Governance of the Corporation
How is governance of a corporation like governing a country, and how is it different? This is a question that lies at the heart of determining what the proper relationship between corporations and the government is, because it reveals what a corporation is capable of doing, and what its limits are, and determines at which point the government should consider it appropriate and/or necessary to interfere.
For the purposes of this discussion, I take the governance of the modern democratic republic as the baseline standard for governance. In what, as a baseline, does a democratic republic consist? It typically has an executive president or prime minister (and, usually, a supplemental executive, as well, such as a Vice President). This executive, in turn, has a number of people to whom he delegates the various branches of the administration. These are the ministers, advisors, or secretaries. In addition to this, it has a body of officials, usually elected, although sometimes appointed, who are in control of the budget and financial decisions of the country, as well as the laws of the land. This organization is called, variously, the parliament, the congress, the duma, etc. There are individuals who can be thought of as the client-owners of the government. These individuals have the power to appoint through vote or by proxy some, if not all, of the officials within the government. These people are called the citizens. In such a case that there is a substantive dispute between individual citizens, or one or more citizens and the government, or between two branches of the government, there is a judicial branch which has the power and responsibility to interpret existing laws in order to resolve the disputes. This branch may not legislate, however, in such a case that the existing legislation is not entirely clear, it does have the power to extrapolate from underlying philosophical principles how the law should be applied. Once a judgment has been made, or in such a case that there is reason to believe that the law of the land has been violated, a government police force is mobilized to enforce judicial judgment, and/or investigate and apprehend suspected law-breakers, commonly referred to as “criminals.” In order to protect the territory in which the government operates, it allows for a standing military force. The primary cause of the existence of this force is to protect the territorial borders of the government, but it may also be used to expand the government’s influence beyond them. Finally, the government is funded by printing money as a means of exchange backed by force of law, and then collecting some of this money from the citizenry and foreign trading partners in the form of taxes, which come, variously, as commodities taxes, income taxes, tariffs, and other forms of systematized forcible confiscation. The purpose of this funding, to the extent that the government has not become corrupt, is to fund its various activities; and not to accumulate capital for its own sake, or allow for the fabulous accumulation of personal wealth among government officials. This system of confiscatory funding is enforced by the police, and administered by the treasury. In many governments there are several other functions which are empowered by the state to do various things, such as infrastructure expansion and maintenance, welfare, or “dole” programs, spy agencies, government standardized and administered educational institutions, government standardized and administered health care institutions, a contracted private fiat central bank, and several other things. These, however, are peripheral, and not essential functions; the government may have some or all of them, but, unlike its essential branches (executive, advisory, parliamentary, judicial, military, police, treasury, and citizenry), it does not require them in order to exist as a democratic republic.
In many ways, the governance of the corporation has a structure similar to that of a government. It also has an executive; a CEO, president, etc., It also has a body of advisor-executives; such as, COOs, CFOs, CTOs, VPs, Directors, etc. It also has an elected board responsible for financial decisions and major company policies. It may, much like a government, contract an independent private judiciary to adjudicate disputes with its employees and clients; alternatively, it may rely solely on its HR department for policy judgments, and defer to the applicable government judiciary on all other matters. It may contract a security or para-military force to protect its physical property and personnel from criminals, or, if operating abroad, from rogue elements and organizations. This force is analogous to a military, in that it is empowered to protect company property and personnel, but not a police force; unlike the police, it is not empowered to carry out the corporation’s policies by force, because the corporation can only make policies, not laws. The difference between a law and a policy is that policies can only be stipulated as prerequisites for continued mutual participation in a particular corporate activity (such as employment, contract, or trade), and not as mandates to be enforced beyond the framework of a mutually agreeable exchange, whereas laws can only be described as such if they carry with them the threat of some penalty procured by force to any violating party within a given territory. In such a case that someone is doing something illegal on company property, the security force may be empowered to physically remove or detain the offending individual, but must immediately notify and defer further action to the applicable government police jurisdiction.
The Differences Between Political and Corporate Governance
The two biggest differences between the governance of governments and the governance of corporations pertain to citizenry and the means and purpose of income.
Differences in Sources of Income
Whereas governments acquire income to fund the activities of governance through systemic forcible monetary confiscation (tax), corporations, to the extent that they operate within legally and philosophically legitimate means, acquire income to fund their governance through voluntary exchange – most commonly through sales of goods and services, including ongoing contractual relationships. There are two key differences here. The first is the use of force. A corporation may not legitimately acquire income through forcible means – to include fraud, breach of contract, and theft, whereas the government’s sole means of income is systemic forcible confiscation (with particular, discreet, peripheral exceptions, such as postal services – which to a large extent acts as a private company, and, like a private company, participates and competes within the marketplace). The second difference is the purpose of that funding. A corporation gains income in order to net profit, which it then distributes to shareholders in terms of company value and dividends, and company employees in the form of bonuses. All income that is not net profit – that is, all income that is used in order to sustain and expand the business – is referred to as “overhead;” and companies typically have a strong incentive to minimize overhead to greatest extent possible in order to maximize net income; also called “profit.” This is in contradistinction to the purpose of income in government. In business terms, all government income is overhead.
Differences in Citizenship Roles
Whereas governments have citizens, corporations have to deal with four separate categories of individual which, in various ways, are partially analogous to the same: employees/contractors, customers/clients, shareholders/owners, and other stakeholders. The government’s relationship to the citizen is very straightforward: the government is answerable to the citizen in that many of its officials and law-makers are selected, whether directly or by proxy, by the citizenry, and the citizenry, in turn, is subject to the laws of the government, and must yield, whether willingly or not, discrete and particular sums of money to the government in some form as tax. Prima face, the four partially analogous relationships of the corporation seem straightforward, but the responsibilities entailed by these relationships, if not spelled out and concretized in very limited ways, seem to be in competition to one another.
Citizenship Roles – a Close Comparison
The basic comparison between the governance of governments and corporations up to this point is relatively straightforward, and fairly uncontroversial. The controversy lies in governance as it pertains to corporate citizenry. In other words: what are the discrete responsibilities of the corporation to the four categories of person partially analogous to the concept of “citizen:” the employee/contractor, the customer/client, the shareholder/owner, and the other stakeholder? In the following pages, I will present my idea of what these discrete responsibilities are, present some competing views from other people who have written on this subject, and reconcile their concerns to the model I am presenting. My model distinguishes between two different sorts of responsibilities in governance: legal responsibilities and ethical responsibilities. The former category of responsibility requires government regulation and force. The latter category requires stakeholder market vigilance.
The Role of the Employee/Contractor
The employee/contractor is a person who, on a limited or ongoing basis (the latter being the more typical case) provides some form of labor to serve the corporation’s interests in exchange for some form of compensation, such as a wage, a salary, commission, tips, and/or bonuses. The customer/client is the individual or group which purchases and/or contracts goods and/or services from the corporation. The shareholder/owner is the individual or group of individuals that own stock in the corporation. The other stakeholder is every other individual other than those already listed that is affected in some way by the activities and/or existence of the corporation. Those responsibilities which exist as necessary legal conditions are what I call the legal component of responsibility. Those responsibilities which should not be mandated by law are what I call the ethical component of responsibility. The legal component of the company’s responsibility to the employee/contractor, first and foremost, is to compensate that individual in the way agreed upon beforehand for services rendered. This is a basic, legal requirement. Failure to do this is fraud and breach of contract. If the person is an employee, then he/she must be compensated for their time; whether that is in terms of an hourly wage, or in terms of salary figured as a daily rate. The employee is also entitled to whatever bonuses, tips, or commissions he/she is entitled to, or would have otherwise been entitled to (assuming employee separation from the company). If the person is a contractor, he/she is entitled to compensation in the manner agreed upon, whether verbally or in writing. Additionally, the employee/contractor is entitled to experience a crime-free working environment; if this working environment is outside of company owned property, then the legal onus for this falls squarely on the owner of the property in question to show that a reasonable level of effort has been put in to deal with any perceived criminal element, and if this working environment is on company owned property, then the company, in order to avoid legal onus, must be able to demonstrate that it made a reasonable effort to prevent it from happening and took every reasonable action at their disposal to stop it once it began to occur (to include notifying law enforcement, if possible). Further, the company is liable to disclose all extraordinary risk associated with the performance of the service, so that the employee/contractor can negotiate terms of compensation appropriate to the work and the risk (or reject the offer on the informed basis of insufficient compensation, or intolerably low levels of work hygiene factors). All of these things are what is required simply on the basis of the concepts of contractual understandings and full disclosure. Anything beyond that, legally, is a matter of negotiation. That being said, although the employee/contractor may not have legitimate legal means to pursue conditions beyond the above described minimum standard, the corporation should, insofar as practical, provide a pleasant, humane working environment, and offer an adequate living wage to its employees and contractors; should it fail to do so, the employee/contractor, as well as the citizenry at large, has broad, extra-legal and, especially, market power to enforce its will upon the corporation to provide conditions it considers to be humane and suitable, and, in accordance with particular principles, it has not only the right, but the moral responsibility to do so. In the case of the employee/contractor, as I mentioned before, the corporation has the responsibility to provide humane working conditions, and an adequately livable wage. These two concepts are extremely fungible; whether or not they are adequate is a matter of opinion. If it is of an opinion sufficiently broadly held among the employees/contractors and/or the general public that the standards of “adequate” have not been achieved in one or both of these matters, then it is incumbent upon employees/contractors to unionize (in a sense compatible with the right to work) in order to negotiate better terms from their employer. It may also be incumbent on the general public to, by some means, boycott the products and/or services provided by the corporation – directly if these are available directly to the consumer, and indirectly if these are only available as business to business services (by boycotting those businesses that do business with the corporation in question). In addition, the power of the press should be utilized to, in a journalistically accurate and responsible manner, lambast policies of the corporation in question that are viewed as unfair or harmful. The employee/contractor is like a citizen of the company in the following ways: he/she is entitled to limited use of company facilities in order to perform work, is entitled to reasonable levels of expectation for personal safety – unless particular risks are negotiated as part and parcel of the job during the hiring process, or prior to a major change in working conditions, and is subject to the corporation’s policies and procedures. The employee/contractor is dissimilar to a citizen in that he/she has no direct say in the way the company is run. It is a matter of effective, transformational leadership for the executives and board members of a corporation to seek input from employees in terms of working conditions, however, the employee has no “vote,” per se. He/she is also not subject to anything equivalent to a “tax,” as this is an exclusively governmental power. It is illegal for a corporation to forcibly redact compensation for goods and services from its employees/contractors, and it is unethical to substantially pressure them to yield money for company activities. It should also be illegal to pay an employee/contractor in “script” (company issued certificates of value not redeemable outside of the company), except as a non-primary means of compensation (e.g., a company stock benefit). The use of intra-organizationally issued script is strictly and exclusively a governmental power, not within the proper purview of company behavior. The company must offer some form of compensation that is a generally accepted means of exchange.
The Role of the Customer/Client
The legal component of responsibility that the company has toward the customer/client is two-fold: firstly, to fully disclose the relevant attributes and essential nature of the product/service offered, and secondly, in the manner agreed upon, deliver said products and services in a reasonably efficacious and timely manner. These two principles hold in all three possible cases of corporate-customer/client interaction: in the case of a direct purchase, in the case of a written contract, and in the case of a verbal contract. In the case of a direct purchase, the company is required to disclose the nature of the product, and all consumer-relevant details on the label. The product is rendered upon the completion of the relevant exchange. In the case of a written contract, the products and services provided are listed in detail, along with the means by which they are delivered. The means of exchange is also described in detail. Upon signing, both the corporation and the customer/client are required to fulfill what they agreed to provide, in the way agree upon. In the case of a verbal contract, the rules are the same as a written contract, but there is nothing in writing; and the validity of the agreement rests upon a mutual understanding. Now it should be noted that any potentially harmful or destructive aspects of the product must also be disclosed. If the corporation is not aware of these things at the time, then there is no legal onus, should these things come to light after the fact; but if it is reasonable to suppose that they should have known, or in some way failed to do due diligence vis-à-vis product testing, then they can be held liable. Beyond the legal component of responsibility, the corporation also has an ethical responsibility to the customer/client. The company is morally obligated to render, so far as is practical, the best (variously: most efficacious, most durable, most valuable, etc.), and safest possible product that it can, given the price at which it is being offered. The company has an ethical responsibility to fully consider the possible risks associated with the use of the products. If they provide a good or service, they should be willing to compensate the customer/client in the case of accidental damages that take place during performance or delivery. A corporation has an ethical obligation to “stand behind” its product – that is, there should be an understood guarantee that if the product or service is defective, or otherwise not fully as efficacious as described, it should be prepared to refund the customer/client – even if there is no obvious contractual obligation to do so. In such a case that it comes to light that there is something about the item that is extraordinarily dangerous or harmful, the company has a legal responsibility to immediately stop the production and sale of the item in question and inform vendors of the situation. It also has an ethical responsibility to inform the press, and put forth a product recall. Should a corporation fail to meet these basic ethical standards, it is incumbent on its partner vendors to stop doing business with the corporation, it is incumbent upon the press to expose the wrong doing, and it is incumbent on the customer/client to immediately boycott the products and services of this corporation. The customers/clients are like citizens in the following ways: they render income to the organization (although, unlike citizens, they do so on a strictly voluntary basis), and they have the power to influence the decisions and policies of the organizations through a kind of “vote” (in the following sense – in that they “vote with their dollars;” that is, they choose which products and services to buy, thereby selecting who wins and loses in the competition of the market environment). They are not like citizens in the sense that they are not subject to the policies set forth by the corporation – except in particular and discreet ways that are applicable only when they are physically on premises owned by the corporation, as well as particular and discreet ways that are expressed in any relevant contract they may have signed or verbally agreed to with the corporation.
The Role of the Shareholder/Owner
The legal component of the responsibility that the corporation has to the shareholder/owner is to deliver such dividends and value in proportion to the company’s success as has been contractually stipulated. The shareholder/owner has the right to, in contractually prescribed ways, elect the board-members in such a way that they believe will either best serve their interests or will otherwise best serve to advance whatever goals they hope the corporation to achieve (predominantly, in the vast majority of cases, profit). The executives have a legal responsibility to be forthcoming to the elected board as to all relevant details pertaining to governance of the company. In light of information presented by the executives, the board has the ethical (but not legal) responsibility set forth budgets and policies that they consider to be consistent with what they perceive the best interests of the shareholders/owners to be. The reason that this responsibility pertains to the ethical component, and not the legal component is that, while the interest of the shareholder/owner is, overwhelmingly, the board’s primary concern, it still must be balanced against considerations that affect other stakeholders. It must serve the interests of the shareholder/owner, while balancing it properly against other ethical concerns, firstly, because that is simply the right thing to do, but also because, if the market and press are working properly, there will be the strong possibility of highly negative consequences for failing to achieve the correct ethical balance – as has been described elsewhere, here, in the exposition of this corporate model and its relationship to various stakeholders. The shareholder/owner is very much like a citizen of the corporation in two particular ways: firstly, the shareholder/owner votes for the board directly – much in the same way that a citizen votes for the congress, and, secondly, the shareholder/owner (like the citizen of a country) is a source of funding for the corporation; but only in a very particular sense – in that he/she provides capital investment to the company to fund its activities and bear particular financial risks on behalf of the organization. While, in the sense that they help fund the organization, they are like citizens, that is as deep as the similarity goes in that particular sense, because the means of funding is very dissimilar; if anything, shareholders/owners can almost be compared to political donors, who back a political candidate in order to achieve some organizational or personal end through that candidate. Shareholders/owners are not subject to corporate policies outside of any special agreements they may have made with the board or the executives. The three most important stakeholders that a corporation must deal with, as already described, are the employee/contractor, the customer/client, and the shareholder/owner. The vast majority of the legal and ethical concerns that a corporation is charged with which are analogous to that of a government to its citizens are to be found in those three kinds of relationships. However, they do have some additional citizen-like obligations to the public at large, which is to say, all other stakeholders.
The Considerations Due to Other Stakeholders
All legal obligations that the corporation has, in terms of governance, to the other stakeholders stem from a single principle – to not commit (which is to say, initiate) an act of harm to others’ persons and property. For example, the corporation has a legal obligation to, insofar as possible, defray damage to the air quality that may otherwise come about as a result of their activities. If someone, while using the company’s products in proper and prescribed ways, accidentally hurts some third party, and a defect of the product itself can be shown to be a partial or full cause of the accident, then the company has a legal obligation to the victim for damages. The company also has legal obligation not to intentionally impede the freedom of movement of the public. For example, it is not permissible by legal principles for a company to leave a car parked on a train track used by a competitor in order to hamper the delivery of the competitor’s goods. There are many such examples, but they all come back to the same thing: a corporation has a legal obligation not to initiate force or cause harm to other stakeholders. There is also an ethical component to the responsibilities that a corporation has to other stakeholders – to establish good will and trust with the general public. There is no limit to the ways in which this can be done, and there is no prescriptive method for accomplishing it; nor is there any set way of proportioning available resources that can be said to be generally applicable to the pursuit of this state of affairs. However, it frequently does become quite clear to the outside observer when this takes place and when it does not. Are there charities or public events that the corporation sponsors that the other stakeholders care about? Is the corporation dedicating research and development resources to the development of sustainable technologies? Is the corporation doing its part to not over-exploit the commons to the detriment of other stakeholders (e.g., public roads, waterways, air, etc.)? Is the corporation being proactive to limit the negative impacts that its products and services may be having on the environment? All of these things (and many, many more) have a powerful impact on public perception of the company, and are key factors in establishing good will and trust. Should a corporation fail to dedicate adequate resources to a good will and trust related endeavor, it is incumbent upon the press to publicize this failing (and, conversely, to publicize the positive things that the company is doing to build up trust and good will), and it is incumbent on the general public, as a second order consequence, to spread this information as widely as possible. The third order consequence of this should be: loss of customers/clients, loss of key business to business contractual relationships, and, potentially, even some employee turnover. In an extreme case, the fourth order effect of bankruptcy and reorganization may take place as a result of general boycott, should the company patently fail to address public concerns vis a vis a particular good will and trust issue. These other stakeholders are like citizens of the corporation in the following sense: in that, in the same way that citizens of a government are indirectly affected by the existence, actions, and laws of their government, they (the other stakeholders) are indirectly affected by the existence, actions and policies of the corporation.
Some Other Opinions on this Subject
What I have presented so far is a comprehensive comparative model between a government and corporate governance, with special emphasis placed on the various relationships that corporations have to stakeholders which are analogous to the relationship a government has to its citizens. What follows are discrete concerns expressed by various writers on the subject of corporate governance, as well as my answer as to how my model addresses those concerns.
Ralph Nader – Who Rules the Corporation?
Ralph Nader, Mark Green, and Joel Seligman, in their article, Who Rules the Corporation?, express concerns about the relationship between the board and executive of a corporation. They maintain that, whereas, in theory, the corporate officers (executives) are selected and dismissed by the board to fulfill defined delegated responsibilities, and, as such, are “employees” of a sort of the shareholders who elect the board, the reality is that the executives are corporate tyrants who manipulate corporate governance in such a way as to heavily influence the election process of board members by using company funds to promote the campaign of particular board members. These gentlemen propose a number of fairly complex and specific regulations to, in my opinion, micromanage (negative normative connotations are purposely implied, here) corporate structure; especially with regards to the board selection process and functions. The question that seems the most obvious to pose is: how is that different from the way a government works? These gentlemen would like to see additional government controls to regulate the board selection process, as well as implement strict rules about board composition and functions, but, given that there are few, if any, governments that are less corrupt than the way he describes corporate political machinations, does it seem reasonable to put additional layers of corrupt bureaucracy on top of that which (according to them, anyway) already exists? And furthermore, not all corporations are created equal. Some are large, some are small. Some are relatively simple, and others are truly vast, and dizzyingly expansive. What makes these gentlemen qualified to propose forcing a one size fits all solution to all corporate structures? This stinks of hubris. Now, it’s not that the changes these men propose are, prima face, stupid. Some of them are good ideas. For example, organizing a board in the same way that a government cabinet is organized so as to increase total awareness of how the company is being run is not a terrible idea. I could envision a corporation organized in this manner being successful; and certainly, one might do well to take his ideas under advisement – as suggestions – but to build an entirely new regulatory apparatus to micromanage corporate structure is expensive, unrealistic, and will create more problems than it solves. And that brings me to the final question that I have about his ideas: what makes him think that the executive, assuming that he/she has total, tyrannical control over his/her company (which is, in most cases, unlikely to be true), who’s to say that’s not best? Sometimes companies have to make quick dynamic decisions in response to market forces. Who’s to say that an empowered decision maker isn’t the way to go? Certainly I could envision potential problems with this – especially is the executive’s judgment is questionable. But I could just as easily envision problems with corporations that are overly bureaucratic. The more complex the bureaucracy, the more difficult and involved change becomes. Not all corporations are alike, and there is no one size fits all solution to corporate governance. This is true of democratic republics, and it is all the more true of corporations, which have to respond quickly and deftly to market forces.
Irving S. Shapiro – Power and Accountability
The objections which I raise to Nader, Green, and Seligman are echoed in an article by Irving S. Shapiro, entitled Power and Accountability: the Changing Role of the Corporate Board of Directors. Shapiro points out that the entire issue of regulating corporate structure beyond the extent to which corporate governance is already being regulated stems from the idea that, because many corporations are as large as they are, people do not see them as wholly private. In reference to this, I would like to point out that, in the previous pages, I have carefully described the legal and ethical responsibilities that corporations have toward the various stakeholders, and how they must each be balanced in order to not put these various responsibilities in competition with one another. It is very much my contention that additional regulation on corporations is not called for – and Shapiro seems to agree. In this article, he says, “Market competition, so lightly dismissed by some critics as fiction or artifact, is in fact a vigorous force in the affairs of almost all corporations. Size lends no immunity to its relentless pressures.” He goes on to point out that the constant overturn of placement (and even inclusion) of companies on the list of the largest 100 companies is compelling proof that even the largest corporations are constantly having to strive for quality and good will to remain competitive in the market economy. Among the conclusions he posits is that “Large corporations cannot fulfill their duties unless they remain both profitable and flexible. They must be able to hold those volunteer owners; which is to say, there must be the promise of present or future gain.” And quite right. If the corporation does not carefully and correctly balance the responsibilities of governance it has to its “citizens” (i.e., stakeholders), it will quickly feel the pain of swift consequence to its bottom line. It bears mentioning, vis a vis the central theme of this paper, that this is in stark contradistinction to government, which, while answerable to its citizens, is much more insulated from their desires by the fact that, firstly, they do not have to convince them to fund them – they are funded through systemic forcible monetary confiscation, secondly, the politicians themselves are usually able to acquire substantial sponsorship from interested affiliates to ensure their continued seats of power, and, thirdly, the politicians have a fundamental advantage in the fight to achieve a status quo in the face of citizen/stakeholder demands: the use of force. Governments are able to use the force of law to achieve its ends by force, whereas corporations can only implement policies.
Thomas W. Dunfee – Corporate Governance and Morality
Finally, I would like to address the arguments that Thomas W. Dunfee presents in his article, Corporate Governance in a Market With Morality, as I share many of his conclusions. He describes two competing points of view regarding proper corporate governance: the one espoused by Milton Friedman, which claims that, aside from legal mandate, the corporations only loyalty is to shareholder’s profit, and no other concern is deserving of any consideration, and the competing view that the shareholder enjoys no special status over other stakeholders, and the corporate policy should be forced to reconcile itself with the concerns of the all the various stakeholders, and that the managers should be empowered to make decisions about how to balance these concerns. Dunfree presents the argument that the reality is somewhere in the middle: that the corporation’s primary concern is profit, but that in reality, market forces are moderated by moral forces, and that the corporation should be responsive to that. This is a sentiment I whole-heartedly agree with. He also points out that freedom in the marketplace is what enables freedom of individual moral choice. I would add that this is because of the essential differences between the corporation and the government: the corporation, to survive, must be extremely sensitive to market, and therefore moral, forces in ways that the government is much more insulated from (as previously described).
Conclusion – a Comparison Between Political and Corporate Governance
Governments and corporations have much in common – especially in terms of the way they are organized. However, there are numerous important differences, and that is reflective of the fact that their functions are very, very different. Both are subject to the will of their citizens/stakeholders, but the government is relatively insulated from the will of its people because it has the privilege of using force, funds itself through systemic forcible monetary confiscation, and is not subject to direct market and moral competition. I take it as essential that freedom of choice, in and of itself, is a concern of the utmost importance, and its preservation also results in maximum market efficacy, and will result in optimal ethical balance – provided that the press and the stakeholder remain vigilant to corporate activity. Because this is the case, it follows that laws should be implemented only when doing so helps to maximize freedom of individual choice, and what I have presented here is a comprehensive model of principle that is reflective of how governments and corporations are structured, their similarities and differences, and where their respective boundaries lie.