Editor’s note: Eric Jackson, a technology consultant and developer, is a regular contributor to Local Tech Wire. His column appears on Tuesdays.
BLACK MOUNTAIN,Since the late 19th-century, corporations have been treated as persons under the law. Well over a century of practice and precedent buttresses this convention, but it has also never quite managed to shake its critics.
The latest critic comes in the form of a documentary film entitled “The Corporation”, which poses a question: if a corporation is a person, then what sort of person is it? Their conclusion is that the modern corporation neatly fits the clinical definition of a psychopath – singularly self-interested, because of its focus on creating wealth for its shareholders, irresponsible, egotistic, manipulative, etc.
I have not seen the film, and my point here is neither to criticize nor to praise it. I understand that it is very well done and I look forward to seeing it. The reason I bring it up is that I think there is something to its indictment of the modern corporation, though probably for very different reasons than the makers of the film. To put it succinctly, I suspect that the accepted drivers of modern corporate behavior may be considered irrational, if not insane, and for a very concrete reason: that they tend to push in a direction that is inherently in conflict with the environment within which the corporation acts.
Risks of a single driver
The accepted purpose of a corporation is to create value for its shareholders, and many business theorists are adamant that this is the only purpose of the corporation. The problem is not that this is an unworthy goal, it is that there is a problem with any organization or person that tries to operate according to a single value, however worthy it might be.
The reason is simple. Operation according to a single value implies that, if it is possible to operate without regard to any other purposes or values, then that is necessarily a good thing. To take it to the extreme, if a corporation can best maximize shareholder value through slave labor, reckless dumping of toxic waste, and co-opting the political process, then it should.
I want to emphasize two critical points here.
First, this problem is a structural one, arising only from the singleness of the driving value. The problem is completely independent of whether the chosen value is morally good, bad or indifferent. A single value leads to rigidity in a system since there is nothing inherently there to balance against.
Second, difficulties arise even if the selected single purpose can be equally or even better served by accounting for other factors. Based on a comparison of Sam’s Club and Costco, I argued recently that paying higher wages can, in fact, be a better way to increase shareholder value than minimizing costs by paying the lowest wages you can get away with. To understand this, one must consider secondary and tertiary effects of policies, something people are notoriously poor at doing. While it will always be true that certain companies stand out in their ability to handle working with complexity, the majority will take the path of least resistance. If they are invited to use a single simple measuring stick, they will not only use it, but will also use it in the simplest way possible.
What about customers?
Perhaps the strongest objection, however, to isolating the increase of shareholder value as the only purpose of a corporation is that it flies in the face of reality. No corporation can really ignore the value gained by other constituencies. Customers leap to mind, for example. Even if one is inclined to ignore such stakeholders as employees and the community, to consider them to act only as constraints on what the corporation can do, it is unhelpful to business success to consider all stakeholders this way.
The fact too is that we do expect more of our corporations. We expect them to be good citizens, although we may differ in our definition of what that means. We expect them to contribute positively to the economy. If all we seek is income redistribution, taxes are more effective. All successful businesses do balance the interests of many constituencies, and this should be legitimized in our thinking about the purpose of business.
I submit that a more useful approach is to say simply that the purpose of business is to create value and then to ask how that value is to be distributed among the stakeholders, or constituencies, of the business. Another way to say this is that a business should seek to maximize the aggregate value received by all stakeholders combined.
Admittedly, this generates more questions than it does answers. Who are the constituents? How do we measure value for each? What weight does each receive? All difficult questions, all with many possible answers.
And this, in fact, is the point: to raise the questions; to allow, even invite some of the complexity. Such a framework does not exclude any of the current answers – the current orthodoxy is a special case when the weights given to all constituencies besides shareholders is zero. But it requires deliberateness, and choice, and provides a framework and a language that invites all businesses and managers to see, rather than ignore, the balance required in a complex and interesting world.
Perhaps a result of the shift in viewpoint might be to empower business actually to create much more of the value it is capable of creating, both social and economic. And perhaps the shift might even turn out to be good therapy for the psychopathic Corporation.
Ideas? Suggestions? Contact Eric at email@example.com
Eric Jackson is the founder of DeepWeave. He has built his career pioneering software solutions to particularly large and difficult problems. In 2000, Eric co-founded Ibrix, Inc. He is the inventor of the Ibrix distributed file system, a parallel file storage system able to scale in size and performance to millions of terabytes.