Quick Review: The Corporation (2004)

NB: Written in 2012 by Deryck Hart

INTRODUCTION

Is it true that a corporation’s first law of business should be its own self-interest in today’s global economy? Also released as a documentary in 2004 with an 8.3/10 IMDB rating, the fascinating book The Corporation (2004) by Canadian Law Professor Joel Bakan, argues that the corporations' sole purpose is to enhance its profits and power. He leaves an impression of corporate over-use of externalities, creating harm to society, through bottom-line type reasoning; In essence, if a corporation were to be a human being, it would be a psychopath in how it is self-obsessed and disparagingly has little concern for its victims. Furthermore, the corporation has been set up in a manner that safeguards its behaviours as it “has become a vehicle by which good men and woman cause harm to society” (Bakan, 2004) to damage the environment, wages, and health with a legal exemption. Initially, corporations were set up to serve the public interest but the psychopathic transition began after an 1886 Supreme Court transcript where Chief Justice Marrion Waite remarked that the court would assign corporations the same rights as ‘natural persons.’ (Bennett, 2010)

Bakan dedicates chapters to the History of Corporations – Rise from the railroad era, Externalization and Accounting – Corporations' psychological character and power on society, and The Reckoning – What should be done to mitigate corporate misdoings? Society’s trust and support of corporations today is at an all-time low. We have to wonder if they are at a required transition point to reverse this declining trend. Will this transition be initiated on their own accord, via government intervention, via societal/environmental pressures, or a combination of all?

The book was an enticing read and I would encourage supplementary critical analysis after reading to balance out any bias the book provides. I shall focus my scope on two points; the first analysis is on the use of externalities in Anglo Corporate America and the second is related to the use of Cost / Benefit Analysis by corporations in health and safety matters.

1.     The Use of Externalities in Corporate America

Free Market thinkers like Hayek and Friedman believe markets can work with less government regulation and promote that corporations do not need to try and do well for society. Focusing on contracting out public services, in 1981 Ronald Reagan launched an anti-government campaign announcing, “Government is not the solution to our problems. Government is the problem” (Reagan, 1981, para. 8) Governments, like corporations, also use externalities. Through privatization, they employ marketized solutions rather than government-based regulations. Supporters of privatization point out that governments are bloated and inefficient and that competition increases quality, efficiency and innovation. Those against privatization focus on the loss of government jobs and the renouncement of government responsibilities to corporations that are more motivated by profits instead of the public good. Privatization reduces government accountability (Boosman, 2008) and helps corporations that are focused on profits but does not help lower taxes for the individual.

Corporations are legally obligated to focus on bottom-line improvements for the shareholders with a laser-like focus on Revenue, Productivity, and Return on Investment (ROI). (Panelli, 2012) They are not designed to be ‘moral entities’ as corporate social responsibility is illegal. Corporations are designed to exploit the vulnerability of others and remain results-oriented. Externalities are identified as indirect effects on third parties to… “ make other people pay the bills for its impact on society.” (Bakan, 2004, pg.70) Samples of externalities include military actions/repercussions, ‘wear and tear’ on the public highways as well as the litter generated by local corporations such as the community cleanup of coffee-cup debris by corporations such as Starbucks and Tim Hortons. Externalities allow corporations to turn a blind eye to the effects on society and instead default to others to manage the problems. Bakan identifies that corporations can operate with impunity and little accountability for their conduct(s). Owners are no longer liable for their consequences since the introduction of the Limited Liability Act of 1855 which allows corporations to exploit without concern for environmental or social degradation; such as the exploitation of child labour and the use of sweatshops. Corporations are preconditioned to remain loyal to themselves.

The book titled Ecology of Commerce (Paul Hawkin, 1993) identifies that while ecology is asking things to slow down; commerce is asking things to speed up.  There is a need for balance in corporate growth and what earth and its inhabitants can support. With limited government support, through ill-funded regulations, society is forcing corporations to internalize effects as they are becoming more conscience. Corporations are not supposed to focus on socially responsible efforts unless it aids in the growth of the company or if the externalization of “hand-washing” creates reduced market share. Increased internalization is now the cost of doing business and is becoming part of the modern branding strategy so that fickle consumers don’t ‘vote with their feet’ and gravitate to alternative brands. “The notion that a corporations ‘do-gooding’ is unethical to profits has been turned on its head.” (Benett, 2010) Today’s Conscience Corporation must be authentic; ‘marketing fluff’ is short-lived with various media outlets, such as the internet’s ability to rapidly call out false claims and statements to a wide audience. Even ‘Hollywood’ is playing a role in shaping the ideologies of consumers and forcing modern corporate America to rethink its approach to the market with movies like Super-Size Me and its attack on Mcdonald's and the fast-food industry. Corporations no longer control their media message; through the use of the internet, more people have access to information from consumers, bloggers, discount providers, and review forums.

Bakan seems purposeful in his failure to mention that corporations, like individuals, are subject to fees like taxes, and tolls to pay for externalities produced by each. “We all produce bad side effects as we live our lives. Individuals, just as companies, drive about and pour soot into the air mass.” (Machan, 2011). Bakan also fails to mention that corporations produce positive externalities, such as the advantageous product and service benefits that people purchased from corporations over the past 157 years which have provided increased life expectancy, decreased birth defects, moderated early life ailments, increased leisure time activities, and resources as well as reduced mundane tasks…to name a few.

2.     The Harm that Corporations do through Cost / Benefit Analysis

Does current product design defect analysis go far enough? Should a corporation be required to go beyond feasible capabilities to build the ultimate safest product? Cost / Benefit Analysis (aka CBA) refers to a calculated methodology of qualifying and quantifying decisions by finding the most economical method of resource deployment. Bakan references Law professor Bruce Welling that “a prohibited activity is not inhibited by the threat of a fine so long as the anticipated profits from the activity outweigh the amount of the fine…” (Bakan, 2004. Pg. 80) Safety testing and certification practices are among the most expensive and time-consuming tasks in product safety design.  Innovation and product design can therefore be prohibitively costly when trying to meet regulatory standards. The product development process requires corporations to engage in risk defence mitigation when considering or launching new products. Companies must consider litigation potential around the defect of the product and not just the intentions or fault. (Tabunka, 1994).

Bakan refers to an automotive Cost / Benefit Analysis at automotive giant General Motors Corporation (aka GM) relating to a gas tank design that was punctured during a rear-end collision leading to a deadly fire. However, his biased example against GM leaves out important details such as the model had an above-average safety record, the at-fault-driver was impaired, and the common design had low fatality yields. The GM case has resemblances to the Ford Pinto case – Grimshaw vs. Ford Motor Company (1978). Ford was aware of a design flaw but made a CBA decision documented as the FORD PINTO MEMO. The design decision was to maintain the fuel tank position behind the rear axle so as not to give up valued consumer trunk space found in competitors’ models, instead of situating it above the axle. The analysis concluded that redesign would be more pricy than the combination of death settlements, injuries, and repairs. Putting profits in front of lives, Ford was found guilty of postponing corrections in design which they knew could kill or injure an estimated number of occupants. Damages were awarded of $6MM with 27 deaths. Their decision was referred to as being reflective of the “callousness of Fords' corporate culture.” (Schwartz, 1991) Today, product liability laws call on manufacturers to design products in risk-beneficial ways and to advise consumers of non-obvious hazards that remain in a product.

The Consumer Product Safety Act was passed in 1972 and defined claims of product liability into the categories of Negligence, Warranty, Strict Liability, and Misrepresentation. “Manufacturers could be subject to fines of $1.25 million for failing to report product liability settlements.” (Hisrich, 2005) Still, if a product had enough scale, like an automobile, it would not be that hard to conduct a positive CBA. The pursuit of safety is still not balanced with other economic considerations for a manufacturer. In 1994 Japan introduced the Product Liability System. “The manufacturer is liable for damages if the injury is caused by a defect in the product regardless of whether it was his intention or fault” (Tabunka, 1994). This helped direct focus away from negligence through misrepresentation to a lack of safety defects that the product should ordinarily provide. In product design, manufacturers are liable for safety risks if the benefits, including monetary, do not exceed that of alternative designs.

Similar to the concept of the ultimate safe car would be a vehicle designed to go to space and return to earth. Parallels can be drawn outside of the automotive industry with space exploration, specifically the NASA Space Shuttle Challenger incident. It was concluded that NASA was shown to have a flawed decision-making process and inter-department issues. Dr. Richard Feynman identified NASA as having a “poor safety culture” (Feynman, 1986) and indicated that they were unrealistic in their estimations of reliability. “Rather than redesigning the joint, they became to define the problem as an acceptable flight risk.” (Feynman, 1986)

The automotive industry is trying to compete with intensifying government regulations. In 1978 the Corporate Average Fuel Economy (CAFE) standards were introduced to reduce the threat to national security by reducing Western dependence on imported fossil fuels. “More recently, CAFE standards have been defended as a means of reducing environmental damage by automobile emissions.” (Kleit, 1990) Corporations like Toyota have marketed their ‘green image’ campaign through the promotion of hybrid electric cars for the betterment of the global environment but these batteries are toxic and hazardous to the environment. This complies with reducing foreign oil and increasing their profits via their technical competitive advantage but the paradox is it is still at the expense of the environment.  

CONCLUSION

“The promise of business is to increase the general well-being of humankind through service, creative invention, and ethical philosophy” (Paul Hawking, 1993) yet this doesn’t seem to be the case today. Bakan wants corporations to take responsibility. This is covered in his chapter(s) on the reckoning with specific mention of improving the regulatory system, strengthening political democracy, creating a robust public sphere, and challenging international neoglobalism. Corporate social responsibility is illegal but even the United Nations recognizes the need for change; “it would be better to look into how to correct the calculus that firms engage in.” (U.N., 2012) They recognize the need to not only focus on costs and benefits that can be defined in monetary terms but to include the costs to society.

At what point do society and government take a stand against the evils and say enough is enough when it comes to the fight for profits and competitive advantage? Has industrialism come to a crossroads “Or will we exceed the carrying capacity of the planet?” (Hawking, 1993) Humankind's continued relentless pursuit of profits has far-reaching global implications. Acid Rain, Deforestation, Global Warming, and Ozone Depletion are just the current symptoms but should be catalysts for change. We can choose to be a scientific and tolerant culture or a chaotic, psychopathic cultural species. “Which will play dominant? The next 100 years will be very important” (Kaku, 2010)

REFERENCES:

• Bakan, J. (2004). The Corporation – The pathological pursuit of profit and power. Toronto: Penguin Group.
• Bennett, A., O’Reilly, A. & Welch, G. (2010). Good for business – The rise of the conscious corporation. United Kingdom: Palgrave MacMillan.
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• Machan, T. (2011). A passion for liberty - Corporations and Bad Externalities – My three-hour interview on C-Span 2, May 1, 2011. A column on consequences of mixed systems.
• Panelli, E. (2012). Professor at DeVry – MBA Leadership. In-person discussions on Congruence Model use at General Electric 2-23-12.
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• Schwartz, G. (1990-1991). The myth of the ford pinto case*. Rutgers Law Review (pp. 1013-1068). Retrieved August 2012, from www.heinOnline.com
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