Part One: The Role of the Corporation in Society
Given the importance of corporations for all sectors of society, we should consider the groups that have an especially large stake in their ways of functioning. The major stakeholders, in addition to stockholders and managers, are employees, customers, suppliers, neighbors, and society as a whole as represented by government. In Europe and Japan the form of economy that has developed around corporations is called stakeholder capitalism. Obviously, corporations have a commitment to those who have invested in them, but in this system they are also understood to have responsibilities to their other stakeholders.
Where this system prevails, corporations are expected to promote social harmony and welfare. High profits are assigned less importance than economic stability. Moreover, European and Japanese policies are intended to limit hostile and foreign takeovers.
Where stakeholder capitalism prevails, largely as a result of the activity of strong unions, there is an excellent public safety net for employees. Corporations have much less freedom to dismiss employees; those who are dismissed are buoyed up by unemployment insurance for up to four years at up to 90% of their last wages; and there is a great deal of retraining available. Critics of stakeholder capitalism argue that this system cannot compete in the global market. Yet in at least four European countries—Austria, Netherlands, Ireland, and Denmark—the economy is growing faster than in the United States, unemployment is lower, and exports are increasing.
A fundamentally different understanding of the corporation and its role in society underlies the stockholder capitalism of America. Here, a firm’s fundamental purpose is to make profits for its investors or shareholders. The firm has minimal legal obligations to employees and/or to the communities in which its facilities are located. Moreover, in the U.S., a business corporation is regarded as a commodity that is bought and sold like any other commodity, without regard for the social consequences of such transactions. Waves of leveraged buyouts and corporate takeovers in the 1980s and 1990s were extreme examples of this mentality.
Stockholder corporations often ignore that general social welfare can contribute to profit. Some economists believe that it was large public sector investments in the late 1940s and 1950s—in roads, infrastructure, education, research and development, etc.—that built the foundation for our great success of the 1990s. Unfortunately, corporations in general have not sufficiently recognized their long-term interest in such investments. The problem is that their payoff is realized in decades, not years, whereas corporations typically aim at profits in the short-term and try to divert public expenditures into areas providing benefits sooner.
If we broaden the definition of the “stake” in corporations, then many types of stakeholders emerge who are less visible. Humanity as a whole has a huge stake in the way corporations in the aggregate shape society.
At present the forces at work in our economic system tend to divide people into categories: those who benefit from its workings—an elite who can sell skills that are highly valued in the market; a much larger group who “serve” the economy in humdrum jobs that offer few chances of personal growth and little more than a basic remuneration; and the vast “underclass”, sometimes called the “disposable people.” These include those in the United States, perhaps 20% of the population, who live below the poverty line, and the millions in the countries of the South who live in destitution.
These poor and destitute people have an enormous stake in corporate policies that hurt them—through actions that limit governments’ ability to help them, through worsening of their natural environment and exploitation of their natural resources, and through exploiting them as cheap labor. The poor have potential power in their numbers, but they can exercise it only if they work together. Today there are peoples’ movements in many countries that undertake to gain power through solidarity.
Planet Earth is a stakeholder. Its life-giving resources are being depleted, and those who seek short-term exploitation rather than long-term compatibility with Earth are despoiling it. From the perspective of humanity as a whole, the failure of most corporations to take this stakeholder into account may be their most important failure.
Increasingly, corporate leaders are reflecting on their responsibility to this wider pool of stakeholders. They implement their social responsibility through policies against the use of child labor; by conforming to the laws of their host countries; paying the prevailing wage; and observing health and safety regulations. Some corporate leaders are even responding positively to pressures by consumers to have their factories monitored by local nongovernmental organizations.
Several leading corporations, including Royal Dutch Shell and Ford, have withdrawn from the organization they helped to set up to oppose efforts to slow global warming. Many are genuinely trying to reduce pollution and to use resources more efficiently.
There are important efforts to show that environmental responsibility need not conflict with corporate interests. The Rocky Mountain Institute, established by Amory and Hunter Lovins, has long been a leader in encouraging corporations to recognize that their profits need not depend on unsustainable exploitation of resources. For example, it persuaded a number of electric utilities that encouraging the use of more efficient appliances, thus slowing the increase of usage of electricity, actually improved profits. Today it promotes what it calls “natural capitalism” on a broader basis, and many companies are interested. This entails the recognition that whereas in the past labor was scarce and natural resources plentiful, it is now natural resources that are in short supply. In future, the Lovins argue, profits will be made by those who economize in their use of these resources.
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