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"The Corporation" and the Search for Agreement

Nicholas Johnson

October 1, 2004
[20041001 1800, 20041007 1440]

I've now seen Mark Achbar, Jennifer Abbott and Joel Bakan's film, "The Corporation," twice (Chicago and Iowa City), and attended a discussion of it at the University of Iowa's College of Business September 29. The film is an important enough treatment to warrant some thought -- not to mention some effort to bring the disputants to as much agreement as possible as to what they're talking about and what we can do about it.

Those who own or manage corporations, teach business students, or study and hope to enter business, are, understandably, a little defensive when confronted with this film's rather overpowering portrayal of corporate abuses.

Some of the responses I've heard from them include the following:

What follows represents my current effort to bring some emotion-free analytical thoughts to bear on what is and is not going on here, with respect for all who seem to be caught up in these issues.

1. Corporations Aren't the Only Problem. Clearly the business advocates are correct that for thousands of years it has been obvious that individuals sometimes engage in illegal, unethical or immoral (by somebody's standards) behavior. Some of those individuals are functioning inside institutions (which can include organizations other than corporations, such as other forms of business organization, hospitals, co-ops, churches, universities, "public interest" non-profit NGOs, etc.). And some of the anti-social behavior is engaged in by unaffiliated individuals. The problems outlined in "The Corporation" are not exclusively those of "corporations."

2. Institutions Impact Individuals' Behavior. Institutions of all kinds provide incentives, rewards and measures ("you get what you measure") that tend to shape the behavior of individuals in ways that (for some of them, some of the time) are different from what they might otherwise have done but for those rewards and measures. As John Carver ("Boards That Make a Difference," etc.) has observed "boards are incompetent groups of competent individuals." Numerous experiments in social psychology would support our common experience and intuition that groups do have an impact on the behavior of their members.

Thus, in the context of the movie, "The Corporation," I would tweak John Carver's observation to say, "Institutions can become unethical organizations of highly ethical individuals." For example, a CEO who has never thrown trash out of his car, because he wouldn't want to litter the roadside, may nonetheless be aware, at some level (or deliberately so conduct his "management information reporting system" that he will not become aware), that his company is disposing of its toxic wastes in ways that risk polluting underground water supplies.

That is why, to the extent that institutional pressures to participate in illegal or unethical practices do exist, sending business school graduates who are steeped in business ethics into unethical corporations is not likely to restructure those organizations in any significant way.

As Mason Williams once said, "You can't fight the system from within, because the system is from within." Whatever that may mean, or however much of an overstatement you may think it to be once you figure out its meaning, it is intuitively the case that more potential reformers find themselves co-opted by institutional cultures than change them.

3. Ethics Are Important -- They're Just Not Enough. There is a point to thinking and doing something about individuals' ethical practices, whether through churches, educational programs, "corporate culture," or professional associations. For example, violations of legal ethics can result in a lawyer's disbarment, removal from the profession through official, formal legal action. There may be no official equivalent for a journalist's violation of journalistic ethics, but there are occasional examples where it has resulted in a journalist being fired by the media employer.

Just because focusing on "ethics" alone is unlikely to provide any thoroughgoing solution for all corporate abuses doesn't mean ethics should be ignored. It's probably healthy for everyone to think longer and harder about the ethical choices they confront.

However, as one of the participants in the UI College of Business discussion pointed out, once Iowa's MBAs are no longer discussing business ethics in the classroom, but are actually working within a corporation, many quickly discover that their most meaningful choice is between (a) engaging in modestly (or seriously) unethical behavior, keeping the job, and continuing to pay the mortgage, or (b) holding firm to their ethical values and resigning as a matter of principle. This is not an easy choice, nor (I gathered from his comment) one their business education may have fully and effectively prepared them to confront. (Indeed, having explored the ethical issues in school may only make their corporate experience even more painful than it otherwise would have been had they remained ignorant of the ethical dilemmas they confront.)

4. Market Forces Can Create Ethical Behavior -- If It Is Also Profit-Maximizing. There are corporations, and times and situations, when the "ethical" or "socially responsible" thing to do can also increase a corporation's bottom line. For example, customers, or a firm's potential future employees, may favor a genuinely "green" company.

Or a firm that needs well-educated, bright, innovative employees, given the business it is in, may well find that the losses it suffers from the churn of trained employees who leave the firm warrants the expense of creating the reality, as well as the appearance, of a "progressive" and "caring" workplace with some of the highest salaries in its industry.

We don't need law or ethics to produce this corporate behavior. It may be characterized as "enlightened," and the results may be socially positive, but in fact it's just another category of profit-maximizing behavior that marketplace forces can be relied upon to produce.

5. Only Statutory and Regulatory Restraints Are Both Fair and Effective. Milton Friedman once counseled me, in effect, "Don't ask a single corporate executive to be 'ethical.' Get the legislature to pass a law requiring him, and all of his competitors, to comply with the standard you want." In other words, focusing on "ethics" (in whatever venue) as the solution to anti-social behavior is not very effective. It's worth doing, but it's no solution to the problems.

Especially is this so in business. It is simply unfair, as well as unrealistic, when competition is tough, and profit margins are slim, to chastise a CEO for not adopting "the ethical thing to do" when the cost of doing so will only increase his competitive disadvantage vis-a-vis his unethical competitors.

Whether we're confronted with anti-social individual behavior (e.g., drunk driving) or institutional behavior (e.g., monopolistic abuses) the most effective, clear, and administratively feasible way of regulating that behavior is through statutory law and administrative regulations.

What's wrong with the John Carver model once again?

(a) What's the for-profit corporate "ends policy" (his phrase) that defines the CEOs role? To make absolutely as much profit as possible, and preferably an ever-increasing amount of profit each quarter.

(b) What "means" can he use to reach that end? That's his choice, not the board's.

(c) Are there any means he can't use? Only those spelled out by the board in the "executive limitations" (again, Carver's phrase), which for our purposes -- and hopefully the executive limitations drafted by most boards -- include the provision that he or she shall not violate any applicable laws.

This realistic approach cabins and curtails, if it does not end entirely, disagreements regarding how much "social responsibility" and "business ethics" a corporation should exhibit.

At the same time, it needs to be noted that citizen action, protests, educational efforts, sermons and college lectures, publications, product boycotts, and films like "The Corporation" may, through their emphasis on ethics, provide a catalyst to the more effective legislative action that might otherwise never come to pass. But those strategies involve using emphasis on business ethics as a means to the end of legislation, rather than as an end in itself.

6. Why Might It Be The Case That Corporations Encourage More Illegal/Unethical Behavior Than Other Institutions? This approach (i.e., law rather than ethics) is not a modest limitation on corporate behavior. One of the points of the movie, "The Corporation," is the rather substantial amount, and seriousness, of even major corporations' violations of law. This past week alone we have witnessed the Department of Justice's $280 billion racketeering suit against the tobacco companies' fraudulent practices, almost immediately followed by the revelation that Merck knew that its arthritis medicine, Vioxx, increased the likelihood of heart attacks while providing very little more benefit (if any) than generic products selling at a fraction of its price -- following which the value of Merck's stock dropped some $27 billion.

To the extent this occurs, is there something about business in general, or the corporate form -- especially the publicly held, large corporate form of business -- that makes it more likely for corporate employees to engage in unethical, or illegal, behavior than employees in other institutions?

And on this one my intuition (subject to data demonstrating I'm wrong) is that there may be something about the for-profit corporate form, and its institutional pressures, that do contribute to more illegal behavior than is to be found in other, non-profit, institutions such as universities or NGOs.

Intuitively, there may be a number of mutually-reenforcing forces at play here.

None of the above means that all corporations are "evil," or that those working in the public interest sector are somehow "better" people. But, if true, it would suggest that there may be something about the pressure to produce ever-increasing profits that tends to push otherwise-law-abiding individuals into criminal behavior when pursuing their corporate roles.

7. Can Anti-Social Corporate Behavior Be Restrained By Laws the Corporations Have Written: Campaign Finance Reform. Central to these issues is the observation I've sometimes made that, "The problem is not that corporations violate the laws, the problem is that they write the laws."

It is that observation that leads one to the conclusion that "campaign finance reform" simply has to be a major piece of this puzzle.

We are now witnessing a presidential campaign in which each candidate has been able to raise $200 million or more in hard and soft money from wealthy individuals, corporate officers, and directly from corporations (as well as, I agree, trade unions, trial lawyers, etc.).

Suppose we are willing to accept a model in which we say, "Corporations should not be held to, or criticized for not having, 'ethical standards.' If the general public has objections to some of the actions they take the solution is to pass laws prohibiting that behavior that will be equally applicable to all competitors."

If we are going to do that, then we simply cannot turn the making of the laws over to the very corporations whose behavior we are trying to modify.

Yes, this raises an additional ethical problem for someone in business: Are there limits to what a business person can and should do in utilizing the social/political/economic power that they have (from campaign contributions, to the selection of certain candidates to run in the first place, to lavish lobbying efforts, to country club contacts)? Does a business person's right (or even obligation) to profit maximize include the right to stop, if he or she can, regulations or law that most truly independent and knowledgeable individuals would urge are desirable and needed in "the public interest"? But that is, perhaps, a subject for another day.

If we are to abandon an emphasis on "business ethics" as ineffective, then we simply must have a more rational and independent system of legislative and administrative regulations and enforcement.

Without that, we are left with little more than the anarchy of the jungle.