The question of how to align corporations’ behaviour with the public good permeates the history of the modern corporation (Ayres & Braithwaite, Citation1992; Dodd, Citation1931; Stone, Citation1975). Roughly speaking, there are two camps in the debate: An ‘economic liberal’ camp arguing that corporate activities are ‘automatically’ aligned with the public good via the mechanism of market competition, which ensures that profit-seeking behaviour of corporations results in an optimal level of social welfare. And a ‘social protectionist’ camp opting for regulation of corporations in order to address the negative impacts of corporate behaviour on society and the natural environment.
In their proposal of a corporate social assessment (CSA), Bennett and Claassen (in this volume) bridge the positions of both camps. The authors suggest to instigate competition for contributions of (large) corporations to the public good. In short, they suggest to achieve such competition by making mandatory an assessment of corporations’ contributions to the public good through an assessment body, which grades corporations with respect to such contributions based on a grading scheme developed by a citizen´s assembly; ranking corporations in accordance with this grading; and on the basis of this ranking distributing the contents of a fund, to which all relevant corporations contribute. While the corporations that sit at the top of the ranking would become net earners, the ones landing at the bottom of the ranking would become net contributors. According to Bennett and Claassen, the prospect of becoming net-earners can initiate a ‘race to the top’, with corporations competing with respect to increasing their contributions to the public good.
Overall, I am extremely sympathetic to the thrust of Bennett and Claassen´s argumentation. Corporations are among the most immediate instantiations of contemporary capitalism – with all its downsides: creation of economic value at the expense of society and the natural environment through capitalization on (and even deliberate creation of) negative externalities; and creation of economic value for a selected few, fuelling economic inequality. Across the globe, despite variations in the concrete forms of capitalism (Hall & Soskice, Citation2001) and in corporate law more specifically, the principle of shareholder value maximization is effectively the central paradigm for running corporations. The central tenet of this paradigm is that corporations should focus on maximizing shareholder value within the boundaries of what is regarded as legal and morally acceptable, and as a result, social welfare would be maximized. However, this assumption does not hold in many instances. Research has convincingly shown that ‘the pursuit of shareholder value may be an appropriate strategy for running down a company – and an economy’ (Lazonick & O'Sullivan, Citation2000, p. 33), negatively affecting many stakeholders of corporations (Stout, Citation2012). For these reasons, suggestions for aligning corporate activities with the public good are desperately needed. In their article, Bennett and Claassen make several fresh suggestions that contribute to the urgent debate on the role of corporations in society. However, I see some open questions in their argumentation that I aim to address in the following.
1. Potential barriers to implementing a corporate social assessment
My first concern relates to the ability of any assessment body to acquire and process all information necessary for evaluating the activities of a certain number of corporations. In their proposal, Bennet and Claassen suggest that corporations should be required to report relevant data on their contributions to the public good, thus providing the assessment body with a suitable informational basis for ranking corporations. Even if we currently can observe the emergence of a ‘non-financial reporting ecosystem’ consisting of novel regulations such as the EU Corporate Sustainability Reporting Directive, consulting firms, data providers, and rating agencies, it is unlikely that a sufficiently reliable and harmonized system for non-financial reporting will be available in the near future. Another problem relates to the ability of an assessment body to map the contributions of several corporations to the public good. As discussed by Stone (Citation1975), ‘the effects of any giant company’s activities are almost so unimaginably complex and far reaching that the thought of tracing out its ‘total social impact’ seems absolutely boggling’ (Stone, Citation1975, p. 244). That is, an assessment body is unlikely to have access to all the information that would be relevant for creating a fair ranking of corporations.
Even if the assessment body had full access to dependable information, the question remains whether they would be able to process this information as a basis for the ranking. Even if an assessment body is well-equipped and qualified, the spatial and temporal distance between corporate activities and an external observer (Zyglidopoulos & Fleming, Citation2011) such as an assessment body, being composed of outsiders to a corporation, is likely to result in a limited capacity of the assessment body to understand the operations of large corporations and their implications for the public good.
A second concern relates to the effectiveness of a CSA as an incentive for corporations to substantially modify their operations. In their contribution, Bennett and Claassen explicitly argue that the CSA should work as a financial incentive. This implies that for net-contributing corporations at the bottom of the CSA ranking, the CSA would work as a financial penalty. As shown by Ayres and Braithwaite (Citation1992, p. 20), regulation mainly based on punishments is likely to result in a game of ‘regulatory cat-and-mouse’ and in resistance to such regulation. In contrast, for corporations at the top of the ranking, the CSA might indeed work as a benefit. However, it is likely to be hard to determine the opportunity costs of aiming for a high CSA ranking: How much profit would corporations forego by avoiding problematic practices? Consequently, it is an open question how high earnings resulting from a high CSA ranking would need to be to create effective incentives for corporations to improve their impact on the public good.
Third, and potentially most important, I wonder whether a CSA fund has the capacity to transform the inherently problematic nature of corporations. As detailed above, corporations can be seen as materializations of the very foundational principle of capitalism: the profit principle, which is pushed to its maximum in corporations via the logic of shareholder value maximization (Davis, Citation2009). Since corporations are most effective at generating profits at the expense of their social and natural environment, Bakan (Citation2004, p. 60) refers to them as ‘externalizing machines’. Just changing incentive structures for corporations is unlikely to change the inherent logics of corporations, which are centered on maximizing profits through an externalization of costs, and thus will leave the destructive dynamics of corporate activities unaltered.
2. Aligning corporate activities with the public good through incentives or through a change in decision processes?
On the one hand, I commend Bennett and Claassen for their highly comprehensive and accessible review of some of the crucial questions in the context of aligning corporate activities with the public good. On the other hand, the main problem I see with Bennett and Claassen’s suggestions is that they aim to substantially change corporate behaviour by modifying the extra-organizational incentive structures for corporations through a centralized planning process (the CSA). Due to the complexity of both corporations´ operations and the ways in which corporations react to regulations, and due to the fact that problematic practices are so deeply entrenched in the nature of corporations, a change in extra-organizational incentive structures is likely to leave corporations’ problematic internal decision processes untouched.
An alternative to a centrally planned modification of external incentive structures for corporations would be a modification of intra-organizational decision processes. One type of modification of organizational decision processes that are suitable for aligning corporate activities with the public good is discussed under the label of economic democracy. Economic democracy aims at integrating various stakeholders in organizational decision processes in order to increase the fairness of business activities. Economic democracy can range from creating corporate boards that exclusively consist of outside directors (see Stone, Citation1975 for detailed suggestions on the reform of corporate boards) to designing fully democratic decision processes within corporations (see Turnbull, Citation1994).
While Bennett and Claassen explicitly discuss the democratization of corporations, they do not unfold its potential to mitigate the negative effects of corporate activity on society, and instead develop the idea of a CSA. I believe that a democratization of corporations can address all the problems sketched above: With respect to acquiring and processing the information necessary for assessing the negative effects of corporations on society and the natural environment, corporation-internal mechanisms and processes that take on board concerned ‘insiders’ (such as employee representatives) as well as relevant ‘outsiders’ (such as civil society representatives) are – due to their decentralized nature – much more efficient and effective than a centralized grading and ranking through an assessment body. Regarding the propensity of corporations to oppose and evade punitive enforcement (to which the CSA fund would amount, at least for the net contributors), which is designed in a top-down fashion, democratic governance of corporations has the potential to transform corporations and contribute to the emergence of a responsible business culture in a bottom-up manner. Finally, I believe that only a modification of the internal power structures of corporations via democratization of organizational decision processes is suitable for sustainably preventing corporations from performing and capitalizing on harmful activities. While external evaluation through an assessment body and an allocation of fees based on their ranking would merely change the economic incentive structures of firms, a democratization of corporations has the potential to change the root cause of a misalignment between corporate activities and the public good: the myopic concentration of almost all processes and structures within corporations on profit, which is hard-wired into contemporary models of corporate governance.
How to achieve democratic decision structures and processes within corporations remains an open question, and many of the potential obstacles to implementing a CSA discussed by Bennett and Claassen (such as political feasibility and the problems related to regulating multinational enterprises) also apply to a comprehensive democratization of corporations. However, I believe that in order to sustainably align corporate activities with the public good, it is not sufficient to change incentive structures for corporations. What is needed is a change of the very nature of the corporation.
Disclosure statement
No potential conflict of interest was reported by the author(s).
Additional information
Notes on contributors
Anselm Schneider
Anselm Schneider is an associate professor in organization theory at Stockholm Business School. His research focuses on the interactions between business and society at the intersection of global governance, sustainable development and corporate social responsibility, with a particular focus on different forms of business regulation. His work has been published in journals such as Business & Society, Business Strategy and the Environment, Organization Studies, and Journal of Management Studies as well as in several edited volumes.
References
- Ayres, I., & Braithwaite, J. (1992). Responsive regulation. Transcending the deregulation debate. University Press.
- Bakan, J. (2004). The corporation: The pathological pursuit of profit and power. Viking Canada.
- Davis, G. (2009). Managed by the markets. University Press.
- Dodd Jr, E. M. (1931). For whom are corporate managers trustees? Harvard Law Review, 45(7), 1146–1163.
- Hall, P. A., & Soskice, D. (2001). Varieties of capitalism. University Press.
- Lazonick, W., & O'Sullivan, M. (2000). Maximizing shareholder value: A new ideology for corporate governance. Economy and Society, 29(1), 13–35. https://doi.org/10.1080/030851400360541
- Stone, C. D. (1975). Where the law ends. The social control of corporate behaviour. Harper & Row.
- Stout, L. (2012). The shareholder value myth: How putting shareholders first harms investors, corporations, and the public. Berrett-Koehler Publishers.
- Turnbull, S. (1994). Stakeholder democracy: Redesigning the governance of firms and bureaucracies. The Journal of Socio-Economics, 23(3), 321–360. https://doi.org/10.1016/1053-5357(94)90007-8
- Zyglidopoulos, S., & Fleming, P. (2011). Corporate accountability and the politics of visibility in ‘late modernity’. Organization, 18(5), 691–706. https://doi.org/10.1177/1350508410397222