In 2001 Lawrence E. Mitchell, The George Washington University Law School, wrote a book entitled “Corporate Irresponsibility: America’s Newest Export”. In it he argues that a fundamental shift in corporate culture and practice must occur if the modern corporation is to survive in anything like its present form. Mitchell wrote in the wake of revelations of the Enron affair.
Mitchell links corporate irresponsibility to an age-old dilemma: how to reconcile the interests of the individual with those of the group. Groups, after all, make relatively few demands of themselves – there are collective or corporate interests and goals that transcend those of an individual member. So, rules may be established to restrain the individual’s desire for unfettered, harm-producing liberty, or to induce positively desired behavior through incentives or rewards.
When we address corporate law and governance, we face similar analysis; that is, reconciliation of the interests of individual shareholders with those of the corporate enterprise as a whole. In modern corporate structures this is pronounced, where a large, diverse and largely anonymous groups of owners – the shareholder – is quite separated from the management of the company. In providing money to a company while being legally and practically foreclosed from meaningful say over its management, shareholders rightfully expect that directors act as fiduciaries – and subvert their own personal interests to those of the shareholder or enterprise. The established structural governance arrangement largely precludes the shareholders from participating in matters of moral or ethical choice in corporations.
But this itself presents a dilemma for directors. The challenge is the task of figuring out how to act in a way that advances the interests of shareholders consistent with fulfilling the overarching interests or purposes of the corporate group. Legally, directors have discretion in areas of moral or ethical choice because of the social policy of the business judgment rule, which allows decisions largely free of second guessing. Directors, I would say, should see this as reflecting a social policy of entrusting them to use their discretion to act responsibly, based on prevailing social values as well as market realities, the responsible course of conduct might be. This requires moral deliberation, and not simple adherence to the maxim of shareholder wealth – although authorities such as Milton Friedman have disagreed.
In this reality, a combination of enlightened self-interest and economic incentives serve as a basis for responsibility, and this involves three factors: reputation (cost/benefit of goods/service, how employees are treated, and community investment); competitiveness (managing supplier/customer relationships, workforce diversity, and protection of the environment); and risk management (control of the wide range of risks that could disrupt corporate performance, be they financial, regulatory, environmental;, or customer attitude, among others).
The challenge, ultimately, is how to align corporate governance such that shareholder interest becomes more closely identified with that of society as a whole.
Paraphrasing Albert Einstein, with a bit of modification for relevancy – we should try not to be people of success, but rather people of value – people who apply skills, knowledge and energy to the betterment of ourselves and to the betterment of the lives of others and our society as a whole.
