Corporations Sordid Past, Sordid Present, Sordid Future
Greed and moral indifference define the corporate world’s culture.
Throughout the economy today, the regulatory system often fails because of lax regulations and ineffective enforcement.
September 25, 2011
Corporations had tarnished reputations from their beginnings in Great Britain in the early seventeenth and early eighteenth centuries. Stockbrokers patronized coffee shops and did business London’s Exchange Alley, a maze of lanes between Lombard Street, Cornhill and Birchin Lane looking for credulous customers. Their companies did well with speculation and fraud and then collapsed. In 1720, spurred by the notorious South Sea Company’s collapse, the Parliament, with some exceptions, outlawed corporations.
Adam Smith in his Wealth of Nations was apprehensive about corporations because he thought managers could not be trusted to safeguard “other people’s money.” “Negligence and profusion” would inevitably flow from corporations.
Joel Bakan, in The Corporation: the Pathological Pursuit of Power and Profit,describes corporations as psychopathic. Although my feeling is that “sociopathic” is a more accurate term, I will use psychopath in this chapter. Psychopaths enjoy inflicting harm while sociopaths are indifferent to other’s pain.
A major block to widespread participation in corporate ownership was unlimited liability. No matter how much or how little you invested in a corporation, you were personally responsible for the company’s debts, with no limit.
By the mid-nineteenth century, business owners and politicians were advocating a “limited liability” change in corporate law. For example, if you invested $1,000 in corporate stock, the most you could lose was your investment, $1,000. Many in Europe and the US criticized this as evading personal moral responsibility.
In the 1890s, New Jersey and Delaware started throwing overboard many restrictions when issuing corporate charters. Previously, corporations had a set life span, narrowly defined purposes and locations. They could not own stock in another company. Mergers and acquisitions rules were relaxed.
With shareholders and officers not being personally responsible, the law had to find someone, some person to assume responsibility. The corporation became that “person.” In the 1886 Supreme Court decision in Santa Clara County vs. Southern Pacific, the corporation became a legal person. The Supreme Court buttressed its opinion on the Fourteenth Amendment that corporations had rights to “due process of law” and “equal protection of the laws.” The court based its decision on the Fourteenth Amendment which was designed to protect freed slaves from the Black Codes passed in former slave states. The Black Codes sought to restore slavery in all but name. Even though the word “corporation” is not in the Constitution, corporations have more rights than human beings.
In the 2010 Citizens United vs. the Federal Election Commission, the court ruledthat the government may not ban political spending by corporations in candidate elections. Corporations can spend without limits. Human beings are limited to $2,000 per candidate in congressional elections. The corporations have more rights than you and me. President Obama declared the decision to be “a major victory for big oil, Wall Street banks, health insurance companies and the other powerful interests that marshal their power every day in Washington to drown out the voices of everyday Americans.”
Almost all commentators lament the corporations’ separation between management and ownership. In my mind, this is not a big deal. Due to legislation and court decisions, the officers and directors became immune from immoral and illegal actions. For Joel Bakan, this is the worst feature to corporations: “By design, the corporation form generally protects human beings who own and run corporations from legal responsibility, leaving the corporation, a “person” with a psychopathic contempt for legal constraints, the main target of criminal prosecution.” By law, the officers and directors can only perform actions and make decisions based on benign results for the corporation. Consideration for the effects on the society, the environment, the community and the nation are not allowed in corporate actions. How did Frankenstein’s monster come into being?
The 1919 Michigan Supreme Court decision in Dodge vs. Ford Motor Company held that Ford’s responsibility was to the shareholders, not to the employees or the community. In 1916, the Ford Motor Company reached $60 million in retained earnings, Henry Ford wanted to stop issuing special dividends and use the money instead for massive investments in new plants that would increase production and employment while cutting costs and prices.
The court held that Ford could turn the company into a charity. While there is some contention that the legal opinion was not drastic, almost everyone thought it was. Milton Friedman held that the moral imperative was to make as much money for the stockholders and that executive who chose social and environmental goals over profits was immoral. Peter Drucker said if you find an executive who wants to take on social responsibilities, fire him fast. No matter what the precise legal impact, the corporate culture takes this as an excuse for evading social and environmental responsibilities. This moral bifurcation has corrupted the corporations and the people who run them. There is a double standard. What is standard in a corporation can be immoral or a crime outside the corporation.
There is no thought for the social good. Unsurprisingly, with 1,400 new drugs developed between 1975 and 1999, only 13 were designed to treat or prevent tropical diseases and 3 to treat tuberculosis. Drugs dealing with sexual dysfunctions, hair loss or personality disorders in family pets were more important than saving humans from an early death or disability.
William T. Esrey, Sprint’s reflects the dominant attitude when clarifying corporation goals in the fast changing world economy by consolidating everything in two sentences:
“We’ve always had one basic principle, and that is, we’re in the business of creating value for our stockholders. That’s what management is supposed to do, over time, in the long run.”
The following is columnist Barbara Shelly’s reaction in the Kansas City Star on October 5, 1999:
“Well, knock me over with a goose feather. I had it all backward.
“I knew, of course, that companies that fail to make a decent return for shareholders are fair game for downsizings, reorganizations, bankruptcies, executive beheadings and other humiliations, up to and including elimination from the face of the Earth.
“I thought, however, that stockholder profits were the natural result of a business’ success in achieving other objectives.
“In my quaint, reverse order, businesses were created to meet a demand for goods and services. They provided an incubator for ideas and talent. They produced something of value, and the best of them assured decent opportunities for a work force and enriched whole communities. If they functioned well, profits to the shareholders followed.”
For Joel Bakan, Enron was not an isolated incident. All corporations share common traits: “obsession with profits and share prices, greed, lack of concern for others, and a penchant for breaking legal rules.”
The obsession with profits over safety is shown the productions liability case, Anderson v. General Motors Corporation, where the jury awarded Patricia Anderson a $4.9 billion verdict. She, her four children and a family friend were coming home from church on Christmas Eve 1993 when her Chevy Malibu was rear-ended by a drunk driver. The Malibu’s gas tank exploded. The adults were able to escape but the four children were trapped in back seat.
The plaintiffs filed their lawsuit on the grounds that the fuel tank was 10 inches from the back bumper. Except for a broken femur, no one sustained significant physical injuries. The children suffered horrible and disfiguring second- and third degree burns. One child had her hand amputated. The plaintiffs’ attorneys were successful in obtaining GM internal memos which GM had previously blocked in previously lawsuits. The most damming document was a 1973 memo written by GM engineer Edward Ivey that seemed to set a price tag on every human life lost or significant injury. Ivey report estimated that “fatalities related to accidents with fuel-fed fires are costing General Motors $2.40 per vehicle in current operation.” See the calculation:
500 fatalities x $200,000/fatality
41,000,000 automobiles = $2.40/automobile
Engineers proposed another location that would have cost $6.80 more per vehicle. GM pointed to an extremely low fire fatality rate – one per 1.3 billion miles. Mr. Ivey testified in depositions that he had not been ordered to furnish the analysis and that no one in top management had seen his memo or ever relied on the memo when making decisions.
On July 9, 1999, the Los Angeles jury awarded $4.9 billion to the plaintiffs. On August 26, 1999, a Los Angeles Superior Court Justice Ernest Williams reduced the award to $1.09 billion and at the same time excoriated GM in his decision, “The Court finds that clear and convincing evidence demonstrated that the defendant’s fuel tank was placed behind the axle on automobiles of the make and model involved here, in order to maximize profits, to the disregard of public safety. The Ivey memorandum, and the fact that the defendant has no accepted responsibility, indicated that the policy of deterrence would be served by imposition of punitive damages.”
Before the award reduction, GM thought that the punitive award was “$4,775 billion and 1,000 times greater than the highest award ever affirmed is a reported case in Californian history. Its sheer size establishes it to be the product of passion and prejudice; nothing else explains it.”
Plaintiff attorney Brian Panish replied, “They haven’t gotten the message. For a company like GM, you don’t give a parking ticket.”
Long before President Eisenhower’s warning about the military industrial complex, retired Marine Corps Major General Smedley Butler wrote a book,War Is a Racket. The highest decorated soldier in his day, he led military actions in the Philippines, Mexico, Haiti and Honduras. After he retired, he realized that he was not protecting the American people but American business, usually United Fruit. See this section from his book:
“I spent 33 years and four months in active military service and during that period I spent most of my time as a high class muscle man for Big Business, for Wall Street and the bankers. In short, I was a racketeer, a gangster for capitalism. I helped make Mexico and especially Tampico safe for American oil interests in 1914. I helped make Haiti and Cuba a decent place for the National City Bank boys to collect revenues in. I helped in the raping of half a dozen Central American republics for the benefit of Wall Street. I helped purify Nicaragua for the International Banking House of Brown Brothers in 1902-1912. I brought light to the Dominican Republic for the American sugar interests in 1916. I helped make Honduras right for the American fruit companies in 1903. In China in 1927 I helped see to it that Standard Oil went on its way unmolested. Looking back on it, I might have given Al Capone a few hints. The best he could do was to operate his racket in three districts. I operated on three continents.”
This is a traditional pattern for empires, the Romans, the British and for ours now. Most taxation systems until the 20th century were regressive, depending on sales taxes, property taxes and tariffs. The non-rich provided the cannon fodder soldiers and paid the taxes. The rich and their companies got access to markets and raw materials at bargain prices. When American business interests had difficulties, the President called in people like Major General Butler and the Marines. With Franklin Roosevelt’s Good Neighbor Policy, interventions became more discreet, using the Central Intelligence Agency to destabilize a country and enlisting support for populist regimes. The US government was active in overthrowing the governments in Iran (1953), Guatemala (1954), and Chile (1973). There were excuses about Communist influence but the countries’ true offense was to have an independent president as Nasser was in Egypt.
As Texas governor and American president, George W. Bush was enthusiastic about businesses regulating themselves. Among the conservatives, the deregulation movement still has the upper hand even after the 2008 meltdown. Here are Joel Bakan thoughts on self-regulation:
“No one would seriously consider that individuals should regulate themselves, that laws against murder, assault, and theft are unnecessary because people are socially responsible. Yet oddly, we are asked to believe that corporate person – institutional psychopaths who lack any moral conviction and have the power and motivation to cause harm and devastation in the world – should be free to govern themselves.”
David Korten’s book, When Corporations Rule the World, offers remedies that would make markets and political institutions more responsive to the people:
- Institute a reasonable ratio for compensation between the highest paid employee and the lowest paid employee, possibly 25:1. For large corporations this will require restructuring the executive positions and selling off major sections.
- Place a small tax (the Tobin Tax, named after the late economist, James Tobin) on stocks, bonds and foreign exchange transactions to discourage short-term speculation and enhance market stability.
- David Korten wants to regulate derivatives. He is too kind. Outlaw derivatives. Let people gamble in Las Vegas and casinos. The German magazine, Der Spiegel, did some research on the worldwide dollar value for derivatives. In their August 22, 2011 issue, they gave an estimated $601 trillion while the value for the world’s goods and services were an estimated $63 trillion.
- Outlaw offshore tax havens.
- Vigorously enforce the anti-trust laws. When was the last time the Justice Department opposed a merger?
- Public policy should encourage employee or community buyouts. For example, when a major corporation is planning to close or sell a plant, the local employees and the community should have the first option to buy the plant on preferential terms.
- The Clinton administration ended welfare as we knew it for human beings. Now it is time to end welfare for the corporations. The federal government should charge as much for public lands use in mining, grazing and timber cuttings as a business would.
- Eliminate corporate tax deductions for lobbying, so-called public education or political organizations of any kind. The ultimate goal is to eliminate corporate influence on the political process.
- Start campaign finance reform to reduce corporate influence.
Unregulated capitalism is unstable. The business cycles, recessions, depressions, environmental contamination and terrible exploitation belong in this model. Corporations should be obeying laws not writing them. Corporations exist to serve the citizen, not the other way around. If a corporations consistently acts outside the public trust, in toxic dumping (BP), unfair labor practices (Wal-Mart) or other violations, citizens working through their congressman should revoke the offending corporation’s charter. The regulated state as seen in Roosevelt’s New Deal is the way to go.
Bakan, Joel, The Corporation: the Pathological Pursuit of Power and Profit,New York: Free Press, 2004. http://www.youtube.com/watch?v=bvPXR_6cn0s Youtube
Fisk, Margaret Cronin, “The Biggest Jury Award of 1999”, National Law Journal.
David C. Korten, When Corporations Rule the World (Kumarian Press/Berrett-Koehler Publications, Inc., 1995, 2001).