Review of Corporate Irresponsibility
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Corporate Irresponsibility: America’s Newest Export. by Lawrence E. Mitchell. New Haven: Yale University Press, 2001. Hardcover, 320 pages. ordering info |
How Corporations Lost Their Compass
by Jeffery J. Smith
CORPORATE IRRESPONSIBILITY: America’s Newest Export by Lawrence E. Mitchell (2001, Yale U Press) is timely and fulsome with the inner workings of corporate law, how it is set up to reward the ever-fiercer search for higher stock prices in the very short term. Every player from director to investor wants higher prices now, and managers, who are even paid in stock options, are in no position to resist, or to plan for a longer horizon. Rather than invest in R&D, all resources are marshaled behind maximizing stock prices today.
What’s not addressed is why corporations who forego the future outperform those who think ahead. In another endeavor, in professional football, when the professional league expands, the newly admitted franchises get to select players from existing teams. During the last expansion, one new team selected older, proven players to try to win a championship as soon as possible. The other team gambled on younger players with perhaps more potential, hoping to be a contender for many years. While neither team reached the top, the former did play for a division championship in their second year then dropped out of sight, the latter went that far in their fourth year and stayed good for a while. So in sports, both strategies work, if imperfectly. Why is the market rigged so that only one strategy, the short term, always works best?
The lawyer’s reason is, even if you wanted to sue a corporation, in order to force it to consider the future, you could not. All the laws and judgments are set up to protect one goal -– maximizing stock value. In this book, reading how these rules came into existence, seeing how players react, is like watching a high-stakes but one-sided chess match.
Even when law is counter-productive, people follow it as religiously as they do the law of gravity. While natural law never changes, legalisms evaporate with every metamorphosis of society. To explain corporate behavior, one can point to corporate law, but beneath that lies the instinct of every gregarious species, such as humans; to wit, “what the boss says, goes.” Thus to change law, we must change bosses; or reduce hierarchy, increase equality, and have everyone to some extent be their own boss.
However, Mitchell diagnoses America as suffering from too much individualism, which he defines as equality in freedom. Right after he disentangles liberty versus license, he bundles them back together again. He blames the pursuit of immediate profit über alles on too much liberty rather than on too little equality. A deeper analysis is found in Morton Horwitz’s The Transformation of American Law, 1780-1860 (1977, Harvard Press), which links judicial favors for the well-connected corporations to industrialization, not to any new popular ideology of “radical autonomy”.
One might find a truer cause in psychology. At the same time publicly held corporations seek to pad their stock price, it’s also true, as Mitchell points out, that corporations which treat their workers well tend to profit very handsomely. Perhaps the compulsion to engross stock value is not simple materialism but something akin to machismo as well.
Mitchell does note that a corporation is merely a piece of paper in a bureaucrat’s office (p 42). To level the playing field, we could abolish the corporate charter, which would abolish limited liability. “For the consequence of limited liability is to permit, if not encourage, the corporation to externalize the costs of its profit making upon others.” If managers, directors, and investors were fully liable for the consequences of their economic actions, then they’d be more careful in their dealings with the health and safety of workers, consumers, and nature.
Mitchell overlooks that taxes and subsidies are two huge distorters of choices by business. Presently, business can avoid taxes by borrowing and writing off the debt, rather than use cash flow to invest in R&D. And subsidies bail out businesses when the market tries to correct their foolish behavior. Losing both taxes and subsidies, along with liability limits, would go a long way toward freeing business to plan for the future.
Rather than remove existing distortions, Mitchell would add new ones, a tax on short-term profits and more paperwork to report one’s good deeds in dealing with workers, customers, and nature. Wasting trees and people’s time doesn’t bother Mitchell, who is more concerned about people losing jobs, jobs that many workers do not like, that ruin their health and the health of the planet, jobs that Mitchell would probably never think of doing himself.
To free corporations to think ahead, Mitchell would abolish elections of the board, noting such elections are merely perfunctory anyway. He also cites the proposal of having everyone be stockholders, the old universal capitalism idea of Louis Kelso, but which Mitchell attributes to the better-known Peter Drucker. In the final analysis, the problem is the behavior and values of those wealthy enough to hold stock, and who hold the lives of workers in their hands. How people, or in this case the elite, feel and act always overrides whatever law -– good, bad, or indifferent -– is written.
The book has a few contradictions and inconsistencies, hard to avoid in any discussion of sex, politics, or religion. For instance, the author chides people for knowing so little about the companies whose stock they hold, yet extolls the business relationship founded on trust. If there’s trust, why pry? An admitted leftist, his bias was not always kept in check -– workers were “loyal”, rather than "stuck in a rut," while corporations were "fickle," rather than "dynamically adapting." Referring to people as “human capital” he equates with slaves; but referring to humans as workers, meaty robots, does not rankle Mitchell at all.
Rather than try to regulate the wealthy, society could do a better job of sharing the wealth -– not the wealth created by individuals but the wealth generated by society. That is, we all deserve a share of the “rents” paid to own or use nature, a la Alaska’s oil dividend. Receiving a rent dividend would make us all equals and topple the hierarchy creating the problems.
Mitchell’s worldview leaves out the basic factor of land and, as a lawyer, he elevates law to a place of prominence in the causal chain of corporate behavior. Visiting his world, to learn the ins and outs of corporate law, is enlightening and thus useful. And for an academic writer, he’s more readable than most, populating his explanations with real people and pithy, quotable observations: “Instead of controlling (the corporation), we have allowed it to control us.” That he anticipates arguments well, yet sticks to the position he himself critiqued, makes his book human and engrossing.
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| Fred Foldvary's editorial on corporations |
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Jeffery J. Smith runs the Geonomy Society.
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