A Brilliant Take on Hypocrisy of Corporations

From Joel Bakan's The Corporation:

Friedman thinks that corporations are good for society (and that too much government is bad). He recoils, however, at the idea that corporations should try to do good for society. “A corporation is the property of its stockholders ... Its interests are the inter­ests of its stockholders. Now, beyond that should it spend the stock­holders’ money for purposes which it regards as socially responsible but which it cannot connect to its bottom line? The answer I would say is no.” There is but one “social responsibility” for corporate execu­tives, Friedman believes: they must make as much money as possible for their shareholders. This is a moral imperative. Executives who choose social and environmental goals over profits — who try to act morally — are, in fact, immoral.

There is, however, one instance when corporate social responsibil­ity can be tolerated, according to Friedman — when it is insincere. The executive who treats social and environmental values as means to maximize shareholders’ wealth — not as ends in themselves — commits no wrong. It’s like “putting a good-looking girl in front of an automo­bile to sell an automobile ... That’s not in order to promote pulchritude. That’s in order to sell cars.” Good intentions, like good-looking girls, can sell goods. It’s true, Friedman acknowledges, that this purely strategic view of social responsibility reduces lofty ideals to “hypocritical window dressing.” But hypocrisy is virtuous when it serves the bottom line. Moral virtue is immoral when it does not.

...

Corporations are created by law and imbued with purpose by law. ... at least in the United States and other industrialized countries, the corporation, as created by law, most closely resembles Milton Friedman’s ideal model of the institution: it compels executives to prioritize the interests of their companies and shareholders above all others and forbids them from being socially responsible — at least genuinely so.

...

[Adam] Smith, in his 1776 classic, The Wealth of Nations, said he was troubled by the fact that corporations' owners, their shareholders, did not run their own businesses but delegated that task to professional managers. The latter could not be trusted to apply the same "anxious vigilance" to manage "other people's money" as they would their own, he wrote, and "negligence and profusion therefore must prevail, more or less, in the management of such a company."

The "best interests of the corporation" principle, now a fixture in the corporate laws of most countries, addresses Smith's concern by compelling corporate decision makers always to act in the best interests of the corporation, and hence its owners. The law forbids any other motivation for their actions, whether to assist workers, improve the environment, or help consumers save money. They can do these things with their own money, as private citizens. As corporate officials, however, stewards of other people's money, they have no legal authority to pursue such goals as ends in themselves - only as means to serve the corporation's own interests, which generally means to maximize the wealth of its shareholders.

Corporate social responsibility is thus illegal - at least when it is genuine.


Now isn't that sweet.

Rational Vices, Good Ol' Business Logic And Power

I've just finished lapping up Dan Ariely's Predictably Irrational, an exploration of the systematic irrational behaviour of human beings.

The book is implicitly anti-corporate establishment, as it dishes out nugget after nugget of problems pertaining to the economic institutions of our global world. But perhaps it is not so implicit after all, because it attacks the most fundamental premise and stronghold of economics - that humans are completely rational beings. Yes, indeed humans are rational and thinking creatures, but dogmatic hardliner economists not only fail to account for the systematic irrationalities of humans (such as fear, anger, perceptual biases, etc, which time and again falsify economic theory) but, even worse, often deliberately omit these irrationalities to preserve the elegance of the theory (arbitrage, anyone?).

This completely flies in the face of science and knowledge, because while it is perfectly fine to encounter scenarios that oppose the logic of established theories, those inconsistencies must be addressed and put to good use to further refine what we already know. What's worse is that many of our global economic and financial institutions are designed around such narrow economic principles, and whole societies are expected to fit into those institutions. It comes as no surprise that we have economic failures, because the rationality of classical economics and humans are, to put it straightforwardly, incompatible at some important parts.

Dan Ariely gives some interesting case studies to support his argument. For instance, studies on salaries and bonuses show that huge paychecks do not guarantee better performance. So, on what grounds are bankers justifying their huge salaries? The commonplace argument is that high salaries are needed to ensure that the best men are retained for the job (or else they will move elsewhere), but this is precisely the standard free market logic that Dan Ariely strives to assert is highly flawed. So when the US$700 billion bailout package went straight back into the pockets of the people running and messing up the financial institutions, it is obviously offensive to millions of taxpayers, but what can they do against an economic logic of salary-performance that is virtually accepted as a natural law? (For more interesting findings, I strongly suggest reading the book.)

Reading The Corporation by Joel Bakan does little to placate any already-existing (and growing) sentiments I have about the state of our financially globalized world now. The corporation began in the late seventeenth and early eighteenth centuries in America and Britain as corporate entities ran by stockbrokers who sought to make money via speculation. Most of these corporate entities failed, leading to loss of livelihoods, and their respective governments were quick to persecute these stockbrokers. However, after Thomas Newcomen invented the steam engine and unwittingly kickstarted the industrial revolution (yes, Joel Bakan brilliantly uses the term 'unwittingly'), corporations were revived because they were the only organized entities that could generate the huge amounts of capital needed to drive industrialization and production.

In the span of 300 years, the power balance has switched in favour of the corporation today. What started out as a damned organization that could be shut down at the whisk of a commissioner's pen, corporations today pervade every aspect of our lives and significantly control society and politics.

I digress, but in some ways I see this as similar to how sociologists trace the rise of male dominance and female oppression - capital accumulation. Because there are sociological and biological conditions under which men end up driven to accrue resources (extrinsic value) in exchange for the intrinsic value of women (in a most basic sense, reproductive capability), women in general rely on the resources that men provide and, in most patriarchal societies, become structurally dependent on men's resources.

Joel Bakan's argument sounds quite similar in that the world today hugely depends on the immense capital that can be accrued by corporations, and we are as reliant on the provisions of corporations as corporations are pervasive. Joel Bakan's angst comes from how little check and balance there is against the power of a organizational entity that is fundamentally not concerned with the welfare of society as much as it is concerned with profits.

I will eventually hope to end up in academia and presumably become a psychology researcher given my interest in the behaviour and psychology of the individual (and belief that understanding the individual will provide much insight into the issues of our world). However, my interest in philosophical, moral and social aspects also suggests otherwise; that I can't be a psychologist purely. The tendency for psychological academia to think of moral constructs as beyond the scope of psychology cannot be satisfactory to my curiosities. It is a dream that I can one day do some work that crosses the disciplines of psychology, sociology, politics, philosophy and anthropology.

Also, all the reading I'm doing, and my interests and drives, clearly makes me a heretic in SMU. Thank goodness I'll be ending my undergraduate term (and irrelevant university core modules that have only served to mess up my GPA, under which my academic capability will be cruelly judged boohoo) in a few more months.

The Corporation

"Over the last 150 years the corporation has risen from relative obscurity to become the world's dominant economic institution. Today, corporations govern our lives. They determine what we eat, what we watch, what we wear, where we work, and what we do. We are inescapably surrounded by their culture, iconography, and ideology. And, like the church and the monarchy in other times, they posture as infallible and omnipotent, glorifying themselves in imposing buildings and elaborate displays. Increasingly, corporations dictate the decisions of their supposed overseers in government and control domains of society once firmly embedded within the public sphere. The corporation's dramatic rise to dominance is one of the remarkable events of modern history, not least because of the institution's inauspicious beginnings."

With such an epic, no holds-barred introduction, I think Joel Bakan's The Corporation will prove to be a delightful read.

Whoever Insists His Business Has Nothing To Do With Politics Is Obviously Lying

I was just musing to myself (yet again) how offering a product or service on the basis of an idealistic notion of serving your patrons (and society at large) is just not enough in our modern day and age. In every practical market/industry, there are companies that have firmly established themselves as benchmarks for the quality of the services or products offered, and many of these companies are big-ass corporations.

In other words, it is insufficient to go into business without a workable business model that will cover all kinds of things ranging from finances to logistics to human resources. Going in with a product, even if it's a great one that will benefit mankind greatly, and hoping its weight will carry itself is naive and unrealistic.

With this notion in mind, 'bigness' can be a great advantage to gain for any corporation that wants to firmly root itself in the market and lock out competition. It is terribly difficult for new firms to enter certain markets because it is too difficult to offer products and services on the level that the existing giants already provide for.

Anyone who is decently versed in the supposed virtue of the free market will know that it is an established fact that the more firms in a market there are, the more efficient the market becomes - competition is good for the consumer and society on the whole.

The fact that bigness shuts out competition is a profoundly bad thing. Market moralists will argue all sorts of things to defend the market intellectually, but the truth is that any corporation that becomes big enough tends to become a monopolist.

But while I argue that it is a bad thing that new firms face difficulty in entering markets locked out by big corporations, it does not follow that big corporations should therefore lower their standards or provide handicaps so as to give weaker entrants a chance.

The issue really is in the immense amount of power that resides in the hands of big corporations who now can redefine the rules as consumers become dependent on them, a power that is unchecked because there are few entrants and firms that can provide alternatives for consumers. With bigness comes great power and with great power comes the potential for great sin.

Also, there are tons of reasons why the pursuit of profit at all cost is bad, or why the Milton Friedman argument that the 'only thing businesses should care about is profit' is a dodgy mantra to follow. But here's an important one. Without virtues or ethical principles guiding a company's direction for profits, especially when the company is a monopolist, the company can be easily bought over by politicians.

Should there be any social elite with the capital who decides to further any self-serving agenda, any spineless powerful corporation can hop on the bandwagon to further the interests of that social elite, providing all sorts of support ranging from commodities to marketing to manipulation of consumers, as long as the social elite has sufficient money.

When political power and corporations come together, giving rise to the agenda-setting problems that the United States particularly faces, society can be quite doomed.

The Giant Corporation: The New Government?

It just suddenly struck me that if the evolution of big corporations (like, REALLY big - think ConAgra, DuPont and Mitsubishi, who have a stake in almost everything from broilers, cattle, crops, flour, automobiles, chemicals, tobacco to shipping) and the reality of their monopoly status is anything to go by, I think we are truly seeing a new form of governance emerging. Actually, if the traditional definition of a state is slightly tweaked, giant corporations won't merely be new forms of governance; they WILL be the new governments.

The Persistence of Realism

Realist literature emphasizing the unexpired role of the state will always draw our attention back to how different states, all essentially representations of governance and power, have robustly existed to this present day. In the process, their intellectual underpinnings have been battered by inquiry and skepticism in the light of capitalism and globalisation, but they have pulled through with little scratches. States still exert their authority on people in our modern day and age (perhaps even more so than ever) and in a remarkable way their physical evolution appears ever so insignificant, despite some changes that people who are only scratching at the surface exclaim about.

For example, some will assert that states have less physical control over people now that violence has lost its trendiness. Let's not consider third world countries for obvious reasons, but even in developed states, their control over populations is still as gripping as ever through non-physical means, such as policy driven by economics - your livelihood is now in the hands of bureaucrats who have ties and interests in certain industries. This is somewhat indirect control, but still as powerful as ever. Still, others may look at the global world today and point out that many global players now have the power to influence a powerful country like the US because of interconnectedness through trade and globalisation. But, do recall that it is precisely a system like this that the US wants and every country that is playing the global trade game today often had no choice but to join in, in the process having their traditions and cultures infiltrated by Americanisation (Ikenberry, 2002). This once again points to the realist nature of state self-interest.

The evolution process of states is remarkably sly and efficient. States waged war a few centuries ago to get power and expand territories because physical power through technological weaponry was the key. Monarchies rose as a result and colonialism became popular as undeveloped countries could be exploited for their resources. Later, the laws established by the international community after World War II outlawed violence and discrimination while upholding human rights and rule of law (paving the way for the spread of democracy while demolishing monarchies, colonialists, autocracies and dictatorships). States didn't sit still on that; to survive they embraced the new ideal - capitalism - and created new routes for conquest by seemingly focusing on economics rather than politics, while at the same time blocking off the surveillance of human rights by using the rule of law as a disguise for legitimacy. Legitimacy creates the moral support for a state to engage in its political dealings - The US was now free to impose itself on undemocratic countries as they were perceived as evil.

It is like how we think that a company that plants its own trees in order to produce paper is being environmentally considerate and therefore not 'bad', when in fact the mass production of the same types of trees in one plot of land (monoculture) is extremely detrimental to the ecosystem and we let it go unchallenged.

And even then, to think of states as now focusing on economics rather than politics seems to fall short of the defining nature of politics and power. I think it is actually more correct to say that economics is now the new form of politics that governments have come to employ in order to further their own interests.

The Growth of the Political Corporation

State and liberty are directly opposed, so they say. Capitalists, liberal economists and right-wing intellectuals will assert the undermining of the state when the free market prevails. When the history of agriculture and cattle farming is observed, such production has evolved from one where the unit of production is the self-reliant family - each family produced its own food from seed to plate with little surplus and with little purchase of capital - to one that consisted of many firms breaking up the production process and a lot of specialisation between a century to half a century ago (which would be argued to be a good example of a properly working free market) to one that is now shaped like an hourglass in our contemporary society - thousands of farmers at the top (production) and millions of consumers at the bottom, with only about four behemoth corporations in the middle controlling the entire process. The power relations are incredibly skewed in favour of these big corporations - one can pretend to imagine how competitive such a market can be. They have plenty of leverage in their hands.

These corporations got to where they are through mergers and acquisitions, in the process carrying out horizontal and vertical integration. It is hard to topple these big corporations because they have resources to waste in order to distort the market in their favour (and, as an afterthought, physical damage to them is not an option since war has been deemed illegal and being cut off from the goods they supply you might kill you). Their place in society has been cemented by their involvement with populations of people through the provision of services. In effect, they have so many dealings in a complex, inter-related web of production such that they have profoundly infiltrated the lives of people and have become indispensable, and interestingly this is much like states do.

This is where it begins to hit me that there is little that distinguishes a giant, integrated and monopolistic corporation from a state - both are revenue-collecting, bureaucratic, conquest-driven, coercive and politically powerful forms of governing/dominating a population. The political power of monopolies and governments require little elaboration. With political power, monopolies and governments have the capacity to reduce the liberties of people through coercion. Monopolistic corporations seek to gain ground and get bigger, as much as governments have been doing through imperialism, colonialism and war in the past. Both giant corporations and governments are characteristically administrative, impersonal and bureaucratic. Most importantly, corporations and governments both seek revenue from the people they 'serve', one through the sale of products and the other through taxation. It is this exchange of services for money that creates a social contract between the service-provider and the people, and in effect a form of state accountability and legitimacy is established. Conquest and taxation has historically been the precedent for states to gain basic legitimacy for existence in the eyes of their own citizens (Tilly, 1975).

At this moment, such a link between a corporation and governance may still seem unclear, but given the free rein that big corporations are increasingly bestowed with now (much of which is, admittedly, earned), there seems little to stop these corporations from casting their nets further and even taking over government functions once the time is right. Already, Big-Four-ish corporations are attempting to control more than just what they initially started out to do. Having more hands in different sectors of the market serves to facilitate the corporation's ability to control and establish power. As Hefferman (1998) argues, "economic power, not efficiency, predicts survival", directly refuting the assertion that it is efficiency which enables a firm to stay afloat in the competitive market. Even if this hypothesis is true though, I wouldn't expect it to happen any time soon - such a new world order would require a thorough remoulding of people's understanding of government before it can be accepted as politics. But we have seen it happen before when people replaced their chiefs with emperors, their emperors with dictators, their dictators with autocrats, and their autocrats with diplomats. Every one of these leaders have been politicians. The new guy might just be the corporate rat - and 'rat' might even be old.

Implications

Have we then created the robot that actually destroys its master when we allow corporations to assume political power? The objective and rational free market may breed a new form of statism if corporations rise to the level of government. Or is this merely another evolutionary path for states to prevail, as we have seen through the ages the rise of monarchies, autocracies, democracies and now corporations depending on what is fashionable (and provides access to political power) at that moment in time?

The important takeaway for me at least is that the corporation could very well completely replace the government one day, and that would be normal. Some might even hail it as 'progress'. It's not the Microsofts and McDonalds'es we're looking at, but rather the ones who can creep right into the very fabric of society such that everything you wear, eat and do has something to do with them. That's what makes corporations like Cargill and ConAgra scary - they're obscure and almost unheard of, but they mastermind the production of many of the things we purchase, from where the crops and cattle are grown to the shipment, transport and logistics, right down to the smallest chemical additives and ingredients in our food. Maybe in the future, the CEO of Singapore Dominance Pte. Ltd. could really be our prime minister, or the head of some Big-4 company could be the hegemonic president of the world. It would probably be some dude who broke down trade walls across the globe and has his fingers in many pies. In that hypothetical future, we would allow some corporate person to make policy decisions for us - who better than a shrewd business man in an economic world huh? It's just the emperor wearing new clothes.

Still, there is something universal (and thus intellectually beautiful) about how it unfolds. At the very heart of it, human nature drives each outcome. States are a spectre of the collective will of power-hungry people.



Bibliography

Hefferman, W. D. (1998). Agriculture and monopoly capital, Monthly Review: An Independent Socialist Magazine, 50(3), 46-61.

Ikenberry, G. J. (ed.) (2002). American Unipolarity: The Sources of Persistence and Decline" in America Unrivalled: The Future of the Balance of Power, Ithaca: Cornell University Press, pp. 285-310.

Tilly, C. (1975). The Formation of National States in Western Europe, Princeton, N.J.: Princeton University Press.