Reinventing the business corporation

Arun Maira | Updated on October 11, 2019

New challenges require new institutional solutions ISTOCK.COM   -

When businesses are unable to responsibly regulate themselves, governments must step in to protect public interests

The Perfect Storm is Sebastian Junger’s riveting account of the tragic end of the best fishing vessel on the US East Coast, commanded by the most seasoned skipper, when it encountered an unusual combination of three storm systems in the North Atlantic. The boat and its skipper could handle any single storm; and they had safely steered out of clashes of two storms coming from different sides. However, they were unprepared for the ocean’s turmoil with three storms coming together.

Institutions of governance, that have helped economies to grow and democracies to spread in the last century, are now sailing into a ‘perfect’ storm, created by the combination of four forces. They are not equipped for this. Fundamental reforms of institutions of governance have become imperative for humanity’s safe progress.

The four forces coming together are: (1) the acceleration of environmental degradation and climate change; (2) continuing advances in the recognition of equal rights for all humans regardless of their differences — race, sex, economic circumstances, etc.; (3) an ideological belief in the power of private enterprise as a solution to everything; and (4) the gale force of advancing digital technologies.

The combination of the last two in particular — technology and private enterprise — is creating the greatest hazards for global governance.

Rapid advances of digital technologies, automation, and artificial intelligence are providing new means for fulfilling a great variety of human needs, for communication, commerce, education, healthcare, etc. Robots are also relieving humans from the drudgery of monotonous work and risks of working in unsafe conditions. New technologies are disrupting economies by eliminating jobs. They are also disrupting societies with problems spreading cancer-like, of data privacy, false information, and sinister surveillance, which institutions of governance are not yet equipped for.

Limited liability company

Privately-owned business enterprises have been around in societies for centuries. In the seventeenth century, a new form of business enterprise — the limited liability company was given legal shape to attract investors in risky enterprises. Investors’ liabilities would be restricted to only what they had invested, and they would be entitled to all the profits (subject to taxation by the State that gave them the protection of limited liability).

Amongst the first limited liability corporations was the East India Company. Its investors pooled money in business adventures in India and further East. Its board of governors was required to ensure that the profits were correctly computed and equitably shared amongst the investors. It was not concerned with how the profits were made. Outrage at the unethical actions of the company’s officers and ravaging of Indian society resulted in the British government ‘nationalising’ the company and ruling India.

The East India Company disappeared, but the purpose of the limited liability company remains — to provide a legally safe way for investors to make profits with limited liability. Even four centuries later, ‘good corporate governance’ is limited to ensuring accurate recording and transparent reporting of the company’s financial affairs and the protection of all investors’ rights.

When far-sighted corporate leaders suggest they have responsibility for the condition of society, they are slapped down. When members of the Business Roundtable in the US recently declared that business corporations should behave responsibly towards society and the environment, The Economist reminded them that the business of business must be only business. Business’ moral obligation is to produce more profits and they should not attempt to address complex social and environmental issues which are the responsibility of governments, it said.

New technologies with power to improve the world invariably require regulations to prevent them from causing harm — electricity, motor vehicles, pharmaceuticals, nuclear technology, etc. With pernicious effects of free-ranging social media and AI becoming apparent, they must be regulated. The challenge is these technologies are owned by private corporations set up to make profits for their investors.

When businesses are unable to responsibly regulate themselves, because the legal responsibilities of their boards seem limited to the protection of the interests of investors and lenders only, governments must step in to protect public interests. However, there is a hue and cry that entrepreneurship is curbed by government regulation.

Reducing regulation

The pro-private sector ideology deepened when President Ronald Regan said, “Government is not the solution; it is the problem”. Since the 1980s it has become fashionable for governments to reduce regulations to make it easy for business to do business. With global investors roaming the world, they have lobbied for international treaties to protect investors’ interests in disputes with democratically elected national governments. Imagine: The East India Company would have an international court to appeal to against the people of India!

New challenges require new institutional solutions. The rising awareness of environmental needs and human rights is pressing against capitalist corporations’ licence to operate with limited liability. Giving away a bit of the profits made, either through philanthropy or ‘CSR’ can hardly compensate for damages caused by their products and processes for earning revenues. Companies that sell tobacco products or junk food, or who damage forests or water sources, cannot become socially responsible with the small CSR they do on the side to burnish their brands.

Business corporations have been granted all legal rights as citizens of societies: the right to own property, to free speech, and to sue other citizens and the government. With rights must come responsibilities as citizens of societies. The fundamental question is: What is the purpose of the institution? Is it a selfish purpose to serve the needs of its investors only, or to responsibly fulfil a societal need?

The boards of socially responsible corporations must be accountable to society for the performance of their companies. They must be required by law to publish accounts of the impacts of their company’s products and operations on the environment and society, just as they are legally required to publish financial accounts for investors. Business lobbies and some economists will argue that these requirements will increase the cost of doing business. This is an unethical argument. No citizen of society can be given freedom from laws because they are costly to adhere to.

Through The Billion Press. The writer is the author of ‘Transforming Systems: Why the World needs a new Ethical Toolkit’

Published on October 11, 2019

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