The Great Debate - Peter Knight v David Korten

Posted: 20 July 2001

Can corporations be trusted? Yes says Peter Knight

Peter KnightPeter KnightI've met many crooks, megalomaniacs and back-stabbers in my life and most of them worked for environmental campaign groups.

Skulduggery is by no means the exclusive preserve of multinationals, although it is easy to cast these large companies as the global bogey-persons: rapers of the seas, pillagers of genetic data and destroyers of diversity. This characterisation, so loved by the Greens and all those who believe The Ecologist, satisfies our need to blame something much bigger than ourselves ­ the hairy giant who lives in the dark wood and eats our store of unmodified corn in the dead of night.

My argument is that it is the giants, both bald and hirsute, who offer us hope as we tumble towards a complex and potentially chaotic new millennium. Let's hear it for the well-hung!

Big companies, as with any other groups and organisations, are made up of people: the fine, the mediocre, the smelly and the bloody awful. This is why multinational companies can be good, boring or bad ­ but not necessarily so.

Instead of posing a threat to sustainable development, I believe they will be our saviours in the pressure-cooker world that awaits our children. This is because big companies have long-term outlooks and are therefore far more conscious of the future than small concerns, or governments for that matter.

Big responsibilities

Furthermore, big companies have a far greater interest in being responsible than mom and pop operations because they have a much wider constituency to satisfy ­ their stakeholders, from shareholders to the local community that gives them a licence to operate.

Compare, for example, the environmental performance of small and large companies and you'll find the minnows are cavalier, buccaneering and much more messy than the monsters. This is because small organisations have fewer stakeholders to answer to, are constantly facing bankruptcy and consequently have much shorter time horizons. For the small and medium sized enterprises it is much easier to hire some dodgy trucker to dump the muck in a nearby hole than it is to dispose of waste responsibly. Look at the recent cases for illegal dumping of asbestos waste ­ and the use of children to strip the stuff unprotected ­ and you'll find it's the small companies who are to blame.

Small companies can duck and dive almost immune to the public gaze. Big concerns, on the other hand, are easily identified (and easily vilified ­ just check the web for all manner of allegations). Consider too the targets chosen by campaign groups, such as Greenpeace. They always go for the big names, preferably with well-known brands, because these companies have much more to lose, and the campaigners a greater chance of winning. Multinationals depend on a good reputation and will defend their public image at all cost.

Tough decisions

This does not mean that global companies are necessarily nice, cuddly things. They, like small companies, governments, mothers and fathers, have to make tough decisions in a harsh world. This might mean shifting production to where labour is cheaper, or where regulations are lax. The pressures of globalisation ­ including the way countries compete for the favours of multinationals ­ make these decisions ever more common, if no more palatable.

This is difficult ground to defend, especially where communities are torn apart or left with no means of income because the factory has been flat-packed and shipped off to where people smelt iron in sandals. But is there an alternative? The Soviet system, which was supposed to solve these sorts of problems, failed hopelessly. Localised economies ­ and everything that makes up the Schumacher fantasy ­ might excite those who enjoy recreating medieval life. But given the global nature of the world's economy and the ever-rising aspirations and expectations of a fast growing populations, it seems highly unlikely that democracies would want to turn the clock back a few hundred years and join North Korea at its banquet of poverty.

Somebody, some entities, are going to have to generate wealth ­ create the jobs ­ if my child and his children are going to live healthy, happy lives. For me, hope lies in companies with core values that reflect those of the broader society. These companies ­ and any megalomaniacs that might lurk in their boardrooms ­ are held in check by their commitment to live up to their values. And ­ and this is important ­ by an ever-vigilant, well-informed public who scrutinise corporate behaviour and threaten to remove the licence to operate unless companies act responsibly. In this way corporate decisions will be taken within a framework of obligation to a broad range of stakeholders.

Transparency needed

There also needs to be the necessary frameworks ­ delivered by government and enforced by the rule of law ­ that ensures multinationals are open and transparent in their behaviour and fulfil social responsibilities that reflect their economic freedoms.

Those who believe that simply by limiting the freedom of global companies and banning the global flow of capital we can all live kissy-kissy lives are at best naive, or have smoked too many aromatic herbs. We live in a global economy, with global companies and we must make the system work for our benefit. This is our reality. It works, certainly better than anything else we have tried, and we should get on with improving it.

My criticism of multinationals is that they are far too nice, especially to their own. Big companies are in many ways the last bastions of socialism, doling out company cars, subsidised food in canteens (which reduces opportunities for small catering companies), large pensions and fat bonuses. Such benefits should be more evenly spread among the stakeholders ­ that's you and me included. Come to think of it, why aren't I working for a multi- national?

Peter Knight is a co-director of Environmental Context, a small consultancy that advises business on sustainable development. He is a former winner of the UK's Environmental Journalist of the Year and a regular contributor to the Financial Times. He writes a regular column in Tomorrow magazine.

No says David Korten David KortenDavid Korten Over the past twenty years we have seen a dramatic shift in power from national governments to global corporations. Now we are waking up to the fact that our largest corporations command internal economies larger than those of the majority of countries. They are reshaping our culture through saturation advertising and their control of the mass media. And they dominate our political processes through their use of the media to shape national dialogue and political contributions to buy the loyalty of politicians. For all practical purposes most of the world is now ruled by publicly traded corporations and the global financial markets to which they owe their allegiance.

At the same time we find our world beset by an increasingly serious array of interrelated problems, including rapidly growing inequality and an accelerating destruction of the life support systems of the planet. What to do? Since corporations hold the power, there is a certain logic in turning to them for solutions.

In doing so, however, we confront a problem. Corporate culture and the corporate legal structure render the corporation blind to all considerations other than its financial bottom line. We thus set out on a valiant mission to convince both corporations, and perhaps ourselves, that social and environmental responsibility will be profitable ­ hoping and praying that it is true.

Corporate costs

Past experience points to a contrary reality. Ralph Estes, author of Tyranny of the Bottom Line: Why Corporations Make Good People Do Bad Things, compiled an inventory of studies estimating the costs that corporations externalise onto the public in the United States each year in the form of such things as defective or dangerous products, environmental damage and workplace hazards. He came up with a total of $2.7 trillion a year, roughly five times corporate profits and 37 per cent of US GDP in the base year of 1994.¹ The truth is that, at least in the aggregate, corporations are extremely inefficient institutions whose profitability depends on passing massive externalised costs onto the public. While the problems may not yet be so extreme in Europe, the norms and structures of US-style capitalism are rapidly infecting the European economy.

Yes, we have an inspiring and widely cited example of a mid-sized corporation run by a principled and visionary CEO with a total commitment to environmental responsibility. Its name is Interface. While rightly lauded by environmentalists, it hasn¹t impressed the financial markets. From April 1998 to April 1999, a period in which most stock indices made substantial gains, Interface shares lost more than half their value.

The fact that under enormous citizen pressures Shell corporation, with its abysmal environmental and human rights record, and Nike corporation, which built its corporate strategy from the day of its founding on the use of cheap sweat shop labour, have launched major public relations campaigns touting themselves as environmental and human rights champions should not lull us into false hopes. It is standard operating procedure for large corporations to use sophisticated and well financed public relations campaigns to cover over misdeeds with caring images even as they work to further weaken regulatory restraints. This is well documented in books such as William Greider, Who Will Tell the People; Murray Dobbin, The Myth of the Good Corporate Citizen; Sharon Beder, Global Spin; Jed Greer and Kenny Bruno, Greenwash and John Stauber and Sheldon Rampton Toxic Sludge is Good for You!

No conscience

Environmental business journalist Carl Frankel reports in In Earth's Company on his effort to identify individuals who were true environmental champions working within large US and Canadian corporations. He found three and all had been fired before he completed the book.

Paul Hawken, a former corporate CEO and founder of The Natural Step USA, has for years sought to educate corporation executives about their environmental responsibility. He reports that "The number who are truly receptive can be counted on one hand. I am constantly confronted with scepticism and resistance."²

Robert Monks, a political conservative, successful investment fund manager, and leading authority on corporate governance, reminds us of an obvious truth: "Corporations are not people; they have no conscience. Although corporate acts are carried out by individuals, even individuals with high moral standards often find themselves caught up in a corporate action that is beyond their control ­ or even, in some cases, their knowledge."³

Monks points out that even corporate decisions as to whether to obey the law are usually based on a purely financial cost/benefit calculation: "The corporation in effect asks whether the costs of disobedience ­ discounted by the probability of being discovered, prosecuted, and fined (there is almost no risk of jail) ­ equal the costs of compliance."

Corporate lawlessness

For evidence that corporate lawlessness has become pervasive you need only frequent the pages of The Wall Street Journal or the business section of The New York Times. Marjorie Kelly, the editor of Business Ethics newsletter, for years sought out and publicised what she believed to be positive examples of good corporate citizenship. She found so few of the supposed positive examples held up under scrutiny that the newsletter is now devoted largely to publicising corporate wrong doing.

We should assume that in most instances corporations are going to do what they are required to do by both law and financial markets ­ focus on the financial bottom line. We should further expect that if they do not, the financial markets will discipline them by trashing their stocks, voting in new management and/or making them the target of a hostile takeover.

Moving to a sustainable relationship with the planet will require a basic rethinking of how we live. When exactly should we expect Shell corporation to announce that it is organising a coalition of petroleum, automobile, and agribusiness companies to work for a radical reduction in our dependence on automobiles, fossil fuels, and toxic agricultural chemicals? When should we expect Nike corporation to announce that henceforth its shoe factories in Indonesia will be converted to producing low cost footwear the average Indonesian can afford and that all shoes that it sells in the United States will be made exclusively in the United States in factories paying union scale? These would obviously be unrealistic expectations, the equivalent of corporate suicide, and would surely cost the CEO his job.

Reclaiming democracy

While waiting for divine intervention to make responsibility profitable, we might ask some basic questions. For example: Was there some global referendum in which we collectively decided to transfer control over the decisions fundamental to our well-being and quality of life from democratically elected public officials to global financial markets and mega-corporations? Do the accountability structures of the corporation suit it to fairly balancing out the many conflicting interests at play in any human society, such as choosing between short-term corporate profit and long-term environmental sustainability? Do corporate CEOs have some special wisdom, training, or right to make such judgements on our behalf?

That the answer in each instance is clearly "No" suggests that giving up on democracy and anointing corporate CEOs as the modern equivalent of the benevolent absolute monarch is not a good idea. Instead we should be working to rebuild the institutions of democracy and dismantle the instruments of unaccountable corporate power, as we put in place regulatory and tax policies that make irresponsible behaviour prohibitively expensive. This will require serious measures to radically reform political campaign financing, break-up large corporations into human-scale units, limit ownership to real stakeholders such as workers, managers, customers, suppliers, and community members who have more than a purely financial interest in the firm's assets, and rewrite corporate law to eliminate the legal fiction of corporate personhood.

Of course, the full power of the corporation's financial, political, and media resources is mobilised to kill such needed reforms. Freedom and democracy for ordinary people have never been easily won.

Dr David C. Korten is author of the best-selling When Corporations Rule the World and the more recent The Post Corporate World: Life After Capitalism. He is board chair of the US-based Positive Futures Network and founder and President of The People-Centred Development Forum.

1. San Francisco: Berrett-Koehler Publishers, 1996.
A Dialogue on Corporate Responsibility with Paul Hawken and David Korten, Yes! A Journal of Positive Futures, Summer 1999.
3. Robert A. G. Monks,
The Emperor's Nightingale: Restoring the Integrity of the Corporation in the Age of Shareholder Activism (Addison-Wesley, 1988).