MICHAEL JOHNSTON. Taming the beast – a challenging new initiative.

Corporations’ unbridled pursuit of self interest (aka ‘shareholder interest’) has plunged the planet into an existential crisis. It is no longer a radical proposition to suggest that the community should expect its corporations to pursue stakeholder interest on an equal footing with shareholder interest. 

“The law locks up the man or woman

who steals the goose from off the common

but lets the greater villain loose

who steals the common off the goose”.  Anon

The systematic degradation of our commons must be contained and reversed if future generations are to survive and prosper. The air we breathe, the temperature in which we live and  extreme weather events, are now risking our very existence.

How did we get into this mess?

What contribution have corporations made towards creating the dire circumstances we face?

Is it possible to harness the power and energy of modern corporations  to solve these planet-threatening issues?

The precipice we face takes it’s rise from the industrial revolution but has roots that extend beyond the age of steam even into pre-history, the agricultural revolution, the bible, magna carta, enclosure acts and so forth. To make our analysis manageable let’s start around 1800. In the early 1800s we shifted away from enterprises based on Charters or Warrants – ‘by appointment to his majesty the king’ or enterprises established by an act of the local legislature – to enterprises registered pursuant to Acts of Incorporation.

These revolutionary new Incorporation Acts enabled citizens to establish companies that limited their risk to the amount they invested in the company. Previously, company liability extended to the physical assets of the owner or owners that resulted, in some cases, in the complete ruination  of such owners if the creditors of a failed enterprise exercised their rights to the legal limits.

The first legislative initiative to enable free incorporation is attributed to the State of New York in 1811. The effects of these new Acts were extraordinary. They fuelled the nascent industrial revolution by enabling easy access to capital (you could now invest in an enterprise without losing your shirt, through limited liability) and also provided perpetual succession for the enterprise or corporation (no need to wind the company up on the death of the owner). The money flowed in and the industrial revolution, now harnessing coal, steam, rapid transport, invention and innovation, took off. There has been 200 years of amazing prosperity and productivity.

Nirvana and the golden age had arrived. There were seemingly no limits. Corporations flourished. Tremendous progress accompanied this burst of revolutionary energy. But was there a dark side? Were there any unintended consequences attached to this burst of entrepreneurial zeal?

Indeed there were, for – in our enthusiasm to minimise investor losses for failed enterprise – we had failed to protect society from the failures enterprises visited upon society. These failures were not always obvious and, in fairness, were often unintended. The burning of fossil fuel was not recognised as aggravating the environment and when, ultimately, it’s consequences were recognised, economists invented excuses that left the problem in society’s lap as “exogenous variables” or “externalities”: matters over which the enterprise had little or no control. Pollution and it’s consequences went ahead unabated.

Another major driver towards the precipice we now face occurred in commercial law where the onus was placed on the corporation to promote, protect and advance the interests of shareholders as almost the exclusive obligation of the corporation. ‘Maximisation of shareholder value’ became the dominant mantra and, in practice, the primary legal obligation required of the corporation.

In granting this largesse to minimise investor losses and provide perpetual succession to corporations – thus massively oiling the wheels of the industrial revolution –  we did not  obtain a societal quid pro quo. In the early days of incorporation of limited liability companies it was mostly assumed that such companies would provide a public benefit but there was no legislative requirement to this effect. Most corporations seeking registration were building roads, dams, canals or railways thus providing an obvious ‘public benefit’.

It’s not as if nobody had any thoughts about this, since one corporation’s application for registration as a limited liability company in the State of Massachusetts in 1837, was refused on the grounds that the proposed corporation did not provide ‘a public benefit’. In this instance, the enterprise, in it’s articles of association, sought merely to establish a carriage company. The registration had been opposed by individual journeymen because it would have the effect of “taking from us the profits of our art, which has cost us years of labour to obtain and which we consider to be our exclusive privilege to enjoy”.  The similarity of this analogy with the modern day contest between Taxi drivers and Uber drivers is not lost.

In circumstances where unbridled capitalism has had deleterious consequences we, the community, have passed laws to govern and restrict their activities. Thus we have been able to remove children from the factories and coal mines, provide safer workplaces, legislate for minimum wages, obtain purer food, penalise fraudulent behaviour and so on.

Here is the pointy end of this proposition: while we have made inroads towards containing and restricting corporate behaviour, through penalties and sanctions, it is clear from recent events that there is a long way to go. The GFC taught us that greed dominated consideration of the financial instruments that nearly brought the global financial system to it’s knees; then, revelations of impropriety in the Banking Royal Commission have shocked the community which previously held banks as revered and trusted models of corporate culture. It would appear that even the Government, which resisted establishing the Royal Commission, has been shocked by the evidence arising from it.

There is a common driver that has edged us to the precipice we now face and it is simply this:

sole reliance on ‘maximising shareholder value’ is not serving our community or preserving our commons. If it’s true in Banking and Finance – as revealed in the Royal Commission – then it is likely true in many – if not all – other industries.

What is to be done to protect us from these marauding, modern-day ‘robber barons’?

A ‘new province for corporate culture’ is required.

There have been many attempts to improve the moral actions of corporations around the globe. These include Owenite socialism, cooperatives, worker ownership, elected worker directors, semi-autonomous work groups, corporate social responsibility (CSR) etc, the list is endless. However they barely scratch the surface of this beast known as ‘capitalism’. Can we tame the beast? Can we harness the energy, productivity and creativity of capitalism towards more socially acceptable outcomes?

There is a light at the end of the tunnel which is attracting growing interest around the world.

It is the creation of Benefit Corporations.

It’s hard to pinpoint an exact origin of the concept as it probably owes it’s provenance to many contributing factors. However, a few entrepreneurs, dissatisfied with their experiences of corporate life, got together to set some standards that they thought would satisfy the elements required for companies to be socially responsible and provide a public benefit. They formed a non-profit standards evaluation enterprise called ‘B Lab’. The standards are comprehensive and demanding, they are not a walk in the park. The accreditation is sought on a voluntary basis, and is maintained by regular assessments.

Some readers will be familiar with the Quality Accreditation movement – ‘ISO 9000’.

B Lab is similar to Quality Accreditation in so far as enterprises seek certification by satisfying the standards and, if successful, obtain an accreditation as a ‘B Lab Certified Organisation’. Some firms can take years to acquire the certification (as have many corporations in obtaining Quality Accreditation).

There are now many thousands of companies across the globe that have achieved ‘B Lab Certification’ but most are concentrated in America. There are many in Australia including two which have been recognised as “best for the world”.

An essential component of this initiative is that the certification is provided by an independent third party.

While the B Lab initiative has been developing, some legislators in the U.S. decided to put the ‘public benefit’ ideas from the ‘BLab’ initiative into corporate law with the result that there are now some 35 states and the District of Columbia, which have amended their corporate law to provide for the registration of ‘Benefit Corporations’.

This registration requires them, in their governance and articles of association, to commit to providing a ‘public good’ as well as obtaining profit. The registered Benefit Corporations are required to report on the impact of their governance and articles of association, as well as the traditional balance sheet and profit and loss accounts.

Italy has promulgated a national law to recognise Benefit Corporations and Canada’s British Columbia is the first provnce in that country to pass the enabling legislation.

Effectively,  the new legislation provides the legal architecture for firms to support the acquisition of a social conscience. The new laws now legitimise the satisfaction of both profit-making and provision of a public benefit, in other words, they can now walk and chew gum at the same time, serving the needs of shareholders and stakeholders simultaneously and legitimately. Directors of Benefit Corporations are protected from shareholder law suits in the event that dissatisfied shareholders object to company efforts to fulfill it’s public benefit obligations.

Many traditional firms espouse the values of being ‘good corporate citizens’ in their CSR undertakings, their missions and visions – often found framed under glass in the reception area of corporate headquarters – but in a contest between corporate citizenship and shareholder value, the latter wins every time.  And it is backed up by current legislation and common law.

 

Why would enterprises embark upon the demanding challenge of becoming a Benefit Corporation?

 

“More bloody red tape!” is the usual and frequent response from the captains of industry. (Note the strident objections from senior corporate spokesmen when the ASX recently attempted to strengthen their protocols regarding corporate citizenship. Some of those captains included the very CEOs who contributed to the ‘train wreck’ that has emerged before the Hayne Royal Commission ).

Evidence is mounting that companies who manage their enterprise having regard to stakeholder interests, as well as shareholder interests, actually outperform their competitors across all performance indicators, including profit. There are over 40 articles examining this trend in sources as diverse as: Harvard Business Review, the Economist, Deloittes, Accenture, Goldman Sachs and MIT. The overarching conclusion is that firms who practice higher standards of governance, reduce financial risk and increase profit in the long term. In other words, pursuing public benefit is good for business.

The model US legislation defines ‘general public benefit’ as:

“benefit corporations will have a ‘material positive impact on society and the environment, taken as a whole, as assessed against a third-party standard, from the business and operations of a benefit corporation.”

Generally speaking this has been interpreted to include employees, suppliers, customers, community, government and the environment, as well as shareholders.

In summary:

We have travelled a long way since the 1800s but the holy grail of a sustainable planet is now endangered by a corporate culture whose sole pursuit of profit foists all of its negative consequences on society. The old saw put it this way: “capitalise your profits and socialise your losses”. This is no longer either appropriate or sustainable.

A new province for corporate culture is long overdue and Benefit Corporations provide a potential avenue to coalesce the forces of profit and the forces for good.

We need to rediscover and revitalise the commons in it’s literal and metaphorical sense.

Michael Johnston, now retired, was formerly a General Manager with Westpac; a Human Resources Manager with ICI’s Botany Operations; A Development Director with CIDA; an Industrial Relations Manager with Sydney Water and a trade union official.

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4 Responses to MICHAEL JOHNSTON. Taming the beast – a challenging new initiative.

  1. Charles Lowe says:

    A fascinating idea and I appreciate how well Michael has argued its case.

    I fear lawyers will drive B triples through this untested criterion: “benefit corporations will have a ‘material positive impact on society and the environment, taken as a whole, as assessed against a third-party standard, from the business and operations of a benefit corporation.”

    Way back in 2006 I asked the then Opposition Spokesperson on Industry (the now -and then – redoubtable Senator Penny Wong) to insert a new clause into the then Companies (now Corporations) Act:

    “A non-natural and legal person [bureaucracy, institution and/or corporation] shall act toward and in respect of natural and legal persons as if that non-natural and legal person were a natural and legal person”.

    A legislative compelling to empathy.

    Tell me that this is not the very best solution.

  2. Dr Michael Bowern says:

    Having spent some of my career in the quality management and quality assurance field (I have a Master of Engineering degree in quality management from RMIT) I was pleased to see mention of the ISO 9000 series of international standards on quality and I feel I should clarify some of the terminology used in the article. Some organisations are ‘accredited’ to perform audits on a company’s quality system to see if it conforms to the 9000 standards. If it does pass this audit the company is ‘certified’ as meeting these standards, but that is not the reason for my post.
    What Michael Johnson might have also mentioned to support his arguments is the existence of the AS 8000-2003 series of standards for Good Governance Principles, Fraud and Corruption Control, Organisational Codes of Conduct, Corporate Social Responsibility, and Whistleblower Protection Programs.
    I have been surprised that opinion pieces never mention these Australian Standards which were published 15 years ago. Standards Australia is recognised by the Australian Government as the peak non-government standards development body for the country. One would expect that boards and managers at all levels in the public and private sectors would be aware of these Standards and publicise and follow their objectives. These standards are complementary to Benefit Corporations as are other standards on environmental protection.

  3. Christiane Moloney says:

    What an inspiring article! Michael and I had discussed this issue many times but it’s the first time that I read his article and I am very impressed! Very well argued and logically developed, the concept of Benefit Corporation is a compelling concept that would take us one step closer to rebalancing the order of things in society. The question is: how do we go from this lonely voice, so to speak , to one that can be heard loud and clear and can’t be resisted? Benefit Corporation is an idea whose time has come. We must now act on it! Christiane Moloney

  4. Kevan Daly says:

    Michael Johnston,
    Your comment ” ‘Maximisation of shareholder value’ became the dominant mantra and, in practice, the primary legal obligation required of the corporation.”, is setting up a straw man to demolish.
    The “maximization” you refer to isn’t an unconstrained maximization, i.e. where any variable that affects shareholder value is up for variation. In fact it’s a highly constrained maximization on at least 2 levels:
    (1) customer satisfaction in price/quality terms must be achieved
    (2) factors of production in price/volume terms must be achieved

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