"In the long run, there's no capitalism without conscience."
--President Bush





Capitalism With Conscience

by Robert Hinkley

In his recent speech to Wall Street, President Bush stated, "In the long run, there's no capitalism without conscience." There is little doubt as to the truth of this assertion, but where is the conscience going to come from that is necessary to assure capitalism's future?

Today's capitalism is driven by large corporations. In addition to sometimes defrauding their own shareholders, big corporations regularly despoil the environment, violate human rights and the dignity of their employees, endanger the public health and safety with dangerous or untested products and damage the welfare of the communities in which they operate. These actions are more illustrative of an absence of conscience than its presence.

President Bush has said that the barrel just has a few bad apples whose shenanigans have called into question the trustworthiness of everyone else. He wants to fix this by forming corporate SWAT teams at the SEC and threatening CEOs and other corporate bigwigs with stiffer criminal penalties for their misbehavior. We are deluding ourselves if we think that this is going to bring (or restore) conscience to capitalism.

Corporations are managed by groups of people acting collectively. Frequently, these people act on the advice of experts from the legal, accounting and banking worlds. Still other groups carry out the plans of the people making the decisions. Everyone knows that pinning criminal responsibility on individuals in this situation is almost impossible. Corporate managers are not going to change their behavior out of fear of prison terms they know they will never have to face.

Despite the president's assertion to the contrary, there is something wrong with capitalism. What's wrong with it is that its engine, the corporation, has no conscience itself.

Under the corporate law, the corporation is dedicated to the unbridled pursuit of profit. The law in all fifty states says that directors must use their best efforts to maximize profits for shareholders. Directors may be sued if they violate this duty. Everybody who works for a corporation knows it is their job to keep this from happening by helping the company make money.

There is no element of conscience in this duty. Maximizing profits is pure self-interest. This dedication to the pursuit of self-interest is the reason corporations act without conscience and, ultimately, why capitalism is largely without conscience.

For there to be capitalism with conscience, we must change the corporation to promote respect for the environment and other elements of the public interest. This change must promote socially responsible corporate behavior throughout the corporation irrespective of who is the CEO or whether he or she is a good apple or a bad one.

Capitalism with conscience requires that all managers understand the pursuit of profits should not result in the destruction of the public interest. For this to be achieved, the duty of directors must be changed. I propose we do this by changing the corporate law to include a legally enforceable Code for Corporate Citizenship. In its most succinct form, the Code would simply add the following 24 words to the duty of directors to make money:

but not at the expense of the environment, human rights, the public health or safety, the welfare of communities or the dignity of employees.

The effect of the Code will be to create new duties for directors to protect the environment, human rights, the public health and safety, the welfare of our communities and the dignity of employees. These new duties should be enforceable in much the same way that shareholders are now able to hold managers responsible for not acting in the best interest of the shareholders- -by civil lawsuits brought by or on behalf of the people whose interest the corporation damages.

The Code will require directors to pursue corporate profits only in ways that do not damage the environment or any of the four other elements of the public interest it protects. In a sense, it will free directors and other people in the corporation to follow their conscience (sometimes sacrificing profits to protect the public interest), without fear of being sued by shareholders.

The Code for Corporate Citizenship will improve the profit motive not eliminate it. It will allow capitalism to evolve to its next logical step by providing what the president has correctly stated it cannot survive without--conscience.

Robert C. Hinkley is a corporate lawyer and former partner in the New York law firm Skadden, Arps, Slate, Meagher & Flom LLP. He now resides in Brooklin, Maine. His e-mail address is rchinkley@media2.hypernet.com