Reimagining the modern corporation

The Uday Kotak committee’s report on corporate governance has stirred a controversy within the corporate world. Authors of previous reports on corporate governance say there was no need for another report. They had already proposed good solutions. However, the Kotak committee’s report like the previous ones are akin to rearranging the deck chairs on the Titanic, while the need is to change the course of the Titanic. The Titanic is the modern, capitalist corporation, which is the principal economic institution in free market economies. All the reports have focused on the internal governance structures of corporations. Whereas there is urgent need to examine the role corporations are playing in shaping economies.

Corporations resent interference in their governance from government and civil society because this, they say, dampens their animal spirits to innovate, invest and take risks. The big problem for democratic societies, according to Robert Reich, in ‘Saving Capitalism: For the Many, Not the Few’, is that corporations, while insisting on their own freedoms, are influencing too much the rules of the game for the rest of society.

Corporations have enormously more power to represent themselves in judicial proceedings and to lobby for changes in legislation than individual citizens can have. They have, Reich points out, systematically used that power in the US to prevent citizens from forming associations to represent their interests—in labour unions, and recently, in class action suits against corporations.

In democratic societies, all citizens, rich or poor, are expected to have equal power to shape the rules of the game by the equal votes they have in choosing their government. Ted Nace describes, in ‘Gangs of America: The rise of Corporate Power and the disabling of Democracy’, how, through a progression of changes in laws and judicial decisions, large corporations in the US have acquired all the fundamental rights of individual citizens, and some more. With their rights protected, and with much greater resources at their command, they can influence the framing of laws and rules in ways that no individual citizen can. Corporations have the right to property and to freedom of speech. They have the right to equal protection and due process, and the right to sue. They also have additional rights that individual citizens do not have, such as the right to limited liability and the right to perpetual existence. He points out how, since the 1980s, corporations have been granted rights in international trade agreements that are not available to people, such as the rights to minimum standards of treatment and compensation for regulatory undertakings.

Corporations have enormously more power to represent themselves in judicial proceedings and to lobby for changes in legislation than individual citizens can have. They have, Reich points out, systematically used that power in the US to prevent citizens from forming associations to represent their interests—in labour unions, and recently, in class action suits against corporations. This has further increased their power to shape the rules of the game to favour corporate citizens over others. The next advance of corporate power over governments elected by ordinary citizens is international treaties for protection of investors’ interests that would over-ride national laws made by governments.

Having more independent directors of corporations, or separating the roles of chairman and CEO, and even giving more voice to small shareholders, which are the contentious issues being debated by corporate governance experts, are merely rearrangements of the deck chairs within the established construct of the capitalist corporation. For corporations to become fully responsible citizens within democratic societies, new forms of corporations would have to be developed that conform to new principles.

Inequalities in income and wealth have been increasing within countries since the 1980s. In ‘Winner-Take-All Politics: How  Washington Made the Rich Richer—and Turned its Back on the Middle Class’, Jacob S. Hacker and Paul Pierson have documented how corporate lobbying has changed laws and rules in the US. Ostensibly the changes are to provide incentives to corporations to invest so that the size of the pie can be increased—which is a good ‘capitalist’ idea, before it is ‘redistributed’—which is a bad ‘socialist’ idea. The result is an increasing ‘pre-distribution’ of income upwards, Reich explains, that has resulted in the enormous disparities of wealth and incomes which are now concerning people in many countries. The power of lobbies for the very wealthy and for corporations’ interests is evident in the recent passage of tax bills in the US in spite of the populist, anti-Establishment wave that had elected President Trump! 

Having more independent directors of corporations, or separating the roles of chairman and CEO, and even giving more voice to small shareholders, which are the contentious issues being debated by corporate governance experts, are merely rearrangements of the deck chairs within the established construct of the capitalist corporation. For corporations to become fully responsible citizens within democratic societies, new forms of corporations would have to be developed that conform to new principles.

The ‘purpose’ of the reformed corporations cannot be the maximisation of benefits for only their shareholders. Their purpose must be the improvement of the world for everyone. Therefore, the scorecards of these corporations must be broader than improvement of profits and shareholder returns, which are the principal, if not only significant measures of corporate performance presently. And, corporate boards must include ‘independent’ directors who are not beholden to maximise returns for shareholders.

The equation between ends and means must be turned around to change the course of the Titanic. This is the idea driving the new concept of ‘social enterprises’.

The prevalent justification of ‘corporate social responsibility’ (CSR) in corporate governance is too weak. CSR is the doing of some good on the side as an avoidance of risks to enable the corporation to stay in business to make more money for shareholders. The moral question remains unanswered: How much profit and wealth is enough? Whereas the view that must drive the governance of the new corporations—the new Titanics—must be to make money for the sake of doing more good. How much good is enough? And how is money to be fairly earned to do this good?

The equation between ends and means must be turned around to change the course of the Titanic. This is the idea driving the new concept of ‘social enterprises’. These are not philanthropies that trickle down wealth that had been previously ‘redistributed upwards’ by the prevalent economic system, creating large accumulations of wealth and disparities in the first place. Social enterprises will take responsibility for creating societal wealth rather than shareholder wealth. They will ensure that larger numbers of people participate in the process of creation of wealth, through the incomes they earn, and their power in the governance of the enterprises. These are fundamental issues for the 21st century that more far-sighted committees on corporate governance must examine.