about profits.

Will government fear the consequences of a major change in their relation to corporations?

A big question is how governments could be convinced to risk corporate flight from their economy by implementing this kind of change. This question is actually a question about democracy. Real democratic choice should include the power to install a corporate charter that is, at the very least, neutral to the public interest. This might be compared to Tommy Douglas and the introduction of Canada’s public health care system, now widely considered our most cherished social program and a key element of Canada’s identity. The shift from private to public health care had a lot in common in its day with the proposed shift in the corporate charter today. Any political party, inside or outside government, promoting this kind of change could mobilize the electorate in a similar way to the mobilization that was needed to establish the Canada Health Act.

Naturally, any major change in society needs to be preceded by public education in order to proceed smoothly and with public support. It may well be, however, that in this matter of corporate social responsibility, governments are in fact trailing the electorate -- and may even be trailing some corporations as well. Business leaders tend to be more sensitive to public concerns than governments, partly because important aspects of business cycles are often shorter than election cycles. Many CEOs may even secretly welcome a Social Corporate Charter that is applied and enforced equally on all corporations. Such a jurisdiction-wide charter change would remove the fear of becoming uncompetitive with competing firms that might otherwise stick with a profits-first-and-only policy.

We might all be pleasantly surprised when SCCs are greeted and supported much more enthusiastically than even their most ardent advocates now anticipate.

(Garth Woodworth—[email protected]-- is a freelance writer who lives in Victoria, B.C. He will be glad to supply detailed sources and references for this article to anyone wishing to obtain them.)