Pushing my grocery cart down the aisle, I spot on the fruit counter a dozen plastic bags of bananas labeled “Organic, Equal Exchange.” My heart leaps a little. I’d been thrilled, months earlier, when I found my local grocer carrying bananas—a new product from Equal Exchange—because this employee-owned cooperativeme outside Boston is one of my favorite companies. Its main business remains the fair trade coffee and chocolate the company started with in 1986. Since then, the company has flourished, and its mission remains supporting small farmer co-ops in developing countries and giving power to employees through ownership. It’s as close to an ideal company as I’ve found. And I’m delighted to see their banana business thriving, since I know it was rocky for a time. (Hence the leaping of my heart.)
Our economic system is profoundly broken. To anyone paying attention, that much is clear. But what’s less clear is this: Our approach to fixing the economy is broken as well. The whole notion of “fighting corporate power” arises from an underlying belief that there is no alternative to capitalism as we know it. Starting from the insight that capitalism has become virtually a universal economy, we conclude that our best hope is to regulate corporations and work for countervailing powers like unions. But then we’ve lost before we begin. We’ve defined ourselves as marginal and powerless.
Corporate power lies behind nearly every major problem we face--from stagnant wages and unaffordable health care to overconsumption and global warming. In some cases, it is the cause of the problem; in other cases, corporate power is a barrier to system-wide solutions. This dominance of corporate power is so pervasive, it has come to seem inevitable. We take it so much for granted, we fail to see it. Yet it is preventing solutions to some of the most pressing problems of our time.
With global warming a massive threat to our planet and a majority of U.S. citizens wanting action, why is the U.S. government so slow to address it? In large part because corporations use lobbying and campaign finance to constrain meaningful headway.
Why are jobs moving overseas, depressing wages at home, and leaving growing numbers under- or unemployed? In large part because trade treaties drafted in corporate-dominated back rooms have changed the rules of the global economy, allowing globalization to massively accelerate on corporation-friendly terms, at the expense of workers, communities, and the environment.
Why are unions declining and benefits disappearing? In large part because corporate power vastly overshadows the power of labor and governments, and corporations play one region off against another, busting unions to hold down labor costs while boosting profits, fueling a massive run-up in the stock market.
Why were electricity, the savings and loan industry, and other critical industries deregulated, contributing to major debacles whose costs are borne by the public? In large part because free market theory, enabled by campaign contributions and lobbying, seduced elected officials into trusting the marketplace to regulate itself.
With all this happening, why do we not read more about the pervasiveness of corporate power? In large part because even the "Fourth Estate," our media establishment, is majority owned by a handful of mega-corporations.
Big corporations have become de facto governments, and the ethic that dominates corporations has come to dominate society. Maximizing profits, holding down wages, and externalizing costs onto the environment become the central dynamics for the entire economy and virtually the entire society.
What gets lost is the public good, the sense that life is about more than consumption, and the understanding that markets cannot manage all aspects of the social order.
What gets lost as well is the original purpose of corporations, which was to serve the public good.
A Movement for the Public Good
The solution is to bring corporations back under citizen control and in service to the public good. The main components of such a movement already exist--including organized labor, environmentalists, religious activists, shareholder activists, students, farmers, consumer advocates, health activists, and community-based organizations.
We've seen the power of ordinary people working together on the streets of Seattle in 1999, challenging the World Trade Organization. We've seen them achieve impressive results curbing sweatshop abuses, limiting tobacco advertising, challenging predatory lending practices at home and abroad, and protecting millions of acres of forests, to name just a few successes.
We've also seen the growth of community-friendly economic designs like worker-owned enterprises, co-ops, and land trusts that, by design, put human and environmental well-being first.
Focus on Corporate Power
Each of these movements advocates for healthy communities, for a moral economy, and for the common good. If they acted together, they would possess enormous collective power. But as yet there is no whole, only disconnected parts. Despite many achievements, the gap in power between corporations and democratic forces has widened enormously in recent decades.
Activists and citizens are beginning to turn this around. We can build on this work. But if we are to close the gap in power, our strategies must evolve. We need to dream bigger, to speak with one voice across issue sectors, and to act more strategically. We need to focus less on symptoms of corporate abuse and more on the underlying cause--excessive corporate power. We must recognize that ultimately our struggle is for power. It is not just to make corporations more responsible, but to make them our servants, in much the same way that elected officials are public servants.
We need what the movement now lacks: a coherent vision of the role we want corporations to play in our society and a strategy for achieving that vision. It's about putting We the People back in charge of our future, rather than the robotic behemoths that set their sights on short-term growth and high profits, regardless of the consequences.
The streams of many small movements must flow together into a single river, creating a global movement to bring corporations back under the control of citizens and their elected governments. The urgent need for unified action impelled a small group of organizations to initiate a long-term Strategic Corporate Initiative (SCI), of which we are a part.
A Way Forward
Over the past 18 months, the SCI team interviewed dozens of colleagues and progressive business executives to develop a coherent, long-term strategy to rein in corporations. Three major strategic tracks emerged:
1. We need to restore democracy and rebuild countervailing forces that can control corporate power.
At the community level, this means elevating the rights of local municipalities over corporations. Communities should have the right to determine what companies will do business within their jurisdiction, and to establish requirements like living wage standards and environmental safeguards.
At the national level, restoring democracy means separating corporations and state. Corporations and the wealthy should no longer be allowed to dominate the electoral and legislative processes.
At the international level, the task is to create agreements and institutions that make social, environmental, and human rights an integral part of global economic rules.
2. We need to severely restrain the realms in which for-profit corporations operate.
Most extractive industries (fishing, oil, coal, mining, timber) take wealth from the ecological commons while paying only symbolic amounts to governments and leaving behind damaged ecosystems and depleted resources. The solution is to develop strong institutions that have ownership rights over common wealth. When commons are scarce or threatened, we need to limit use, assign property rights to trusts or public authorities, and charge market prices to users. With clear legal boundaries and management systems, the conflict over the commons shifts from a lopsided negotiation between powerful global corporations and an outgunned public sector, to a dispute resolved by deference to the common good.
3. We need to redesign the corporation itself, as well as the market system in which corporations operate.
Companies' internal dynamics currently function like a furnace with a dial that can only be turned up. All the internal feedback loops say faster, higher, more short-term profits. And maximizing short-term profits leads to layoffs, fighting unions, demanding government subsidies, and escalating consumerist strains on the ecosystem.
To prevent overheating, the system needs consistent input from non-financial stakeholders, so that demands for profit can be balanced with the rights and needs of employees, the community, and the environment.
To end "short-termism," company incentives--including executive pay--should be tied to measurements of how well the company serves the common good. Stock options that inflate executive pay should be outlawed or redesigned. Speculative short-term trading in stock should be taxed at significantly higher rates than long-term investments. Companies should be rated on their labor, environmental, and community records, with governments using their financial power--through taxes, purchasing, investing, and subsidies--to reward the good guys and stigmatize the bad guys.
At the same time, we need to celebrate and encourage alternative corporate designs, such as for-benefit corporations, community-owned cooperatives, trusts, and employee-owned companies.
The paths outlined here do not represent impossibilities. With a citizens' movement, we could turn these musings into reality in 20 years.
Building a Global Citizens' Movement
How can we change laws regulating corporate behavior when corporations dominate the political process? The answer is that change begins with the people, not their government. It always has. Civil society organizations and communities can align their interests to produce a wave that government leaders must either surf upon or drown within.
The people control the vital issue of legitimacy, and no system can long stand that loses its legitimacy, as fallen despots of the 20th century have demonstrated. Corporations have already lost much of their moral legitimacy. Business Week in 2002 found that more than four out of five people believed corporations were too powerful. A national poll by Lake, Snell, Perry, and Mermin two years ago concluded that over three-quarters of Americans distrust CEOs and blame them for the loss of jobs. An international poll by Globe Scan recently found corporations far behind NGOs in public trust.
Trigger events lie ahead that will create further openings for change. We can expect to see new global warming catastrophes, unaffordable energy price spikes, and new corporate scandals. We can capitalize on these openings if we can help people connect the dots--making the link, for example, between excessive CEO pay, companies' short-term focus, and the inability of the private sector to manage long-term problems like the energy crisis and global warming.
We also need conceptual frames that link various movements together into a common effort. Currently our economy is dominated by a Market Fundamentalism frame, based on the belief that when self-interest is set free, Adam Smith's "invisible hand" will create prosperity for all. Also dominant is the Private Property frame, which justifies actions by executives and shareholders to exploit workers, communities, and the environment in order to maximize the value of stockholder and executive "property" in share ownership.
We can advance new frames. "Moral Economy," for example, is a frame that puts the firing of thousands of employees and simultaneous awarding of multimillion-dollar bonuses to executives in a moral context. Suggested by Fred Block of the Longview Institute, the Moral Economy frame invites the introduction of new system forces into market dynamics in order to protect the moral order, and to counteract the amoral, short-term, self-interested behavior promoted by Market Fundamentalism.
Within the overarching framework of a Moral Economy, other frameworks like Community and the Commons challenge the supremacy of individualism and self-interest in the Market Fundamentalism frame. Community well-being becomes the standard by which business practices are judged, and communities themselves the arbiters of whether standards are met. The Commons represents our shared property and wealth, which is not to be exploited for the selfish benefit of the few.
New conceptual frames, trigger events, a crisis of legitimacy--elements like these can serve to help build a citizens' movement. But we cannot simply wait for this movement to form spontaneously. At the international level, we need regional organizations to come together to agree on overarching priorities. At the national level, we likewise need discussions that forge strategic priorities. At the community level, we need to create a network of municipalities working together to challenge corporate rights, to promote alternative business forms, and to inventory and claim our common wealth assets. Communities can also take the lead in creating public financing of campaigns, and in tying procurement and investment policies to corporate social ratings.
The idea is not that people will drop their issues and adopt new ones, but that we can learn to do both at once. We can knit ourselves into a single movement by adopting common frames and by integrating strategic common priorities into existing campaigns. For example, campaigns covering any issues from the environment to living wages could demand that targeted companies end all involvement in political campaigns.
As individuals, we can relegate our identities as consumers and investors to secondary status, elevating to first place our identities as citizens and members of families and communities, people with a stewardship responsibility for the natural world and with moral obligations to one another. We can stop buying the story that government is inefficient and wasteful, grasping that the real issue is how corporations and money dominate government. We can stop thinking that the solution is more Democrats in power, and realize it is more democracy.
The transformative changes we need will not be on any party's agenda until a citizens' movement puts them there. It's up to us to build that movement. By joining together--by taking on the common structural impediments that block progress--we can make it possible for all of us to achieve the variety of goals we're currently struggling for.
How would reducing the underlying power of corporations affect today's issue campaigns? Ending corporate campaign contributions and political advertising would benefit a great many public interest causes. How often in recent years have initiatives to protect forests, increase recycling, provide healthcare coverage, and raise minimum wages been defeated by corporations who outspent their civil society opponents by a ratio of over 30 to one? We've all witnessed elected leaders move to the political center once they started receiving a steady flow of corporate contributions.
Likewise, if we could reduce the 13,000 registered corporate lobbyists in Washington, D.C. and end the revolving door between government regulators and corporations, would a handful of companies be allowed to own the lion's share of our media? Would savings and loan, energy, transportation, and tobacco companies still have been de- or unregulated? Would oil and coal companies still drive our national energy policy?
Imagine what it might be like in 20 years if our efforts are successful and people could once again govern themselves. A line would be carefully drawn between corporations and the state, reducing financial influence over elections and lawmaking, making possible a whole new generation of progressive elected officials committed to social transformation.
In 20 years, imagine that the institutions of the global economy are overhauled so that labor and environmental issues are integrated into trade policies, and impoverished nations are freed from unpayable international debts. Trade and investment rules promote fair exchange, and national governments have the policy space to support social and environmental goals at home. Transnational corporations that take destructive action are held accountable in a World Court for Corporate Crimes.
In 20 years, imagine community self-governance has become the new norm. No longer can companies open new stores in communities where they are unwanted, or play communities off one another to extract illegitimate public subsidies. We value and protect our precious common wealth, from ecological commons like air, water, fisheries, and seeds, to cultural commons like music and science.
In 20 years, imagine that it is a violation of fiduciary responsibility for corporations to pay CEOs obscene amounts, or to aggressively fight unions and lobby against environmental safeguards. Responsible companies protect the environment as though there is a tomorrow, and they view worker knowledge and company's reputation in the communities where they operate as their greatest assets. Imagine such companies receive preferential treatment in government purchasing, taxation and investment policies, while irresponsible companies find themselves barred from government contracts.
Imagine we have a new national policy to make employee ownership as widespread as home ownership is today. And alternative company designs--like cooperatives and new, for-benefit companies--grow and flourish.
Imagine, in other words, that We the People are able to reclaim our economy and society from corporate control. Daring to dream that such a turn of events is possible--and charting the path to get there--is a critical challenge of our new century.
While the Baker-Hamilton report from the Iraq Study Group dominates the news in recent weeks with its rebuke of the colossal mess the United States has made in Iraq, there is another report released at the end of October -- even more vital in its import -- that has gone virtually unnoticed. I'm referring to the Stern Review on the Economics of Climate Change, released by the U.K. government, which has received far too little attention in the U.S. press. It too is about a colossal mess we've made, not in a single nation but in the atmosphere of the entire planet, with possible consequences for all life on earth.
If the news in the Stern Review is scary to think about, it's ultimately a message of hope: It's not too late to act on global warming -- provided we take strong, united global action, starting now and increasing over the next 10 years. Indeed, "delay would be dangerous and much more costly," the Review warns. What's powerful about the report is that it positions the issue in easy-to-grasp economic terms. It estimates that acting now to stabilize climate change could cost 1 percent of global GDP each year -- which is relatively manageable -- but not acting could create losses that dwarf that. Likely the losses from inaction, the Review estimates, would reach 5 percent to 20 percent of global GDP year after year, "now and forever."
For politicians who argue that taking action now to reduce global warming emissions is too costly in economic terms, the Stern Review offers a stern rebuke: The real economic damage will come not from action but inaction. And as a measure of the report's economic credibility, it was commissioned by the British Chancellor of the Exchequer, was prepared by one of the world's leading economists, Sir Nicholas Stern, and has been endorsed by four Nobel Prize-winning economists plus the president of the World Bank.
The Stern Review offers powerful economic ammunition for the global warming debates that will play out in politics in coming months and years. But as useful as it is, it takes us only part of the way. An analysis by my colleagues at the Tellus Institute shows that the report stops short on two counts.
First, it looks only at environmental damages that can be monetized and quantified, when the risk of catastrophic changes in the climate and ecological systems are far more unknowable. "The Stern Review should be considered a conservative estimate of the dangers," says Tellus President Paul Raskin. By using only monetized values, he added, "it's like looking at a mountain through a pinhole."
Second -- and more consequential -- is the question of how we get to a world of reduced emissions. The Stern Review concludes that climate stabilization will require that annual greenhouse gas emissions be brought down more than 80 percent below current levels. And it predicts that this can be achieved without significantly compromising world economic growth -- since the shift to a low-carbon economy will create huge business opportunities in developing low-carbon and high-efficiency products. As the U.K. Treasury put it in a public statement,
"Tackling climate change is the pro-growth strategy."
While this optimistic assessment may in an economic sense prove true, it underplays the enormous lifestyle changes that will ultimately be necessary if massive global climate change is to be averted. "It's a question of both necessity and opportunity," Raskin says. The necessity is that we can't get to a sustainable world by any other pathway than that of deep and fundamental changes in how we live. The opportunity is that this could lead us "to a world of greater human fulfillment," he adds.
Imagine, for a moment, that each of us reduced our own personal energy use by 80 percent. Families might have one car rather than two, we might drive dramatically less often -- staying home rather than going to the mall, living closer to where we work -- and we might travel less frequently, in all instances leaving us more time for our families, potentially more connected to our neighbors. We might choose smaller houses that are far more energy-efficient, and we'd likely be buying local -- giving up our Italian sparkling water shipped halfway around the world. We might eat fruits and vegetables in season, reestablishing our relationship to the rhythm of the seasons.
We might, in short, have better, happier lives. We might have less stuff, yet closer relations with nature and our fellow human beings, and greater well-being as a result.
Climate change might, in the end, prove itself an optimal crisis. It could be among the catalytic forces -- along with reaching peak oil production and other forms of ecological exhaustion -- that are grave enough to break us out of our cultural trance, yet not so insurmountable as to crush our spirit. It might spur human society to the fundamental transformation that our culture so desperately needs, to move us from a culture of consumption and waste and isolation to one of sustainability and community and, yes I'll say it, happiness.
In his new book, "The Upside of Down: Catastrophe, Creativity, and the Renewal of Civilization," Thomas Homer-Dixon makes precisely this point. Many religious people think we're entering end times, he writes, and their intuition is largely right. "Some kind of real trouble does lie ahead. That trouble doesn't have to be calamitous in its ultimate results, though," he writes.
Homer-Dixon -- like many people today -- sees that some kind of societal breakdown is increasingly likely. But it can give rise to what he terms "catagenesis," a collapse or breakdown that leads to genesis, to the birth of "something new, unexpected, and potentially good."
Constrained breakdown can "shatter the forces standing in the way of change," he writes. "It can, in short, be a source of immense creativity -- a shock that opens up political, social, and psychological space for fresh ideas, actions, institutions, and technologies that weren't possible before."
The breakdown of the Iraq war has already proven such an event. We might view it culturally as the shock to the system that opened up a new political space, sweeping the Democrats into power. And the Democrats, even before they've taken office, have begun to propose action on global warming that goes beyond what any of us dreamed was politically possible just a few short months ago.
Future speaker of the House Nancy Pelosi -- along with 109 others -- has recently endorsed legislation, sponsored by Rep. Henry Waxman of California, that sets a target of reducing greenhouse gas emissions by 80 percent by 2050. Which corresponds to the Stern Review assessment.
Imagine that: One of the most powerful leaders in Congress endorsing 80 percent reductions in greenhouse gases. Somebody pinch me. On Oct. 30 -- when the Stern Review came out -- I would have told you such a goal would remain politically unmentionable for a decade or more. But all that changed two days later, when Nov. 2 elections unfolded.
Things can change dramatically, and they can change overnight, and that change can make our lives better. That's the hidden opportunity in global warming. In a word, hope.
I've been waxing nostalgic lately over the ethics scandals of old. They seem always to come in waves. There was the early wave of government procurement fraud, then medicare billing fraud, then insurance sales frauds rippling out from Prudential's scandals. After reading about Prudential in the book "Serpent on the Rock," I would have voted it Most Fascinating Scandal -- were it not for the gold-standard scandals of the 1980s, when Ivan Boesky and Michael Milken were hauled away in handcuffs for junk bond fraud, insider trading, and stock parking. That era holds a special place in my heart as my First Ethics Scandal. I remember the urgency I felt as it unfolded -- I was certain such a major ethics crisis wouldn't be seen again.
Well. Here we are a decade and a half removed from the savings and loans scandals, in the midst of a perfect storm in ethics. Turbulence patterns are converging from Enron, Arthur Andersen, Global Crossing, Tyco, Dynegy, Adelphia, WorldCom and the rest.
It's not hard to trace the route from today back to the 1980s. The two eras are (un)ethical bookends to the greatest bull market in history. The management excesses that seemed so shocking back then -- hostile takeovers, massive layoffs, and exorbitant CEO pay -- became ordinary stuff in the 1990s. It was fuel for a hungry market, and as that market became more ravenous it demanded greater sacrifices. Thus minimally acceptable excesses gave way to outrageously fraudulent excesses, until the whole thing blew up in a kind of July 4 extravaganza, with the explosions of Kenneth Lay and Andrew Fastow, the flame-out of Bernard Ebbers, the detonation of Dennis Kozlowski, and the little mauve starburst of Martha Stewart.
The debris from the pyrotechnics has been drifting to earth day after day for months now, leaving the business press hot to talk about business ethics. At Business Ethics magazine we've been getting as many journalists' calls in a month as we used to get in a year. So there seems to be a role for corporate social responsibility (CSR) folks, though not the role we had in mind when we began. What we all wanted to do back then was change things.
Looking back over the years, I'm struck by how little change of real substance has taken root. Codes of conduct have sprouted like weeds. Ethics officers at major corporations have grown from a handful to hundreds. Business for Social Responsibility has become a multi-million-dollar operation. Social investing assets have swelled into the trillions. Business schools have added endowed chairs and required courses in ethics. Awards and best-of lists have grown in profusion. Through it all, as ethical decision-making was taught to MBAs, good companies were sought out for stock portfolios, or descriptions were compiled of best practices, the underlying assumption was that managers had genuine freedom to be socially responsible. We believed CSR was about separating the good guys from the bad guys, and that good guys could be spotted by their exemplary policies and programs and sustainability reports. But the lessons of the perfect storm tell a different story.
As professor Sandra Waddock of Boston College Carroll School of Management noted in an unpublished paper, "Fluff is Not Enough," Enron rang all the bells of CSR. It won a spot for three years on the list of the 100 Best Companies to Work for in America. In 2000 it received six environmental awards. It issued a triple bottom line report. It had great policies on climate change, human rights, and (yes indeed) anti-corruption. Its CEO gave speeches at ethics conferences and put together a statement of values emphasizing "communication, respect, and integrity." The company's stock was in many social investing mutual funds when it went down.
Enron fooled us. But that's not the real lesson here. The lesson is that all the things CSR has been measuring and fighting for and applauding may be colossally beside the point, because they fail to tell us what's really going on inside companies. What's going on is a single thing: unremitting pressure to get the numbers, by any means possible.
This is happening even at the "best" firms. I've had candid conversations with managers at top-tier firms among our 100 Best Corporate Citizens, and what I hear is disheartening.
One executive with his firm 20 years told me recently, "I'm inside the most enlightened company, and I'm telling you, it is no more." Another legendary CSR firm, once known for its employee-friendly practices and no-layoff policy, has in recent years been laying off tens upon tens of thousands, and sucking money from an "over-funded" pension plan to feed its bottom line.
And those are the good guys. Elsewhere firms stoop to buying "janitor insurance" so they can profit when employees die, or move incorporation to Bermuda to evade taxes. No steps seem too brazen or shameless to take, when they boost the numbers enough. If we want to know why the corporate social responsibility movement has accomplished so little of substance, here's the reason: The pressure to get the numbers overrides everything else. It overrides not because God-given, organic "market" forces are at work, but because the system is designed that way. It is designed to serve certain people and not others.
The Financial Elite
Of course, in getting "the numbers," companies are not compiling bloodless digits at the bottom of an income statement. Corporate profits lead to share price increases which represent dollars in the pockets of real-life human beings, primarily two groups of human beings: executives and wealthy investors. Chief executives get most of the blame, and certainly their pay has gone from outrageous to usurious. But they're not the only ones pocketing unconscionable wealth these days.
In just the waning years of the bull market, from 1997 to 2000, the wealth of the Forbes 400 went up by $1.44 billion each. That's an increase of $1.9 million each day, for more than a thousand days on end. We're told that everybody's retirement portfolios shared in the gains. But since 1983, two out of three American households saw no increase in retirement wealth from pensions. Among the wealthiest 5 percent pension wealth went up 160 percent.
Somebody's profiting from the overwhelming drive to get the numbers, and that somebody is not "everybody." It's the financial elite. They prosper not because they're more productive or virtuous than the rest of us, but because they wield power. CEOs select their own board members and craft their own pay packages, rigging the game to make themselves wealthy. Yet they keep their jobs only if they make shareholders wealthy, and get fired when they don't. In the last couple of decades when we dreamed we were working a CSR revolution, the real revolution was the shareholder revolt happening in corporate boardrooms.
Back in the days of Ivan Boesky, hostile takeover artists awakened slumbering boards and forced them to better maximize gains for shareholders. A new tool for doing so was firing CEOs, which boards did at two dozen major firms between 1991 and 1993, including General Motors, IBM, American Express, and Kodak. Another new tool for enforcing shareholder primacy was massive stock option packages, the same options packages that led directly to the ethical scandals of our day.
It was the laser focus on stock price gain that encouraged executives to drive their beasts so hard they collapsed. CEOs were the visible villains, but there were whips wielded to keep them driving toward maximum share price: whips of firing, stock options, and hostile takeovers. These are among the tools of corporate power. And they are tools available only to the financial elite. They are among the tools that make corporations and CEOs do what they do.
It's time we in CSR began studying these mechanisms, talking about system design, understanding why corporations behave so single-mindedly. And that means focusing on power. Because power is what it's all about, not good intentions or voluntary initiatives or toothless codes of conduct. Power.
If the financial elite wields power, the CSR movement wields talk. We put managers through ethics training, help them craft voluntary codes, applaud their environmental stewardship, or launch dialogues with shareholder resolutions, assuming that well-meaning managers can overcome the system-wide pressure to get the numbers. But they can't. To use an extreme analogy, it's like talking ethics to an S.S. officer in Weimar Germany, while ignoring the system in which he must function.
If CSR has been riveted on things colossally beside the point, it's because we haven't focused enough on system design, particularly on how the system lends power to the financial elite. We haven't fully addressed this issue of power. We haven't adequately studied how it's currently used, or fully imagined how to craft new structures of power, structures where power is wielded not by the few but by the many; structures that can turn stakeholder management from rhetoric into reality.
If we wish to stop being beside the point, if we wish to accomplish in the next 15 years what we failed to accomplish in the last 15, we would do well to focus on democratizing structures of power. Than means imagining, and then creating, economic democracy. Democracy is about two things. First, it is about purpose. In the political realm, it's about an overriding concern for the common good. In the economic realm, it's about having the common good trump the narrow self-interest of the financial elite. It's about broadening corporate purpose from serving shareholders to serving stakeholders, and releasing executives from the destructive mandate to maximize shareholder gain at any cost.
Second, democracy is about structures that bring this purpose to life. It's not about separating good corporations from bad, but about shaping the system forces that act on all corporations. It's about consciously crafting new democratic system structures, structures of voice, structures of decision making, structures of conflict resolution, structures of accountability. Eventually this will mean changes in law. But legal changes must be of a different sort than we've attempted thus far. Laws controlling corporations now amount to a patchwork of regulations about working conditions, pollution, or consumer well-being, focusing on outcomes rather than underling mechanisms. Thus we've been like homeowners chopping down nuisance trees which continually spring back, because we have failed to eradicate the roots.
As Abram Chayes remarked in "The Corporation in Modern Society," it was the judgment of America's constitutional convention "that limitations of structure rather than limitations of substance would best secure our liberties." If the founding generation's work has proved "effective, durable, adaptable," economic reforms have proved less so. It is quite possible, Chayes wrote, "that the difference in approach contributed to the difference in the quality of the result."
Taking on the challenge of economic democracy is a tall order, but there are tall leaders in the CSR movement today; leaders at the peak of personal power, with time yet in their professional lives for another major challenge. I'm thinking, for example, of the first generation of socially responsible entrepreneurs, the founding fathers and mothers of socially responsible mutual funds, the authors of books, the heads of nonprofits, the creators of stakeholder theory. I'm thinking of all the people who have defined CSR and built it into the industry it is today. When this generation passes, their like may not be seen again.
So the people who can lead the way are among us. The need for economic democracy is self-evident. And the historical moment for change is opening, as the Watergate of Wall Street unfolds. What we're witnessing today is not another scandal du jour: We are seeing the weakness of the system design itself, laid bare for all to see, if we can help people to understand what they're seeing.
We are experiencing a unique convergence of forces, not only the forces of scandal, but the forces of change. We can use this moment to take corporate social responsibility to the next level, the level of economic democracy. We can become a new founding generation, completing the design in the economic realm that our forefathers began in the political realm. Instead of chasing one form of corporate wrongdoing at a time, we can put in place enduring structures of justice, effective structures of checks and balances. For it is only in this way that we can truly safeguard the common good, not only for today, but for generation after generation to come.
Marjorie Kelly is editor of Business Ethics.
Sometimes it's the little things that say it all. The little thing that lingers in my mind is the story about Enron's creation, when the original plan was to call it Enteron -- until somebody figured out this was the Greek word for "intestines." There you have it. In the end, the story of Enron's implosion is not about one diabolical company. It's about the guts of our economy.
It's about many gut-level issues that confront us: corporate control of politics, executives getting rich while their company sinks, employees laid off by the thousands, 401(k) plans tanking, messes left by deregulation, a corporate board asleep at the switch. All are themes in the Enron soap opera, yet not one is unique to Enron. The problems the scandal reveals are systemic. The individuals involved may have been uniquely greedy and unethical, but they were empowered by a system that exalted greed as it diminished ethics and accountability.
The most basic issues of Enron are system issues. These come down to two, not unrelated truths:
1) The ideal of the unregulated free market is flawed, and it's time we said goodbye to the invisible hand.
2) Managing a company solely for maximum share price can destroy both share price and the entire company.
These are foundational flaws in theory, flaws in how we conceive of markets and how we define business success. They are system design flaws. For beyond the juicy tales of villainy at Enron, the deeper issue is why the system lent so much power to villainy, and why there were so few checks and balances to stop it.
A key reason is that we are told -- and, more incredibly believe -- that checks and balances are bad, because free markets are good. Unregulated markets are ideal. Left free to work its magic, self-interest (ie. greed) ostensibly leads things to work out to the benefit of all, as though guided by an invisible hand. This myth is taught in Economics 101 as gospel truth, trumpeted routinely in the business press, and sold abroad as the cure for what ails all economies.
The lie of it has been exposed many times. Think of the Great Depression, the savings and loan crisis, or the collapse of Asian economies in 1997-98. Unregulated free markets often lead to disaster. Self-interest is an insufficient regulator for a complex economy. (Duh.) Yet we seem to have to learn this lesson again and again.
Enron is the latest case in point. Consider California's experiment with electricity deregulation. At an Enron Senate hearing, Sen. Barbara Boxer demonstrated how the experiment left the state "bled dry by price gouging." Jeffrey Skilling, as CEO of Enron, had predicted deregulation would save California $9 billion a year. But as Boxer noted, the state's total energy costs instead soared from $7 billion to $27 billion in a single year. Prices rose a gut-wrenching 266 percent.
Not coincidentally, Enron's stock also shot up. Total return to shareholders in 1998 was a remarkable 40 percent. The next year, a miraculous 58 percent. And in 2000, a jaw-dropping 89 percent. Deregulation did indeed work the magic it was designed to work, by turning Skilling's stock options into a gold mine -- just before it turned the company into rubble.
California wasn't the only one duped by the magical thinking of deregulation. Enron helped convince Massachusetts, New York, and Pennsylvania to deregulate energy markets. And it did the same with Washington.
In 1993 Enron persuaded the SEC to grant it an exemption from the Public Utility Holding Company Act (PUHCA), a Depression-era law that prevented utilities from diversifying into unrelated risky businesses. Enron pursued this diversification, to its disaster. As Rep. Ed Markey (D-Mass.) put it, "If Enron had been regulated under PUHCA, I seriously doubt that the types of transactions that brought this company down would have occurred."
Strike two against the myth of deregulation came in 1997, when the company won exemption from the Investment Company Act of 1940, allowing it to leave debt from foreign power plants off its books. This led to dubious offshore partnerships, which contributed to the firm's undoing.
Strike three came in 1999, when Congress killed the Glass-Steagall Act of 1933, which had separated commercial from investment banking. This allowed J.P. Morgan, to use one example, to entangle itself with Enron in dangerous conflicts of interest. It underwrote bonds for Enron, traded derivatives contracts with the company, bought stock in the firm, and had a research analyst covering the company (recommending it as a buy until last fall), even as the bank risked billions in loans to Enron. Lured by millions in investment banking fees, J.P. Morgan was left holding the bag on $2.6 billion in Enron debt. And that's what Glass-Steagall was designed to prevent.
One could go on. Enron successfully opposed regulation for derivatives trading, then used such trades to mask debt. Arthur Andersen helped defeat a proposal to separate auditing and consulting practices, which left it reluctant to challenge a client. Businesses across the board opposed truthful accounting for stock options, which led to over-reliance on options and in some cases inflation of stock prices.
Piece by piece, protections that might have prevented the debacle were defeated. Layer by layer, existing protections were removed. The result was the train wreck of Enron.
What's astonishing is not that this wreck occurred, but that -- time and again -- we bought the deregulation myth that led inexorably to it. We swallowed this absurd fairy tale about some invisible hand.
An earlier generation wasn't so credulous. Those who lived through the Depression saw the absurdity of economic faith healing ("only believe in free markets and all ills shall be healed"). They knew what we have forgotten. Even the editors of Fortune magazine acknowledged, in a June 1938 editorial, that what failed in the Depression "was the doctrine of laissez-faire." They wrote, in language that would get a business editor fired today: "Every businessman who is not kidding himself knows that, if left to its own devices, business would sooner or later run headlong into another 1930."
Or an S&L crisis. Or Medicare fraud. Or Enron.
As though under mass hypnosis, we have denied what we know in our gut: the theory of laissez-faire is bankrupt. It's a hoax. Why were there so few checks and balances to stop the villainy of Enron? Because we pretended we didn't need them. We believed the hucksters who sold us the elixir of unregulated free markets.
Of course, unregulated markets are never really unregulated. Complex economic interactions need rules. The question is who makes those rules: elected representatives serving the public good, or a financial elite serving only itself.
With Enron, the rules were made by folks like CEOs Kenneth Lay and Jeffrey Skilling, and chief financial officer Andrew Fastow, as well as the financial powers entangled with them. Like all elites, they preferred to run things without public oversight. This is why the invisible hand keeps rising out of the grave. As I show in my book The Divine Right of Capital (Berrett-Koehler, Nov. 2001), free market mythology is a smokescreen that disguises the real nature of elite power -- much like the divine right of kings. It allows elites to run our economy to suit themselves, without interference, and with a veneer of legitimacy.
Which brings us to our second question about Enron: Why did the system design lend so much power to greed? Because doing so was in the interest of the financial elite, including Enron executives and Wall Street. Lay and Skilling both were "laser-focused" on shareholder gain, which led to their own option gains. They succeeded at this so well -- with annual gains of 40, 60, 90 percent -- no one asked questions. Those who did were brushed aside, like Sherron Watkins and her memo to Lay. Why disturb the goose laying so many golden eggs?
In the wake of Enron, some have called for closer alignment between executive and stockholder interests. But this close alignment was itself the problem. When we define business success as maximum share price, a soaring price makes it impossible to see problems. What could be wrong? The business is succeeding beyond anyone's wildest dreams.
We fail to recognize that managing a corporation with the single measure of share price is like flying a 747 for maximum speed. You can shake the thing apart in the process. It's like a farmer forcing more and more of a crop to grow, until the soil is depleted and nothing will grow. It's like an athlete using steroids to develop more and more muscle mass, until the body itself is destroyed.
The problem with Enron was not a lack of focus on shareholder value. The problem was a lack of real accountability to anything except share value. This contributed to a kind of mania, a detachment from reality. And it led to a culture of getting the numbers by any means necessary.
If maximum share price is an irresponsible management theory, and deregulation a flawed economic theory, there are better theories already at hand. It's intriguing that the movie "A Beautiful Mind" is up for Academy Awards during the Enron scandal -- because its protagonist John Nash won a Nobel Prize for proving Adam Smith's theory was incomplete. Self-interest alone can lead to disaster for all, Nash demonstrated mathematically. Self-interest coupled with concern for the good of the group is most likely to lead to the benefit of all.
Nash's mathematics revolutionized "game theory" and is central to the "evolutionary economics," which emphasizes that cooperation is as vital as competition. It's a more evolved theory than the invisible hand, more appropriate for an economy that has become more humane than the aristocratic world of Smith.
Viewed through the lens of Nash's theory, the Enron scandal can lead us to question our fundamental assumptions. Do we really believe corporations are only about making money? Or do we care how they make their money? Do we really care about ethics and public accountability?
If we do, then we need real accountability. We need actual sanctions for ethical infractions, not a flimsy ethics code that the Enron board could waive on a moment's notice, as it did in allowing Fastow to earn millions from off-balance sheet partnerships.
We need checks and balances not only on the side of shareholder value, but on the side of public accountability. That means changing the system design. What a new design might look like is explored at length in The Divine Right of Capital, but the concept most appropriate to Enron is the idea of graduated penalties for unethical conduct.
Firms caught cooking the books, for example, might lose all government contracts. A federal contractor responsibility rule could prohibit the government from contracting with egregious corporate law-breakers. Such a rule was put in place by President Clinton as he left office, but was overturned by President Bush. It should be reinstated and made permanent through legislation.
If Enron had faced the prospect of losing millions in revenues, it wouldn't have waived its ethics rules so blithely. Watkins might have been empowered to approach the board, and the board might have been inclined to listen -- since real financial consequences were at stake.
A more serious penalty was suggested by the attorney general of Connecticut, who recommended pulling the license of Arthur Andersen, so it could no longer do business in the state. If all accounting firms -- and all corporations -- knew they faced this ultimate sanction, they would be less inclined to push the limits. We would start to see ethics and accountability with real teeth.
The ultimate lesson of Enron is that effective system design requires our conscious choice. It cannot be left to some invisible hand. It's time we sent that creepy appendage back to the grave where it belongs.
Marjorie Kelly (MarjorieHK@aol.com) is publisher of Minneapolis-based Business Ethics magazine and author of the recently released The Divine Right of Capital (Berrett-Koehler, Nov. 2001, www.DivineRightofCapital.com), from which portions of this are adapted.
My mind's eye chooses odd images from the World Trade Center devastation Sept. 11 -- somehow avoiding the obvious, lingering instead on the peripheral. What I keep seeing in my inner eye are all the documents and faxes drifting down from the sky, littering the wreckage like confetti tossed by some macabre hand.
Moments before, each document had its own unique place -- the upper left corner of a particular desk, the lower drawer of a certain file cabinet -- and each document had in its own way been numinous with meaning. There were stock certificates, options trading documents, desk calendars, overnight packages too urgent to wait another day, faxes too urgent to wait another hour. Yet each of these documents was reduced, in an instant, to litter.
In that instant, it became clear to an entire nation that what matters is not documents but lives. What matters is not investments or appointments or the little urgencies of all our days, but life itself. Each other. Our bodies, breathing.
I think of this now, as I look at the messages and documents littering my own desk, and I am grateful in some odd way for the reminder that ultimately they may matter little. As I've been making phone calls in recent days, I've found myself focusing more on the real human beings on the other end of the line, less on the business I want to transact with them. It's the kind of shift I think many of us are making in the wake of September 11, canceling travel plans to be with loved ones, working late a little less often. It seems to me one of those small gifts that tragedy sometimes brings: refocusing us on what really matters.
In a larger sense, a refocusing of priorities is what the responsible business community, at its best, is all about. It's especially what the socially responsible investing community is about. I was fortunate enough to be in the midst of that community at the annual gathering of social investing professionals -- SRI in the Rockies in Tucson, Arizona -- when news broke of the attack on the World Trade Center. It was an extraordinary group to be with at such a time, a group that for me is like an extended family of the heart. As the crisis brought the conference to a halt that Tuesday, the generous soul of the group emerged. We came together the morning of the attack with little mention of markets or portfolios but instead prayers led by the religious leaders among us, small groups where each of us could express our fears, and ad hoc committees focused on matters of group care -- like chartering a bus so 50 folks could make the three-day drive to the East Coast.
Through it all, we were guided by the rules of the road articulated by Alisa Gravitz of Co-op America and the Social Investment Forum, who called on us to "work from a place of connection and love," to "change what we're doing when we need to change," and to "nurture the wells of goodwill."
This tone of compassion and flexibility would be echoed spontaneously in the week ahead by other social investing professionals -- like those at Walden Asset Management in Boston, who wrote to clients on Sept. 18 suggesting that we as a nation "address the underlying causes of terrorism," "dispense with our false sense of security," and "curb our extreme sense of entitlement in our standard of living and redirect our wealth from private interest to the care of others."
How striking these reactions were, coming from investment professionals -- and how different from those which surfaced in the mainstream financial press. In a Sept. 17 issue of Barron's financial weekly headlined "War on Wall Street," columnist Thomas Donlan urged that we "demonstrate that humans do not make war on mosquitoes. We eradicate them." He urged also that the twin towers be rebuilt "as symbols of capitalism as before." Jonathan Laing similarly observed that a resumption of economic activity would provide "a certain measure of revenge."
Absent from such sentiments was the self-reflectiveness I had seen among SRI folks -- the willingness to recognize that the poverty from which resentment springs is not somehow isolated from our own prosperity. As Afghan writer Tamin Ansary said in a widely circulated article, "Suffering and poverty are the soil in which terrorism grows."
Beyond the financial community, like-minded sentiments bubbled up among others, like Brooklyn novelist Trace Farrell. "We've been playing like privileged children ... while people outside the circle of comfort have been paying for our privileges with endless varieties and gradations of suffering," she wrote in an eloquent e-mail. "If we cannot figure out what this attack has to do with us, then we should be prepared for many more strikes 'out of nowhere.'" Because "nowhere," she continued, "is the enormous shadow we cast and never turn to look at but drag everywhere behind us."
It is sobering, to think the attacks have something to do with us, something to do with our economic system. If the social investing community is finding ways to articulate this, it is an awareness all of us in business might learn to cultivate. We might remember that as the little urgencies of our days go on, suffering too goes on. And suffering may be asking something of us.
Marjorie Kelly is editor and publisher of the bimonthly Business Ethics: Corporate Social Responsibility Report www.business-ethics.com.
Pundits wring their hands about growing wealth inequality, and the loss of local control of corporations due to takeovers. What most fail to realize is that a proven solution is already at hand. It's employee ownership. And by that we mean real, long-term ownership -- not the speculative stock-option kind. Largely beneath the public radar, a major experiment in employee ownership has been underway for the last 25 years. It's succeeded in putting an estimated $650 billion in company assets into the hands of some 10 million white-collar and blue-collar workers.
It's an experiment that is working. Research and experience has shown that employee ownership can not only broaden the ownership of assets, but also avert plant shutdowns, increase productivity, reduce absenteeism, decrease the risk of capital flight, and defer (or eliminate) taxes for founders who sell to employees. But despite all it offers, employee ownership remains an under-appreciated policy option. It's time for that to change.
Employee ownership deserves to be more widely supported -- for the benefit not only of employees, but of the entire economy. One study reached the dramatic result that, in companies where employees own a majority of the stock, three times as many jobs are created per year as in conventional firms. Another analysis for the New York Stock Exchange estimated that productivity in the U.S. would increase by 20 percent, if American companies made a serious effort to involve employees in decision-making at all levels and reward them with the gains from this effort.
Employee ownership entered the scene in a major way in the 1970s -- after the federal 1974 Employee Retirement and Income Security Act (ERISA), establishing the tax-deductibility of employer contributions to Employee Stock Ownership Plans (ESOPs).
In the following two decades, the number of ESOPs and stock bonus plans increased sixfold, from 1,600 in 1975, to an impressive 10,170 in 1995, according to the National Center for Employee Ownership in Oakland, Calif. Growth more recently has leveled off, with 1998 ESOPs and stock bonus plans totaling 11,400 -- only slightly higher than three years before. The number of employees covered declined slightly after 1996, from a high that year of 8.7 million covered, down to 8.5 million in 1998.
One reason, according to an analysis by the Urban Institute in Washington, D.C., is that employers are choosing other forms of stock compensation -- such as 401(k)s, broad-based stock purchase plans, or stock options. The NCEO estimates 15 to 20 percent of public companies offer options to most employees -- including PepsiCo, Starbucks, Walgreens, Whole Foods, and Whirlpool.
But options do not represent ongoing ownership, because 90 percent of employees sell immediately after exercise. Growing in significance are 401(k) plans, which controlled $300 billion in the stock of sponsoring employers in 1998, compared to $500 billion for ESOPs. But since 401(k)s convey no employee voting rights, they too fail to represent real employee ownership. ESOPs still remain the primary vehicle for employee ownership.
A key reason is that they offer a significant advantage, in the opportunity for employee participation in management. While not all employee-owned firms use participation, those that do find it is key to success. Studies consistently show that when broad employee ownership is combined with informed participation, companies perform substantially better than otherwise expected.
The neglected policy option of employee ownership deserves to be picked up again. In doing so, it behooves us to learn from past mistakes. For if employee ownership itself has been a success, state efforts to promote it have been less so. Since 1974, 28 states have taken steps to encourage employee ownership. The initiatives include declarations of support, state centers with extensive programs, tax benefits, exemptions from state securities laws, loan guarantees, or interest-rate subsidies and special financing.
One objective of many policies has been the broadening of ownership -- as in Maryland's declaration, passed in 1980, saying it was state policy "to encourage the broadened ownership of capital and that ESOPs were an important means of reaching that goal."
Another objective has been avoidance of plant closure -- as with New York's policy, which states: "the general welfare is directly dependent on the economy and plant closures are a problem. The purpose of this act is to encourage employees of these plants to continue them as employee-owned enterprises thereby retaining jobs. "Legislative enactment of declarations and other forms of support peaked in the 1980s. Between 1974 and 1986, twelve states passed employee ownership policies. Between 1986 and 1994, only two did so.
Some policies have since lapsed, been repealed, or been drastically cut. Montana's program was never implemented, and was repealed in 1999. California planned to offer services, but found no demand. Oregon and Washington had operating programs in the 1990s, but discontinued them because of budget cuts. Massachusetts' program was likewise de-funded. Funding for programs in New Jersey and Hawaii was never authorized. A handful of states in the 1980s did fund programs, and today four are still in operation: in Maine, Massachusetts, New York, and Ohio. Two others -- Michigan and Washington -- have limited programs still in operation. The Washington program closed in 1997, but since then sporadic, ad hoc employee-ownership deals have been done.
The most recent action was taken by Maine, which passed "An Act to Broaden Ownership in Businesses in Maine" in the most current legislative session. While the bill originally had three components -- a fund for grants, an outreach program, and a study commission -- only the commission component ultimately passed. The commission is charged with examining current patterns of ownership, the local impact of ownership changes, and policy options for broadening ownership.
Possibly the beginning of a new trend is the investigation of employee ownership as an instrument to privatize government functions, which appears to have replaced the earlier objectives of broadening ownership and avoiding plant shutdown. The Virginia Competition Act of 1995 was the first policy declaration about privatization, and it created the Commonwealth Competition Council to investigate the feasibility of privatizing state functions. North Carolina passed similar legislation in 1998. These states are, in essence, laboratories. If successful, their programs may become a model for a broad movement of privatizing government services through employee ownership.
What can we learn from these two decades of history? One study showed there were three elements consistently found among statutes successfully implemented: laws were clearly written and required specific action; an early effort was made to educate personnel charged with implementing the statute; and the agencies in question had a structure that facilitated activity.
The best example of a program that works is the Ohio Employee Ownership Center in Kent, Ohio, established in 1988. In an NCEO evaluation of state programs, it was deemed the "most efficient and most effective." The center offers a regular newsletter, an annual conference, and technical assistance. It also runs Ohio's Employee-Owned Network, a training network supported by modest annual dues from 60 member companies. It provides 23 full days of training for employee-owners, on topics like understanding financial reports or team-building.
Since the Ohio program was established, formation rates for employee-ownership companies in Ohio have grown faster than the national rate. For private companies, the relative rate of employee ownership plans increased by 45 percent.
The Ohio Employee Ownership Assistance Program has assisted more than 10,500 employees in buying all or part of 47 companies. Many of those employees would otherwise have been unemployed due to plant closings or downsizing. The cost per job retained was just $129. State promotion of employee ownership can work. The key to success is not the phrasing of the law, but implementation. The key to failure is lack of resources.
Another problem has been lack of demand -- due in large part to low awareness by business, potential employee owner groups, and government agencies. Experience shows that state programs can be most effective in five areas:
1) Facilitating ownership transition in small business -- which is the single largest preventable source of job loss. 2) Encouraging employee participation to improve performance -- which is the key to employee ownership success. 3) Adding employee ownership to regional economic development efforts -- as Maine did with Coastal Enterprises, a community development corporation which recently helped workers buy an electric-blanket plant Sunbeam planned to shut down. 4) Using federal money to help avert plant shutdown -- which is the best kept secret in the world of employee ownership. (Only a quarter of the states used these funds; employee buyout groups can raise the issue with the state displaced worker unit). 5) Developing equity funds -- which have worked exceptionally well in the Canadian province of Manitoba. This last item points to one of the most interesting region-level initiatives.
The Manitoba Federation of Labor and the provincial government sponsored the Crocus Fund, a regional venture capital fund, which pools Canadian-style IRA accounts to invest in equity stakes in local firms. Crocus uses social screens, including a preference for employee-owned firms. More than 27,000 working Manitobans have invested in Crocus since it was set up 1993, and its assets have grown to $165 million (Canadian). Crocus now provides about-two thirds of Manitoba's venture capital. It has invested $100 million in 47 companies, creating 3,500 new jobs, and maintaining 5,200 -- in a province with only 1.1 million inhabitants. Notably, Crocus is the top performer in its class of funds in Canada.
If past avenues to promoting employee ownership haven't always proved fruitful, Manitoba's and Ohio's successes show there are programs that work -- and work impressively. The routes to promoting employee ownership are mapped. What we need is a renewed public will to embark on them.