The corporation of today faces an identity crisis. At law, corporations are “persons”. Corporate persons are distinct and separate from their associated human persons, such as the owners, directors and employees. As such, corporations, like humans, can enter into contracts, sue, and be sued in their own names.
This concept of the corporation as a person came about in England in the late 19th century. Other countries have since adopted the corporate model, and it has become the primary form by which business is conducted in the modern world.
The rise of corporations, in parallel with international trade and globalisation, have significantly benefited the world. Developed and developing countries have experienced unprecedented economic growth in the past century.
At the same time, corporations are being blamed for many systemic problems: environmental pollution, labour exploitation, growing income inequalities, and the Global Financial Crisis, to name a few.
What happened?
Some scholars point the finger at Milton Friedman, the economist and Nobel prize winner. In 1970, he famously declared: “There is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game”.
Many corporate leaders, Wall Street, intellectuals and even the respected Economist magazine have taken Friedman’s pronouncements as gospel text. They championed the mantra of “maximising shareholder value” as the chief, if not exclusive, goal of the corporation.
In recent years, however, there has been strong pushback against such brute capitalism. It is coming from all quarters: politicians, religious leaders, regulators, academics, activists, consumers and even from within corporates. These separate strands of agitation over climate change, corporate governance issues and social inequalities are beginning to coalesce under the umbrella of what is known as the “sustainability” movement.
In its wake, there have been vigorous debates on the values of corporations and the
primacy of shareholders versus stakeholders. Detractors want corporations to change their behaviours, even if they have to rework the basis of their identities.
But can this happen? Can the corporation change its nature and identity?
According to the legal folks, the answer is “no”. The laws must change first. Legal scholar Joe Bakan, author of The Corporation: The Pathological Pursuit of Profit and Power, says that the corporation is fundamentally a psychopath. Because of the nature of its legal incorporation, “basically the kind of person a corporation is, is a profoundly self-serving person. And as you learn in any introductory psychology class, that is the definition of a psychopath.”
Despite the advocacy, legislators have been slow to act. The most that has happened is the creation of new hybrid corporate forms such as the Community Interest Company in the UK and the Benefit Corporation in the US. These new legal entities are designed to “do good” as well as “do well”. The vast majority of corporations, however, remain regular commercial entities whose primary accountability, in law, is to their shareholders.
That said, the leaderships at many corporations, are responding to the pressures around them. They have begun to change their attitudes and behaviours. For example, in August 2019, 181 leading US CEOs signed a “Statement on the Purpose of a Corporation” in which they committed to move away from shareholder primacy to “include commitment to all stakeholders” [the emphasis is theirs]. We are also seeing more companies such as Unilever and City Development Limited expressly committing, in words and deeds, to the likes of the UN Sustainability Development Goals.
I used to think like Bakan – that you need to change the laws on how companies are incorporated so that we can define the kind of “persons” corporates should be. But I now realise that corporations are made of human individuals – the board, the CEO and its staff. And if these individuals and others around them (such as customers and the community) push the sustainability agenda, then effectively, the identity of the corporation can be transformed (even as its legal form remains intact).
Of course, the majority of corporations are not quite there yet. Business is still very much about business, making money for the shareholders. But the sustainability movement is gaining momentum. COVID-19, for all its negatives, is giving sustainability an extra hard push by exposing the vulnerabilities of the current structure and systems.
In the meantime, each corporation should seek to rediscover its moral compass and realign its actions and identity with the tenets of compassionate capitalism. It can start by caring for its stakeholders, including the environment and the community.
