To Benefit America and Its Future, Corporations Need a Higher Level of Ethical Behavior

Corporations doing more of what is right will mean more for corporations—and the world

Throughout the economic history of America, corporations have been the primary entity driving growth, wealth creation, employment and economic vitality. The incentive and reward for functioning in this manner has been profit. Consistent laws, protection and support from government, combined with reasonable regulations aimed at creating an “open market” and favorable tax incentives, all encouraged the formation and development of corporations.

These corporations served as an efficient vehicle that allowed those with capital to combine it with others in the hope of a return (profit) on their investment. If this corporate-concentric system had not been the cornerstone of economic development, it is likely that America would have remained a nation of tinsmiths and sodbusters; the country certainly would not have created the most dynamic economic system in the history of the world.

This has truly been a story of parallel interests.

Over the past 200 years, in exchange for the opportunity to earn a profit, corporations have employed millions of workers, stimulated innovation and creativity, provided an amazing array of goods and services, supported education and the arts, and through taxes on profits earned, they have supported a large portion of services provided by government to all citizens. It is difficult to exaggerate the positive influence corporations have had on American society and success. But corporations also owe a lot to a government that protected their ideas with patents, sought to prevent unfair competition in markets and went to war (literally and figuratively) to open international trade; the government educated millions of citizens to have the knowledge and skills needed to be reliable, productive workers. The corporations also owe much of their success to the millions of workers who invested their lives in corporations, toiling mostly in obscurity, so that the corporation may make its needed profits.

Of course, there is also a dark side. From inception, in a drive for ever-increasing profits at all costs, there has been a continuing litany of abuse, fraud and even illegal activity by corporations. At times the government was in league with corporations; looking the other way or even sanctioning monopolies, abusive trusts, maltreatment of competitors, customers and employees. At other times the government seemed to be at war with corporations; assessing confiscatory taxes, implementing stifling regulations and confusing best-practices with anti-competitive activity.

Despite the problems, the triad of corporations, government and the people have worked together in a balanced system that has, in general, equitably benefited all parties. There has always been more respect than envy for the success of corporations and the economic value they bring to society. But this attitude of admiration for corporations has begun to wane. In fact, among the general population, respect for corporations in general is at the lowest level since the Great Depression; it is so low that it is barely above the level of respect given Congress. In fact, the fuel for the continuing grassroots “Occupy” movement is ignited by a lack of trust and respect for corporations. This is not a healthy situation for either corporations or the economy.

There are a multitude of reasons for this decline in respect for corporations; not the least of which were the greedy, irresponsible actions of corporations that triggered the economic collapse of 2008, followed by corporate “bailed-outs” and mega-bankruptcies. But the overriding explanation for the crater of disrepute that corporations have slipped into can be traced back to the very reason corporations are created – to make a profit. Of course, there is nothing wrong with profits. Profits, after all, provide the grease that makes the wheels of commerce run. The problem is that the drive for profits has become an all-consuming obsession that has thrown the balance between the welfare of government, society and corporations out of balance.

The Route of all Evil?

This idea that profits are the “be-all and end-all” reason for the existence of corporations has so permeated the discussion and analysis of corporate activity to the point that all sense of balance and fairness has been lost. The only action that is considered acceptable for a corporation and its directors is one that maximizes profit. This single-minded mania to maximize profits at all costs has created an environment that fertilizes short-term decisions, irresponsible actions, shareholder lawsuits, outright fraud and illegal activities. Quarter after quarter, every public corporation is measured, rewarded or penalized based upon the level of profits produced. Even worse is that the bar for the “anticipated” profit is often set by those outside the corporation. No one ever seems to question the activity – good or bad – of a corporation reporting constantly increasing profits, but just allow those profits to slip once and all hell breaks loose. Just ask investors who were holding shares of Ford, Chevron or Starbucks this week when these companies missed the earnings targets set by “The Street.”

Sure, profits are important – indeed necessary – but if this attitude that profits are all that matters continues unabated, then society, the economy, effective government and – believe it or not – most of all, corporations will suffer possibly irreparable damage. What is needed to prevent this potential catastrophe is to reestablish parallel interests in a way that rebalances the interests of corporations, society and government. Fortunately, there is a new concept taking shape that has the potential to achieve this objective.

An article in The Wall Street Journal on Jan. 19 (“With New Law, Profits Take Back Seat”) outlined a new idea called the “benefit corporation” that is gaining acceptance in a number of states. The idea of these “benefit corporation” laws passed in seven states so far (including New York and California) is to provide immunity to corporations and directors to make decisions that may benefit corporations, society and the environment, even though these actions may not maximize short-term profits.

Hundreds of corporations have begun to adopt this alternative business model and for the right reasons. As WSJ reported, Patagonia Inc. an outdoor-apparel company with over $500 million in revenues in 2011 has adopted this model and quoted its CEO Casey Sheahan as saying, “We’re trying to preserve for the long-term the way our company is run.” He pointed out that traditional corporate structures don’t encourage boards of for-profit companies to sacrifice shareholder value for a public good; even though such action may ultimately be in the best long term interests of the company.

The benefit corporate concept does not seek to downgrade the importance or value of profits, but it does offer corporate executives and the board of directors protection and incentive to consider that there are other activities of a corporation – social and environmental – that can be just as important as profits to increasing the ultimate value of the corporation. This idea in essence raises the bar of ethical performance to the level of not just doing the right things that are required to be done, but to a higher level of stewardship: doing the right things that are not required to be done. That is true ethical leadership.

And the Moral of the Story …

If the American society and economy are to remain vibrant and if America is to continue its global leadership, then corporations must continue to be supported, encouraged and respected as the vehicle to achieve these objectives. However, for corporations to play this role, they once again must be mindful of the balanced parallel interests between society, government and profits that must be in place for all to be successful. Failure to understand and accept this concept not only will damage America, but in the end will do even more damage to the profits of corporations. The way to avoid this from happening is for corporations to accept the real philosophy of broad-based ethical leadership so that they can once again be seen as a benefit for all. It is as Charles Wilson said “What is good for the country is good for General Motors—and vice versa.”

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