Documentary Review: The Corporation

The Corporation is a look at the dominant economic institution of our time. Aside from some stylistic issues (they overuse quirky camp footage), it is a well made film and agree or disagree, it will make you think and give you a better understanding of the issues involved. It has interviews with people all over the political spectrum and from a number of professions, including CEOs of corporations and notable conservative economist Milton Friedman. It gives air time to people the film disagrees with to voice their arguments.

Many people have a hard time articulating a coherent definition of a corporation. A general definition includes the following points. Corporations are legal entities, like people. They enjoy all the rights afforded under the bill of rights, by virtue of a court’s interpretation of the 14th amendment in the late 19th century (Santa Clara County vs. Southern Pacific Railroad Company). Unlike people, corporations are immortal and have only one consideration influencing their behavior, profit.

After noting that corporations are legally considered people, the documentary asks a rather obvious question: what kind of people are they? The short answer is that because of the ways the narrow and sole concern with profit shapes their decision making, corporations meet the clinical definition of psychopathic behavior. Another question flows from this answer: how is it that moral people, presumably most of them not psychopathic, can work at an institution that behaves contrary to their personal morality? That question puts the matter backwards. It is not the people that shape the institution’s behavior, but the institution that constrains human behavior. Let us examine the corporate institution to make the case.

One of the first things taught to corporate managers in business school is fiduciary duty and if my ongoing training in an MBA program is a good example, it is reinforced in almost every class you take. Fiduciary duty is your primary responsibility as a corporate manager to increase shareholder wealth. That is not a choice, advice, or consideration, but a legal obligation. Shareholders can sue top managers for destroying shareholder wealth, although they are more likely to be fired than sued. (Lawsuits would only happen in cases where it can be proven that the manager is not just incompetent, but consciously destroying shareholder wealth for personal gain.)

Clearly, there are many parties with interests in the corporation aside from shareholders; the people that have interests beyond shareholder profits are called stakeholders. Unlike shareholders, who could live anywhere in the world and may have very little contact with the corporation aside from a broker and the prospectus, stakeholders work at the corporation and/or live in the community around them. If a chemical company has a manufacturing plant in your town, then you are considered a stakeholder because you have an interest in how the chemical company affects your environment even if you don’t work there. Note that someone could be a shareholder and stakeholder. People, unlike corporations, often have conflicting goals and considerations guiding their decisions. Corporations have no inherent responsibility or interest in stakeholders. Furthermore, they are legally obligated to act on behalf of shareholders even when their actions are detrimental to stakeholders. This is a crucial observation about the institutional behavior and legal obligations of a corporation with respect to shareholders and stakeholders. I recall a radio interview some time ago with an author who published a book critical of corporate malfeasance. (I think it may have been Robert F. Kennedy’s partisan book, “Crimes Against Nature”.) To make his point, the author discussed a chemical company that knowingly dumped toxic waste that epidemiological studies linked to increases in birth defects, cancer, and autism in a nearby community. The author went on to demonstrate that there was no way the company didn’t know what they were doing based on a timeline of events. The disc jockeys were incredulous on several points. First, they doubted the certainty of the causal relationship between chemical waste and said health problems, which indicated they were ignorant of epidemiology. Second, they made the naïve claim that the people running these companies were people like us and it was implausible that they would knowingly cause these problems just to make a profit. These are common misperceptions about how corporations (and people) behave, and again, it is worth noting that the institutional constraints of a corporation determine how people behave and not vice versa.

The only constraints on corporate behavior are direct or indirect threats to corporate profit; i.e. worker intransigence, public protest and governmental regulations. Negative publicity and protest predictably lead to falling revenues, or in the case of worker protest, diminished productivity. Corporations only respond to fines or lawsuits when a cost-benefit analysis determines that it is more expensive to absorb the fines or lawsuits than to do something about them. The car industry is perhaps the most well known practitioner of cost-benefit analysis to the public because of the Ford Pinto. If an automotive company determines a potentially lethal defect in a car will cost more to recall and fix than to settle a potential lawsuit, they will allow the defect to stand with no notice to the public or revision. Incidentally, this is why corporations are agitating for “tort-reform” to put caps on punitive damages awarded in lawsuits. Without those caps, cost-benefit is much harder because punitive damages are currently calculated on the deterrent effects they will have than the scale of the crime.

Corporations are Power Systems, and like other power systems, personal choice and prerogative is marginal. (One commenter in the documentary makes the point that the institution of slavery is evil and immoral, even though an individual slaveholder may have been the nicest guy around.) The former CEO of Goodyear comments that CEOs are not free to act however they wish; the range of acceptable choice is tightly constrained by fiduciary duty and their competitors. Workers, like electricity and machinery, are costs that eat into profit. Corporate managers are legally obligated to minimize those costs. If that means sweatshops or third world exploitation then that is what they are compelled to do. If that means union busting and driving down wages in the U.S., they will do it. They will push wages down as far as possible until it threatens their profits. There is nothing conspiratorial about this; it is part of their obligations as institutions. It doesn’t matter if the CEO or board members feel that wages should be higher. During economic downturns, corporations will often cut much of their labor force to cut costs, which usually engenders much anger. Note that from the above observations, a CEO and board members could be personally against layoffs and still be compelled to layoff workers. The same applies to other controversial decisions, like outsourcing.

Capitalists argue that the profit motive is a good thing and results in efficient economic activity ultimately enhancing the wealth of society. Self interest results in common good. This argument partly rests on the assumption that those making the profits are also paying the costs. In the real world, most firms pass many of their costs to others. Economists call these passed costs “externalities.” Externalities are a symptom of profit motive where companies lower their costs by passing them on to others. For example, suppose someone gets cancer because a chemical company dumped sludge in a river they draw water from; that someone has picked up the costs the chemical company should be paying for cleaning up their waste. The CEO of the largest carpet manufacturer in the world remarks that every ecological system in the world has been in decline since the industrial revolution. In other words, without externalities, no manufacturing industry is sustainable. The current economic framework is slowly grinding down the earth’s resources, largely due to these externalities.

Another criticism of the corporation is its internal structure, which most closely resembles a strongly authoritarian dictatorship. One commenter speculates that is perhaps why many corporations forge such close ties to brutal dictators in the third world. There may be something to that, but the overriding principle is that authoritarian governments provide very profitable environments for corporations. Again, the sole consideration of profit motive leads to amoral action. Since the rise of corporate economics, corporations have done business with odious dictators and actively participated in the liquidation of millions. The documentary discusses IBM and Ford’s ties to the Nazis and United Fruits machinations in Latin America, notably Jacobo Arbenz’s overthrow in Guatemala. Other examples include, but are hardly limited to, the oil interests pushing for Mossadegh’s overthrow in Iran, various corporate interests behind Pinochet in Chile, chemical corporations and financial institutions working with drug cartels in South America, Bechtel in Cochabamba Bolivia, and on. (All of the above examples also demonstrate the influence powerful corporations have on U.S. foreign policy.)

One of the more frightening aspects of corporate behavior is social programming. This is primarily done through advertising and targets children. The crass and disturbing visual of advertising is best illustrated on screen. The effects that the constant bombardment of marketing and ubiquitous corporate messaging have on our society is unclear because it is both unprecedented and on such a scale that it is difficult to get ones arms around.

At a first approximation, corporate critics divide into two camps: those that want to dismantle the institution and replace them with economic entities that have greater considerations than profit and those that want to reform them. Corporate social responsibility (CSR) is a good example of the former. One common misimpression I have encountered personally is the conflation of criticism of the corporate structure with criticism of the entire economic system. Corporations and capitalism or other market driven economic systems are not the same and are wholly independent. You could have a market economy without corporations. One argument in the reformist camp is that not all corporations are malevolent parasites (or worse). True enough, but that isn’t the point. There have also been benevolent dictators and slaveholders, which says nothing about whether those institutions of power are legitimate or just and whether what is needed is reform or dismantling. Likewise, benevolent corporations say nothing about the legitimacy of the corporate system. Until stakeholder interests are recognized for being as important as shareholder interest, the corporation will continue to be a morally flawed institution by definition.