Joel Bakan’s The Corporation: The Pathological Pursuit of Profit and Power shines a bright light on the nature, costs, benefits and behaviour of a curious creation of the 20th century— the modern, for-profit public shareholding company. Even if we do not buy into the by now notorious central metaphor of the book—of the corporation as a psychopathic personality—we are still led by Bakan’s examples and the tenacity of his gaze to new insights about the strange ways in which responsibility travels in the social realm. And even if one does not quite wish to appoint the government as the chief clinical consultant to rein in the destructive impulses of the psychopath, one nevertheless is led to ponder new ways in which the social and environmental ills associated with large corporations—such as environmental destruction and child labour—can be stopped, perhaps by methods employed by corporations themselves to do that which they do so effectively: survive.
The modern public corporation is a perfect example of a RAD—a Responsibility Absorption Device. RADs are encountered quite frequently in our modern world: they include genes, diseases, forces of nature, forces of history and ideologies. They offer significant advantages to almost everyone who buys into them: anyone, that is, who is willing to behave as if they are real, and as if their reality is independent of any one’s actions. RADs work by allowing those who believe in them to transfer onto them the responsibility (the full weight of the consequences) of their actions. Since, as the French philosopher Jean-Paul Sartre poignantly pointed out, responsibility is a painful thing to accept, RADs are agreeable phenomena to most individuals. No one seems to lose from their ubiquitous presence—no one, that is, until someone gets hurt. Then the RAD becomes exposed (and usually replaced with another one), and the cycle begins anew.
The RAD that is the modern public corporation is based on two central ideas: that the shareholders of the public corporation have limited liability for the actions of the corporation, and that the shareholders have limited decision rights in how the corporation should be run—the major decisions being left to its professionally trained managers. In creating a new legal personality—which can be punished for various torts and crimes—the law took care to protect those who supplied it with its subsistence in the form of money. To figure out why this happened, ask yourself: would you invest your money in Royal Dutch Shell Company shares if you knew you might have to pay for the clean-up of the Niger River Delta at some point in the not-too-distant future? The fact that you know you will not—and not the fact that the Niger River Delta does not yet need cleaning, according to Shell’s assurances—is what provides the cushion of comfort necessary for you to part with the cash. Accordingly, Shell can raise money from thousands of large and small investors who do not know the first thing about the intimate details of the oil extraction, purification and gas retail businesses.
The overwhelming success of this legal move in bringing together cash, talent and technology had a second, perhaps not completely unintended, consequence: it forced a separation between the ownership of the corporation—which was vested in its shareholders—and those who controlled the corporation, its managers, who would own only very small proportional shares of the corporation. They would make the decisions but would shoulder even fewer of the consequences of those decisions than would the shareholders (who could, after all, lose all of the money that they had invested).
Now the corporation is ready to work as the perfect RAD, which absorbs the consequences of the actions of the controlling decision makers into a contractual maze. Shareholders may be punished—up to the cost of their shares—for the actions of their managers, but, clearly, they cannot be held morally accountable for these actions because they had no part in planning them. Their managers, who did, but who are not liable for the consequences, can always turn around and blame catastrophes caused by their actions on the need to attract shareholders’ cash. Who could place moral blame on the actions of someone who is merely trying to survive? The circle is complete: large-scale corporate actions are taken that may cause catastrophes and induce costs proportional to the scale of the corporation, but those responsible for those actions can legitimately blame them on those who cannot shoulder any such responsibility. Killed someone recently? You can now safely blame it on your genes or upbringing, citing a wealth of new scientific research to buttress your case. Similarly, if your company has destroyed the natural habitat of a river delta or two, contributed to the proliferation of child labour in Bangladesh or fuelled the corruptive money-pump of some decrepit regime in Eastern Europe, you have the option of blaming it on the imperative for efficiency inculcated into the entire system by the shareholders’ greed. One feels a sense of wonder at the working of such RADs, based as they are on the tacit cooperation of many interested parties.
When we distance ourselves from the corporation sufficiently—and this is what a book like The Corporation helps us to do—we are struck by the amazing combination of amorality and success that it embodies. These are survival machines (like genes, the other notable RADs of recent vintage). They thrive, as Bakan points out, as much on human misery as they do on human happiness (the price of gold shot up immediately after September 11, 2001) and as much on self-destructive temptation as on healthy desire (junk food advertisers’ campaigns to structure children’s desires so they can’t escape the craving for Big Macs and shakes). Again, we see the RAD at work: the psychologists who are paid by companies to design marketing campaigns aimed at getting children to nag their parents in just the right way (read the book if you want to find out what this is) are providing “objective knowledge” to company executives, who then use this knowledge to increase revenues by increasing product demand. There is no single agent that can be accused of doing anything reprehensible—no more reprehensible, to be sure, than the children who give in to their own cravings and binge. And it is this antiseptic wiping-off of responsibility that enables the corporation to survive even in times of moral scrutiny.
Of course, hints of Bakan’s perspective on the corporation can creep into the life and dreams of the corporate executive. But, long before Bill Clinton, modern Organization Man (and Woman) had learned to compartmentalize. Get used to this word (Bakan uses it comfortably and sharply). Compartmentalization is the ability to play several morally incompatible roles in the same day: professional deceiver and corporate spy during the day, dutiful parent at night. It allows an amoral survival machine (the corporation) to coexist happily, and even co-dependently, with an institution based on conventional morality (the family).
According to psychiatrists (at least those Bakan interviewed) compartmentalization is not a bad thing. It is functional for the individual who engages in it and therefore not pathological. But, Bakan argues, the corporation, qua legal personality, is pathological. It can usefully be thought of as a psychopath: manipulative, unresponsive, unempathic and irresponsible. This seems on first sight to be an interesting move: it adds to the shock effect of the book (except that the book does not need it) and crystallizes the picture of the corporation as a structure that sloughs the real costs of its operations off onto others (usually those least equipped to fight back). Unfortunately, the metaphor is not followed up. Psychopaths have been studied using scientific methods for the past 150 years, and we have many therapeutic options available: Should we draw inspiration from them in dealing with corporations? Should we use talk therapy (is dialogue possible?) or semi-coercive methods? Should we leak mood stabilizers into the water coolers on the executive floors? Bakan abandons his metaphor just when it could start to get interesting.
Instead, the book sets up a fairly standard conflict between the laissez-faire approach of a Milton Friedman—who has over many years honed a coherent argument that the only social responsibility of the corporation is to maximize its profits—and a loosely defined collage of thinkers, idealists and social actors who believe that government regulation of corporate activity is desirable and even necessary. Corporatists such as Friedman will accept corporate largesse (such as the environmental restoration efforts of Shell and BP) only if it is done for the ulterior purpose of maximizing profits, and rest their outlook on a view of property rights as pre-eminent. Statists, on the other hand, point to the unreliability of socially minded projects undertaken for ulterior motives (cash), and point out that, from a legal standpoint, the corporation would not exist without the state, implying that the state can revoke the corporation’s right to life or to a particular form of life. Bakan leans moderately and not unrealistically—toward the legitimacy and desirability of greater government intervention, and proposes measures that might have been sensible in a world with more talented and capable politicians and with a greater tolerance for government intervention—in other words, a pre–Reagan-Thatcher world.
There is another way, based not on the tension between business and government, but rather on that between the corporation and the market. The natural enemy and regulator of corporate behaviour is not another organization, such as government, but the markets: for capital, labour and products. Markets are the natural antagonists of large public corporations, whereas governments and corporations are structurally similar: they are both hierarchies, and function effectively as RADs.
The corporation is—at its core—a failure of the market; it does not play by market rules. Instead of transacting at arm’s length, members of the corporation enter into long-term relationships governed by employment contracts. Responsibility for individual action becomes diffused, as no single individual or group of individuals can be held accountable for the damages caused by corporate action. Shareholders are ignorant, and thus their liability is limited by law. Managers are powerful, but their downside is limited by their employment agreements. The public corporation, as we have seen, is a brilliantly designed RAD.
Enter the market, which functions as a Responsibility Establishment Device—a RED. In a market, participants are liable for the full value of their assets. You buy an asset, you manage it. If its value goes down relative to the price you paid for it, you lose the difference between the purchase price and the current value. If your asset causes damages to others, you are at least visible as the person who made the decisions leading to the damage in question. Often, you are liable for the costs of such damage, if not legally, then certainly socially and morally. There are no shareholders to hide behind or to blame for pressuring you into making the decisions that caused the damage. There are no reallocations of responsibility or mecahnisms for renegotiation that can insulate the decision maker from the consequences of his or her behaviour.
These effects are directly perceived in the immediate and decisive actions of large, privately owned corporations with undiluted ownership. When Ikea and Charles Veillon S.A. were confronted with allegations of child labour in the factories that made their goods—rugs produced in Bangladesh, for example—these firms opted to terminate their relationships quickly and unequivocally with the factories named in the allegations. In contrast, Exxon—a large U.S. public corporation—decided to cut back on its public relations and environmental response offices in response to the Exxon Valdez disaster, and the widely respected and publicly owned General Electric Corporation continued business as usual in the aftermath of repeated, large-scale environmental violations.
Markets—at the product, capital and labour levels—also work to discipline and spontaneously regulate the actions of large public corporations. Royal Dutch Shell customers in northern European countries brought about a 50 percent cut in the price of Shell gas in the aftermath of rumours that the corporation was planning to dump the Brent Spar oil rig in the North Atlantic in the spring of 1995. Customers simply drove a bit further down the street and bought British Petroleum or Elf Aquitaine gas. Royal Dutch Shell managers reacted swiftly and decisively, pulling back the Brent Spar and docking it in a Norwegian fjord until further studies could be undertaken to determine the optimal disposal policy. That is the product market RED at work, not as satisfier of needs and desires, but as a mechanism for the aggregation of the myriad of choices consumers make into a cohesive sledgehammer for punishing and rectifying corporate wrongdoing.
A little while later, PIRC, a large, London-based pension fund research group, sponsored a resolution put forth to the annual general meeting of Royal Dutch Shell, asking for a greater emphasis at the corporate level on social responsibility, including the creation of an independent auditing agency for the firm’s fulfillment of its social development goals. Although the resolution was defeated, the firm’s Committee of Managing Directors nevertheless created a company-wide mandate for social responsibility that included the production of an auditable social responsibility report. That is the financial market RED at work: the open ownership policy of the public corporation makes it vulnerable to concerted efforts by shareholders to affect corporate mandate and behaviour.
Given these mechanisms—together with the low cost of shareholder and consumer coordination and research into corporate activities afforded by the internet—it is now possible to have green mutual funds that invest in firms with sterling environmental records. It is now possible to punish, through concerted coordination of buying behaviour, the actions of firms that employ child labour. It is now possible for wealthy philanthropists to buy their way onto the boards of firms whose behaviour they want purposefully to affect. The responsibility for regulation of corporate behaviour no longer has to be sloughed onto the sloping shoulders of hierarchical RADs. It rests with us. And even though they have, during the past century, lost the battle with big business, governments can retain a legitimate role in the new world-picture that has emerged from the foregoing discussion, by passing laws that make it easier for concerned citizens to intervene in corporate affairs, by mandating corporate disclosure laws that reduce the costs of doing research on corporations and by intervening (in their anti-trust capacity) to drive down the costs of communication and coordination technologies.
Given all the creative solutions to these problems that can be explored through market behaviour, the black-and-white world of Bakan’s The Corporation (public corporations black, government interventionists white) is ultimately too simplistic. Maybe that is why the movie of The Corporation is likely to be more successful, in the long run, than the book.
Mihnea Moldoveanu is Assistant Professor of Strategic Management and Director of the CCMF Centre for Integrative Thinking at the Rotman School of Management at the University of Toronto.