Corporate Irresponsibility: America's Newest Export

Corporate Irresponsibility: America's Newest Export

by Lawrence E. Mitchell

Corporations are often so focused on making short-term profits for their stockholders that they behave in ways that adversely affect their employees, the environment, consumers, American politics, and even the long-term well-being of the corporation, says Lawrence Mitchell in this provocative book. This is a significant issue not only in the United States but also in…  See more details below


Corporations are often so focused on making short-term profits for their stockholders that they behave in ways that adversely affect their employees, the environment, consumers, American politics, and even the long-term well-being of the corporation, says Lawrence Mitchell in this provocative book. This is a significant issue not only in the United States but also in the world, for many countries are beginning to emulate the American model of corporate governance. Mitchell criticizes this emphasis on profit maximization and the corporate legal structure that encourages it, and he offers concrete proposals to bring about more socially responsible corporate behavior.

Mitchell declares that managers should be freed from the legal and structural constraints that make it difficult for them to exercise ordinary moral judgment and be held accountable for their actions. He suggests, for example, that earnings reports be required annually rather than quarterly, that the capital gains tax be increased on stocks held for fewer than thirty days, and that elections of corporate boards of directors be held every five years rather than every year. Mitchell places the problem of corporate irresponsibility within the broader context of American life and demonstrates the extent to which contemporary corporate behavior represents a corruption of our cherished liberal values of personal freedom and individuality.

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Editorial Reviews

Joseph William Singer
An important work about the place of corporations in economic and social life.
Business Ethics
Brief, readable, and compelling. Recommended for those who wish to understand how corporations are governed.
Topics . . . include the impact of limited liability, corporate moral judgments, wealth and social value, and investor loyalty and long-term value.
Washington Post
[W]ell reasoned and well researched...[T]ouches all the bases-legal, financial, economic and moral-while written in an accessible, breezy style.
Publishers Weekly - Publisher's Weekly
In the not-too-distant past, corporations served three constituencies in a fairly equal way stockholders, employees and customers. That paradigm, Mitchell argues quite persuasively, has given way to one overriding goal: profit maximization and the creation of greater shareholder wealth. According to Mitchell, the laserlike focus on short-term profits instead of long-term sustainable growth causes corporate managers to abandon concerns for employees, customers, the environment and society at large to ensure that their company meets its quarterly profit targets, which will keep stock prices rising. Mitchell, a law professor at George Washington University, further argues that managers are forced to place profit maximization above all else, not out of personal greed, but because of the legal structure of modern corporations. To once again make corporations more accountable, Mitchell offers a number of suggestions, including extending corporate directors' terms, requiring companies to disclose figures on a yearly rather than quarterly basis and, in his most original proposal, changing accounting methods to treat employees as assets rather than liabilities. This is an important, provocative book that is sure to stir debate between groups who advocate the need for more corporate accountability and those who see nothing wrong with the status quo. (Jan.) Copyright 2001 Cahners Business Information.

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Yale University Press
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Chapter One


How widespread are our corporate problems? How severe is corporate irresponsibility? Sometimes we know it when we see it: Firestone makes exploding tires and Ford knowingly allows them to remain on SUVs; Hooker Chemical pollutes Love Canal; Union Carbide builds a substandard factory in Bhopal. Sometimes it's less easy to see: General Electric lays off tens of thousands of workers and in the process destroys entire communities; Mattel's board of directors grants itself obscenely valuable stock options so complex that their value is hidden from the stockholders, who vote to approve them; some of America's largest corporations abuse federal tax laws in order to pay almost nothing in taxes even as their profits soar.

    Pinning down the problem is difficult; good statistical data are almost impossible to come by if for no other reason than that the notion of corporate irresponsibility is notoriously hard to define. Moreover, much of what I will discuss as corporate irresponsibility is behavior that does not rise to a highly visible level but results from a day-to-day way of thinking about and running large corporations.

    So you could, if you chose, decide that the problem is not terribly important and close this book right now. But that would be a serious mistake. For whether or not I can provide information that might pass as scientificallyacceptable, it is clear that the vast majority of Americans believe that corporate misbehavior is a serious problem —and this despite our widely celebrated unprecedented prosperity. In September 2000, Business Week published the results of a poll which found that fully three-quarters of Americans believed that their lives were too dominated by business (and that same number agreed with Al Gore's aggressive stance against big business). Among the findings were that 66 percent of Americans believed that "large profits are more important to big companies than developing safe, reliable, quality products for consumers. Adding to the disenchantment is the perception that companies often buy their way into government." The poll found a general perception that business had grown beyond the capacity of government to control it, creating a dangerous power imbalance in American society as well as in the rest of the world, an imbalance in which American business is perceived to overwhelm local sovereignty and culture for the sake of increasing profits. The poll's findings were consistent across age and income groups and are particularly notable for their discovery that the sentiments expressed were not so much antibusiness as anticorporate. So perhaps I can't prove that corporate irresponsibility is a widespread problem, although I'll try. But the fact that the overwhelming majority of Americans believe that it is provides a powerful incentive to try to find out why.

    Our corporate problems, including the ethic of stock price maximization, largely lie rooted in the structure of the American corporation. But the corporation also functions in a more fundamental social, political, and ethical ideology of radical individualism that dominates American culture and reinforces and exacerbates the problems arising from structure. This chapter will establish the groundwork for analyzing corporate responsibility by situating the issue in our cultural context. In order to have a concrete basis for understanding the link between corporate behavior and culture, let's first look at several examples of what I consider to be corporate misbehavior, and then see how they fit in.


    In fiscal 1999, the Coca-Cola Company, an icon of American business success, suffered an $813 million charge to earnings—that is, a loss—as a result of poor overseas operations, primarily in Russia and Eastern Europe. Coke suffered a significant decline in stock price during the course of 1999, with several peaks (including rebounds in early 2000) but lapsing to lower levels. The solution for this corporation (with its new chief executive) described by the New York Times as one "known for generous benefits, job security and unflagging optimism about its future" was to lay off 20 percent of its workforce (six thousand of its thirty thousand employees worldwide) at a cost of $800 million. While the company defended the move as a way of focusing on its core business, it appears that dropping stock price was the driving motivation. Coupled with the layoff announcement was the disclosure that some of Coke's foreign bottlers would reduce their levels of inventory, with one expert quoted as saying that this implied Coke had overstated its earnings growth for the preceding two years and expressing concern that it might continue to do so in the future. Of course overstating earnings growth is away of increasing stock price in the short term. Although there is no suggestion that Coke was behaving fraudulently, the overstatement, coupled with the layoffs, suggests (especially after a year in which the stock price was beaten down) that current stock price was at the forefront of management's concern. That's no surprise given the state of American corporate law and financial markets. Does it justify terminating the employment of six thousand people? Might Coke have found a different way to get through a difficult time? Even if the corporate decision makers decided that Coke employed too many people, does the fact that they hired them in the first place give Coke's executives a moral obligation to make layoffs the last possible option? to make them as painless as possible?

    If you were the owner of a small business that was having a hard time and you worked every day with loyal, longtime employees, how hard would you try to find other alternatives before walking into their offices, looking into their eyes, and telling them they were fired? Of course the Coke board and CEO Douglas Daft didn't have to work with most (if any) of the fired employees every day. They didn't personally have to go and look them in the eye and tell them they were being fired. They had underlings to follow orders, to do their dirty work for them. They had protection against the experience of actually having to fire people. And they had the protection of corporate law and the demands and expectations of capital markets to prevent them from having to own up to the consequences of their decision; after all, business is business, and business is about maximizing profits. Sorry.


    Sometime around 199l, Unocal established the Yadana gas pipeline project as a joint venture with the ruling Burmese junta (through a corporation controlled by the junta) to engage in offshore drilling for natural gas and to transport that gas to Thailand through pipelines running through the Tenasserim region of Burma. It was well known at the time of this agreement that the junta, which went by the ironic name of the State Law and Order Restoration Council (SLORC), had engaged in extensive human rights abuses and violations of international law. Nonetheless, SLORC allegedly acted as agent for the project, with financial support from Unocal, "to clear forest, level ground, and provide labor, materials and security for the Yadana pipeline project." In an opinion denying Unocal's motion to dismiss the complaint of farmers from the region, the federal district court described allegations not only of rape, intimidation, and forced relocation, but SLORC's use of slave labor for the project. As the case approached its resolution in federal district court in California, where Unocal is headquartered, National Public Radio's program All Things Considered did a story on it.

    I will deliberately leave out the potentially inflammatory details and horrifying stories of the way the slave labor allegedly came about and was conducted. I don't need those details for my purposes, because NPR reporter Daniel Zwerdling's interview with Unocal's vice chairman, Jon Imle, is enough to make the point:

Mr. John Imle (Vice Chairman, Unocal): I don't believe those charges. I wouldn't call them lies. I—maybe confusion about what has been going on where. I mean, I've heard stories that—I just don't believe those stories.

Zwerdling: Imle says when he and his fellow executives decided to get into the pipeline project with Myanmar's government, their first goal was to make a profit. After all, he says, they're a business.

Mr. Imle: But right behind that and as a condition—always a condition of that investment, we will only invest in places where we can improve the lives of people.

Zwerdling: And Imle says the gas pipeline will improve lives across the region. The project is pumping gas across Myanmar to a power plant inside Thailand, and that'll help bring electricity to people who still cook with firewood and light up their homes with kerosene lanterns. Still, Imle says, he and his colleagues realized that they caused controversy when they formed a partnership with the military rulers in Myanmar. They know that everybody from U.S. presidents to human rights groups to United Nations officials, all these people have repeatedly denounced Myanmar's dictators as some of the most brutal on the planet. And Imle says he realized that Myanmar's government is infamous for using what some people call forced labor or conscripted labor....

Mr. Imle: I accept that conscripted labor is used broadly in civil projects in that country in Myanmar.

Zwerdling: But Imle says he was determined to make their pipeline project a model of the ethical way to do business. Maybe they'd even nudge the dictators toward democracy. [Zwerdling then describes the structure of the project, including the Myanmar army's intended role of providing security.] He [Imle] says company executives wouldn't tolerate it if the military forced villagers to work on the project against their will.

Mr. Imle: We worked very hard ... to determine that we would be able to conduct our business in an absolutely ethical, honest, and moral manner.

Zwerdling: And do you feel, deep down inside, convinced that the military did not abuse workers in any way connected to the pipeline?

Mr. Imle: I'm not in a position to know that much about the internal conduct of the military on the ground. But I guess what I'm trying to say is there was no contractual relationship with the military. We were not in any way in control.... But the use of conscripted labor in connection with this project was a non-starter from the beginning, and everyone knew that. Now what the military may or may not have done that nobody knows about, I can't address. But whatever happened in the area of this pipeline, I don't think those things happened in the area of this pipeline, I don't think these things happened, in my heart of hearts, I really don't.

    Now I didn't highlight anything in the conversation, just to avoid any advance signaling of my own view. But I don't think you can help notice Imle's logic: First, Unocal's goal was profit; second, despite Unocal's insistence on ethics, Unocal executives knew that the Myanmar regime was brutally repressive and used slave labor, and they frankly had no idea what was going on in Myanmar; third, Unocal had "no contractual relationship" with the junta, apparently implying that the absence of a direct contract to provide slave labor relieved Unocal of the responsibility for investigating and asserting control.

    Leave aside the scary resonances of early American political reactions to reports of the atrocities Germans were committing against Jews during World War II, as well as the echoes of President Bill Clinton's extraordinary technical responses in the far more trivial Lewinsky affair. Just look at the bare outline of Imle's defense, taking what he said as entirely accurate: Unocal wanted to make a profit, its executives knew all about the Myanmar government, they evidently didn't ask or investigate at high corporate levels what the military was doing, they had no contract with the military to provide slave labor, they therefore had no legal control over the military's behavior in Unocal's name and for its benefit, and Imle's deepest intuitions told him the story couldn't be true. Would we accept this from a politician? from our friends or neighbors? Would we accept it as an excuse from our children?

    Why should we accept it from Unocal? Was Unocal's decision a legitimate corporate decision? It sure is cheaper to force people to relocate than to pay for their land or to redirect the pipeline in order to permit them to continue their lives. It's obviously cheaper to use slave labor than to pay someone to work for you. And if Unocal's executives were acting through these agents in whose country such activities were legal (or at least let's assume that they were, to make Unocal's case easier), why shouldn't they do what is necessary to maximize stock prices? Posing the question this way and on these facts pretty much answers it. And yet the answer is not so clear as a matter of American corporate law.


    On July 9, 1999, a California jury awarded the highest liability award in American history, $4.8 billion, including $107 million of compensatory damages and the remaining $4.7 billion in punitive damages, to Patricia Anderson, who, along with her children and a family friend, were seriously burned when the fuel tank of their 1979 Chevrolet Malibu exploded in a rear-end collision. The plaintiffs offered to reduce the punitive damages by $4 billion if GM recalled the cars and all those built on the same frame, but the company refused. Although the punitive damages award was later reduced to $1.09 billion, significant evidence was admitted regarding a memorandum discovered by lawyers in the early 1980s (but for various reasons never produced at trial). Written by GM engineer Edward Ivey, the memo analyzed the cost of making safer fuel tanks ($2.40 per car) against the possible losses from damages GM would have to pay in the event of accidents and resulting fires. Obviously, GM declined to recall the cars or redesign the fuel tanks. In reducing the punitive damages award, Judge Ernest Williams observed that the placement of the fuel tank was intended "to maximize profits, to the disregard of public safety."

    Was General Motors' decision a reasonable corporate decision? If the purpose of the corporation is to maximize stock price, then a cost-benefit analysis is perfectly appropriate, and the answer is yes. Was the decision a human decision? No. One way of getting at the answer is to ask what Ivey would have done with his report had he known his wife, children, or other loved ones would be driving Chevy Malibus.

    It's not that we don't make cost-benefit decisions all the time. We do. Our resources are scarce. We have little choice but to make cost-benefit decisions. But there's a difference between a human making those decisions and the same decisions made by a corporation.

    The difference between a natural person and a corporation is that we natural persons experience the costs of our decisions as well as pay them. If we behave in a way that harms other people, we typically not only are aware of it but feel the pain of it as well. If, for example, a colleague from another law school sends me her paper and asks me to comment on it, and I decide that it's more beneficial for me to get my own writing done, I may well decline to read it—but I'll feel bad about it and will almost certainly feel the need to apologize.

    Corporations may sometimes pay the costs, but they don't experience them in the same way. GM and its executives had no experience of explaining to its customers that their cars might explode and, short of being hauled into court, no experience of the need to apologize. In other words, they didn't feel responsible because they didn't experience the consequences of their decision to keep profits up at the expense of human life. How would GM's executives react if they had to confront the Andersons or any of their other customers face to face? We don't know; they might make the same decision. But they would make it with a more human understanding of its consequences, with a full appreciation of its costs. How does their ability to avoid this confrontation, to externalize costs and not feel responsible, affect our evaluation of the nature and purpose of the American corporation?


    In December 1991 Marriott Corporation issued convertible preferred stock. The company also issued $400 million of debt in early 1992. On October 5, 1992, Marriott announced a restructuring of its business in which its highly profitable and fast-growing management and services businesses (producing more than half of Marriott's operating profit) were to be placed in a new subsidiary and spun off to Marriott's common stockholders. Its far less profitable real estate and concession businesses were to be left in Marriott, along with all of the debt and the preferred stock. The new business was expected to be highly profitable; the remaining business (with which the debtholders and preferred stockholders were stuck) would be heavily leveraged and was expected to produce rather minimal cash flow after debt service. Why did Marriott do this? Well, the new company, with all the good assets and no debt, would be significantly more valuable to stockholders than a Marriott burdened by debt. In other words, stock price would be maximized. Not so for the debtholders. The market value of this relatively newly issued debt plummeted, and, although the preferred stock price increased, the corporation into which the preferred stockholders could convert their stock was one that was largely denuded of the assets the preferred stockholders thought they were getting. Marriott put the costs of maximizing its stock price onto the debtholders and preferred stockholders. At the stockholders' meeting called to approve the deal, one sensitive shareholder said to Chairman J. Willard Marriott, "Your father would be ashamed of you."

    Why wasn't J. Willard Marriott ashamed? Well, for one thing, he didn't (or so he might have thought) have to confront the people who were suffering from his decision. For another, he undoubtedly saw his job as being to maximize common stock prices—after all, that's the job we told him to do. While taking money from bondholders hardly rises to the level of tolerating slave labor or knowingly installing faulty fuel tanks, it is in line with this behavior in that the two things that permit it to occur are the same: the mandate to maximize stock price, and the separation of the decision maker from the consequences of the decision.


    Death and taxes, as the old saying goes, are the only things about which one can be certain. But death is not inevitable for the artificial corporate person. Sure, it can die after a fashion—in bankruptcy court or after being swallowed up in a merger—but these are hardly certain, and even when corporations experience their own form of death there is always some sort of afterlife for the assets and often for the business as a going concern. But what about taxes? Corporations surely are subject to taxes just like the rest of us, in their case at a flat rate of 35 percent on all of their reported profits. But there's the rub: reported profits. Recent evidence suggests that the pressures of making profits for stockholders have made even good corporations turn bad as they find ways to avoid reporting profits to the Internal Revenue Service, in the process diminishing their tax burdens and increasing profits to stockholders.

    On February 20, 2000, the New York Times reported how widely corporations have begun to engage in these schemes. For example, AlliedSignal got slammed by the tax court after it sold an investment for $400 million and, in a scheme cooked up by its investment banker, Merrill Lynch, moved the profits to a Dutch partnership. It thus neatly avoided a $140 million tax liability. When it reclaimed the profits from the partnership, the tax liability had disappeared, and AlliedSignal reported a $4 million gain on the partnership investment itself!

    This is not an isolated case. According to the Times the situation has become so bad that corporate tax lawyers (discharging their ethical obligations) have been ratting to the IRS on their own clients. But IRS resources are limited so that fewer than 10 percent of corporate dodges are being picked up. The result is that while individual income tax revenue increased 6.2 percent in 1999, corporate tax revenue fell by 2.5 Percent.

    AlliedSignal is only one example. As the Times reports (and the numbers suggest), more than a few highly respected corporations are engaging in these and other tax evasion practices. Some of these may be legal, but many others push the envelope of legality and frequently come out on the other side. Why would they do this? The Times gave an answer: pressure to increase stockholder profits. One of the major corporate expenses, taxes, is being pushed onto the rest of us through corporate bilking of the federal treasury. It leaves less money than we are entitled to for our social infrastructures. And it limits our ability to redistribute wealth the way our tax system was designed to do.

    Why behave in these ways? Why should corporations be particularly susceptible to the kinds of behavior that most individuals —even if the thought crossed their minds—would reject as unethical to say the least? What is it about the way we structure the corporation and the nature and purpose we envision for it that gives the corporation a different moral construct, or at least makes a different moral outlook easier for them to adopt and easier for us to swallow?


    In order to understand the problems underlying the structure of American corporate law it is essential to understand the foundations of American law upon which it is built. This in turn requires us to look at the political, social, and ethical theories underlying our laws, the concepts of enlightenment liberalism that are implicit in our Constitution, and the social and political philosophy that frames our public and private relationships with one another. It is these concepts that form what we might see as the tectonic plates undergirding our entire social structure. Like the tectonic plates upon which Earth's surface sits, these theoretical plates sometimes shift imperceptibly to shade our prevailing moods, giving us only the faintest shudder as they settle into our collective consciousness. Sometimes, though, they clash violently, as they do in earthquakes, changing for a time or forever our social outlook. When we have looked at these deepest levels of our common understanding, we will begin to see that the fundamental flaw of our corporate structure is the fundamental flaw of liberalism itself, a flaw which is hard to see in the purest theoretical forms of liberal philosophy but which becomes pronounced and even pathological when the shifting plates create distortions in those forms.

    The metaphor is useful. But it's not perfect. The problem is that the Earth's shifting surface is a natural phenomenon. We can no more control it than we can control the rotation of the planets around the sun. Our philosophical plates are different—they are entirely of our own making. They sometimes may not seem like it because they become so embedded in our social norms and collective subconsciousness that they appear to be inevitable. But they're not. Whether intentionally or not, we ourselves have created them. That means that we ourselves also have the power to change them. Metaphor, no matter how useful, should not blind us to this reality.


Excerpted from CORPORATE IRRESPONSIBILITY by Lawrence E. Mitchell. Copyright © 2001 by Yale University. Excerpted by permission. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.

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