ARE CORPORATE DECISIONS “MORAL” ?

The creation of the modern corporation came about at around the same time as the creation of modern democracies. The concerns about the legitimacy of power that led to the creation of checks and balances in the creation of political systems were evident in some skepticism about the exercise of public power as well. Originally in the US, every corporate charter had to be voted on separately by the legislature to make sure that its purpose was legitimate. That did not last very long. But the accountability we still seek is that which is most likely to result in corporate choices that best benefit society over the long term. In some sectors, these would be seen as “moral” decisions. This does not mean that we want corporations to set policy. We do not want corporations to decide, for example, emission standards for environmental pollution. That must be left to government agencies accountable through the political process. But we allow them to make decisions that minimize the costs of their operations by externalizing them onto the community at large. Can business “do well by doing good”? This is a perennial question. Almost every company proudly points to some evidence of “good citizenship,” from participation by employees in extracurricular charitable activities to efforts to minimize environmental degradation. Companies such as The Body Shop and Ben and Jerry’s have made social responsibility (or, at least, their view of social responsibility) part of their marketing strategy. Consumers can feel less guilty about buying arguably decadent products like make-up and ice cream if they know that by doing so they are supporting good causes. But can companies thrive when the cost of social responsibility raises prices too high, instead of making the products more marketable, making them less so? Clearly, there is some point beyond which the company’s goods and services will become too expensive to keep the company going.9 At one end of the scale are the most basic aspects of social responsibility, like compliance with the law. In the best of all worlds, decisions and priorities that meet social goals also benefit shareholders. A “green” company may save manufacturing costs by creating efficiencies. A company that provides additional benefits and support for its employees and takes care to eliminate discrimination will benefit from a broader and more loyal and motivated staff. At the other end of the scale are activities so unrelated to the goods and services sold that pursuing them is considered by the marketplace to be irrelevant, even detrimental to the company’s productivity. Who should make those trade-offs?

CASE IN POINT SHLENSKY V. WRIGLEY (1968)
Can CEOs decide not to pursue opportunities that will increase revenues in furtherance of some social goal? Who should decide how much that is worth? In 1968, some shareholders of the Wrigley Corporation sued the company and its directors for failing to install lights in Chicago’s Wrigley Field. The shareholders claimed that the company’s operating losses for four years were the result of its negligence and mismanagement. If the field had lights the Cubs baseball team could play at night, when revenues from attendance, concessions, and radio and television broadcasts were the greatest. The shareholders argued that the sole reason for failing to install the lights was the personal opinion of William Wrigley, the president of the company, that baseball was a daytime sport, and his concern that night games would lead to a deterioration of the neighborhood. This was, they argued, not an appropriate basis for decision by management, who were supposed to make the interests of shareholders their top priority. The court ruled against the shareholders. As long as the decision was made “without an element of fraud, illegality, or conflict of interest, and if there was no showing of damage to the corporation, then such questions of policy and management are within

WHO CAN HOLD CORPORATIONS ACCOUNTABLE?
In policy terms, we want corporations to behave consistent with the public good. In economic terms, we do not want them to externalize their costs onto the community. How do we make that happen? One way is by establishing a system of accountability. We grant legitimacy and authority to the exercise of public (government) power through accountability. We are willing to defer to the authority of elected officials because we put them there, and if we do not like what they do, we can replace them. In the US, the checks and balances of the three branches of government add to the credibility and legitimacy of the government. Any of the three branches that goes too far can be curbed by one of the others. In theory, the legitimacy and authority of corporate power is also based on accountability. Corporate governance also has its checks and balances (including the government). To maintain legitimacy and credibility, corporate management needs to be effectively accountable to some the limits of director discretion as a matter of business judgment,” the court ruled (emphasis added). This decision, which deprived the fans of night games and the investors of a substantial source of revenue, was made on the basis of management’s notion of social responsibility. Is losing money damage to the corporation? How relevant is it that, at the time, William Wrigley had a controlling block of the company’s stock? Later, after the team was sold to the Tribune Company, efforts to install lights met with opposition from fans and the state legislature passed a law prohibiting night games after midnight except for teams that had been grandfathered. Finally, Major League Baseball threatened to require the Cubs to play in another facility and lights were installed in 1988, 20 years after the lawsuit. The key question here, indeed one of the core issues of corporate governance, is “Who decides?” A CEO can decide that the company’s social responsibility is best met by making a substantial charitable donation to his or her alma mater, which then shows its gratitude by giving the CEO an honorary degree and a box at the school’s football games. There is also a very happy and congenial member of the board of directors when the university’s president is invited to the board. But is this “social responsibility”? Who is in the best position to make sure that any expenses not directly associated with identifiable and quantifiable returns are at least related closely enough to have a cost effective impact on long-term value maximization? Who is in the best position to make sure that the company’s definition of social responsibility is an accurate reflection of the definition of the owners? Of the community? independent, competent, and motivated representative. That is what the board of directors is designed to be. Corporations exercise vast power in a democratic society. In a thoughtful and enduring essay, “The Corporation; How Much Power? What Scope?,” Carl Kaysen outlines the various alternative modes for containing corporate power,10 asking whether and how corporate power can be “limited or controlled.” “ Broadly, there are three alternative possibilities. The first is limitation of business power through promoting more competitive markets; the second is broader control of business power by agencies external to business; the third, institutionalization within the firm of responsibility for the exercise of power. Traditionally, we have purported to place major reliance on the first of these alternatives, in the shape of antitrust policy, without in practice pushing very hard any effort to restrict market power to the maximum feasible extent. I have argued elsewhere that it is in fact possible to move much further than we have in this direction, without either significant loss in the overall effectiveness of business performance or the erection of an elaborate apparatus of control. While this, in my judgment, remains the most desirable path of policy, I do not in fact consider it the one which we will tend to follow. To embark on a determined policy of the reduction of business size and growth in order to limit market power requires a commitment of faith in the desirability of the outcome and the feasibility of the process which I think is not widespread. What I consider more likely is some mixture of the second and third types of control.11 ” Kaysen is pessimistic about the prospects for corporate self-regulation. “The development of mechanisms which will change the internal organization of the corporation, and define more closely and represent more presently the interest to which corporate management should respond and the goals toward which they should strive is yet to begin, if it is to come at all.” But, as the scandals of 2002 and thereafter have shown us again, the theory is often far from the practice. While the details of each of those failures differed, each was above all a failure of accountability, that cornerstone of the markets that permits one group to provide the capital and another to put it to use for the benefit of both – and of all. So, the questions we must answer are: How do we make sure that corporate power is exercised in the best interests of society? How do we measure corporate performance? How should society measure corporate performance? Those questions are closely related, but their answers are worlds apart. For example, imagine a company that has record-breaking earnings and excellent shareholder returns. This is in part made possible by a rigorous cost-cutting campaign that includes illegal dumping of toxic waste materials, thereby saving the money that had been used to meet environmental standards for disposal. The company’s balance sheet and other financials will look very good. But the cost to society, in damage to the health and property of those affected by the illegal dumping, will not be factored in. Neither will the cost of investigating and prosecuting the company, which will be borne by the taxpayers. The cost of defending the company, and any fines imposed, will of course be borne by the shareholders.

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