February 20th, 2009

Why Corporations are Going from Bad to Good

Earlier this month, I read that management consulting firm A.T. Kearney announced its research (pdf) on 99 companies with a strong commitment to sustainability, comparing their financial performance with industry averages. In 16 of the 18 industries studied, those companies committed to sustainability outperformed industry averages by 15% over the six months from May through November 2008.

Then I read Sandy Skee’s post on Making Way for the New Corporation, about how the rigid divisions between for-profit and non-profit will no longer work in the new economy.

That triggered some thoughts, including my recollection of my earlier studies and readings on corporate law and history; and how a reassessment of corporations’ role based on that history and on current trends, may provide an important window into the (near) future.

In a nutshell, corporations are entities allowed by law, and were originally temporary creations for the public good, to help finance and complete large-scale projects — such as construction of hospitals and universities. Corporations eventually began to be used as vehicles for profit, that reduced risk for their investors and had no definitive termination date. This article from New International gives a great, brief history, as does an Ode Magazine article and the wikipedia entry for corporation.

The relationship between the state and corporation has always been a complex one. Over the past 400 years corporations have conquered territory and brought in resources for the state, breaking laws put in place to constrain them and often gaining in power and privilege. History shows a repetitive cycle of corporations over-reaching, causing social turmoil that requires the state to reign them back in through regulation.

One of the most important aspects of corporations, since the 19th century, has been the legal precedence giving corporations the rights of “personhood”, even while limiting the liability of those who financed and controlled them. In 1886 a landmark decision by a US court recognized the corporation as a ‘natural person’ under law. The 14th amendment to the Constitution: ‘no state shall deprive any person of life, liberty or property’ — adopted to protect emancipated slaves in the hostile South — was used to defend corporations and strike down regulations.

This idea of corporate personhood has been largely responsible for the often schizophrenic behavior by corporations throughout the 20th century. Those that finance and control corporations do not have enough personal accountability, and often act in ways different than they would as individuals. Thus the phrase “it’s nothing personal — it’s just business.” The Ode Magazine article mentioned above goes into this in more depth.

For example, there’s not a father on the planet that would consider pouring poison in the backyard where his own children play every day. But at the office this same man may express little concern about dumping polluted waste water from a factory he manages into a river that flows alongside the yards of his children’s friends. (from Ode Magazine)

While corporations have created astounding wealth, we now see that much of that wealth has come at great costs. Capitalism can take many forms, and I still believe it should the primary driver of our future economy. But there never was such a thing as a free market — there has to be rules, or you have anarchy and chaos (think pirates!); the critical thing is figuring out the details of the rules that can help create and fairly distribute the greatest sustainable prosperity.

In the rapidly evolving, vastly-more-transparent world we inhabit today, these limitations of our current form of capitalism have now become all too clear.

It is the obvious problems that corporations have created, as well as the greater transparency they face, that are now leading to some important trends. At the same time, not-for-profit corporations are realizing greater effectiveness in achieving their important missions by engaging in more capitalistic behavior.

These trends include some states’ efforts at creating new legal entities. Sandy Skee’s post mentions the new Minnesota Socially Responsible Corporation, that describes legislation that allows companies to create a corporate structure that integrates “financial success and social responsibility.” Vermont has already enacted an L3C, a hybrid of non-profit and for-profit, further analyzed here.

The trends also include a type of recent “race to the top”, where for-profit corporations are scrambling to make substantive, positive changes in the way they do business and the types of products and services they provide; and to tell their stories of how they are helping solve social and environmental problems while making their profits. They see that there is a demand for this, that it often leads to greater profits and is a competitive edge.

Unfortunately, some corporations have tried to talk the talk, but not walk the walk, leading to “greenwashing” — but in the transparent world that is the current Internet, most of these businesses are quickly spotted and vetted.

These efforts involve a rapidly-growing list of third-party certifiers, as well as self-regulating associations and other types of membership organizations. Skee mentions corporate designations like B Corporation, and there are countless others — with some good examples here.

Add to these trends, the activities of the brand-new Obama adiminstration and it seems there certainly will be a “new corporation” in our near future. This is a fundamental paradigm shift that is occuring for business and capitalism. It will lead to continued greater accountability, transparency and, if we remain vigilant, a continued race to higher ground where profits go hand-in-hand with greater sustainability and social justice. Stay tuned.

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