The Code for Corporate Responsibility:
Widening the Perspective of Management

A Paper for Robert J. Milano School of Management and Urban Policy
New School University

By Gili Chupak, May 2004
E-mail Address: gilichupak@planet-save.com

 

Executive Summary

Code for Corporate Responsibility (C4CR) is an unincorporated non-partisan grassroots democratic consensus organization started in the summer of 2002. A small group of volunteers have been able to motivate state legislators to address the issue of corporate responsibility and consider enacting A Code for Corporate Responsibility. The Code for Corporate Responsibility (The Code) attempts to change corporate behavior by targeting the managers and directors of corporations. Under The Code, directors and managers will be allowed to forgo profit for the sake of workers and the environment and could even be held liable for harms caused by the activities of their corporations.

In this paper, I have researched corporate responsibility. What is it? How do we get there? And what is blocking us from arriving at corporate responsibility? I used a whole systems perspective in order to determine the most effective strategies. I described each strategy based on its ability to impact responsible corporate behavior using the leverage point categorizations offered by the whole systems analysis. I limited my analysis of the strategies to the framework of law to accommodate the mission of C4CR.

C4CR will need to get organized before it can move forward with any of these strategies. This paper is an attempt to shift the perspective of the reader to think about corporate responsibility and social change in terms of systems. I hope this will increase the readers understanding of the issue of corporate responsibility and that the discussion of systems will spark the reader’s mind to think differently.

Table of Contents

Table of Contents *

The Code For Corporate Responsibility *

The Code *

Problem Statement *

Corporate Responsibility: A System’s Perspective *

Paradigms Paradox *

Shareholder Primacy *

Triple Bottom line Accounting *

Corporate Personhood *

Strategies *

Reclaim Democracy: Undo Corporate Personhood *

The wto & nafta *

Charter Revocation *

The Code for Corporate Responsibility – The Code *

Stakeholder Governance *

Public Pension Funds & Socially Responsible Investment *

Concluding Remarks *

Bibliography *

Articles, books and papers *

Web Sites *

The Code For Corporate Responsibility

"C4CR envisions a world in which corporations work for a just, peaceful and sustainable global society." This is a bold statement. It challenges our basic ideas about corporations. Corporations exist to maximize shareholder profit and often perpetuate injustice, war and unsustainable practices. How can they ever possibly work for a just, peaceful and sustainable global society when many believe that corporations are the perpetrators of exactly the opposite?

C4CR maintains that the answer is in state law. It is states that give life to corporations. By adding 28 words to the corporate charter, management of corporations will be able to pursue non-shareholder interest and could be held liable for harms caused by the activities of the corporation. The 28-word clause, The Code for Corporate Responsibility (The Code), would be added to all corporate charters and will read: "Directors and officers would still have a duty to make money for shareholders ‘but not at the expense of the environment, human rights, the public health or safety, the communities in which the corporation operates, or the dignity of its employees.’" A change in the state law would insert this 28-word miracle clause into the corporate charter of all corporations incorporated in that state, revolutionizing our society and fulfilling the mission of C4CR, "To transform the legal purpose of corporations to include responsibility to employees, communities and the environment."

Code for Corporate Responsibility (C4CR) was formed in the summer of 2002 as a non-partisan grassroots democratic consensus organization. It is an unincorporated association with a circle of 7 core active members and little money. With such a bold vision, an ambitious mission and a profoundly simple strategy they have been able to get The Code introduced in both the legislators of California and Minnesota. The Code is very compelling.

Much of C4CR’s accomplishments have elicited the support of those individuals and groups that are already aligned with the same vision of changing the world. Enacting such radical legislation in most, let alone all, of the states in the Union will require the support of other constituencies. Identifying potential constituencies and recruiting their support will require thinking and planning. I have thought about it and hope my insights will be the beginning of an organizational planning process.

In this paper, I evaluate a number of strategies that involve public law. I consider each strategy in terms of its overall effectiveness to change the behavior of corporations and how C4CR could pursue it. It is my hope that this will be a useful starting point for a strategic planning process.

I begin with an argument to keep the liability clause of The Code, which leads to my problem statement. Then, I present my conceptual framework and develop the criteria to evaluate each strategy. Next, I introduce corporate responsibility and discuss underlying issues involved in the shift to corporate responsibility. This leads to a discussion of alternative strategies to effect corporate responsibility. Finally, I analyze the strategies and come to a recommendation.

The Code

In it original form, The Code consisted of liability and permissive clauses that discouraged harm and encouraged stakeholder consideration. Because of objections aired during the hearings of the Judiciary Committee of the California State Legislator, the liability clause was removed when introduced in Minnesota. The thought that managers would be liable for the harm caused by the activities of the corporations was unfathomable to some legislators.

Abandoning the liability clause, I think, is a mistake for two reasons. First, without the liability the bill will not have the desired effect of discouraging harmful behavior. It essentially emasculates the bill. Without the threat of being sued for corporate harms, corporate management will have little to no motivation to pursue non-shareholder interest. With the permissive clause still in tact, management will be allowed to pursue non-shareholder interest, so long as it only slightly affects shareholder value. This will no doubt encourage some managers to look differently at their objectives, but it will change corporate behavior merely a small fraction in comparison to the threat of liability. Without the liability clause, The Code does little to manifest the grand vision of C4CR, "…a world in which corporations work for a just, peaceful and sustainable global society."

C4CR can develop arguments against the objections. The typical objection is that shareholders, activists, pretty much anyone can sue a corporation and its directors. This is especially true with certain environmental issues where exposure to harm spans a large geographic area and can affect massive amounts of people. The objection is that a corporate manager could get sued because he drove his car to work, polluting the environment. True this is a problem, and a daunting one, but it is the situation that the world faces today.

Not to despair, we humans are clever creatures. Limitations, problems and crises have always spurred innovation. There are already years of work and experience in the realm of minimizing harm in the face of scientific uncertainty (The Precautionary Principle) and internalizing costs (Market for carbon emissions and sequestration). The precautionary principle can be used to defend activities like driving to work in a vehicle that pollutes and harms the public interest. It takes into account the available alternatives. So, a corporate executive who comes to work in his SUV might face liability, but a corporate executive who drives to work in his hybrid electric vehicle will be minimizing harm. Additionally, to be even more responsible, the executive could purchase carbon credits for the amount of emissions that he produces driving. This would make the CEO a role model for responsible behavior

The change that C4CR is working towards is radical and would require an almost complete overhaul of all corporate activities. Without education and development of mechanism that can be used to assist The Code in modifying corporate behavior, The Code could create great havoc and a lot of uncertainty. This is not necessarily a desired result of The Code. In conjunction with The Code, education and promotion of such mechanisms as creating new markets and the precautionary principle are essential to a smooth transition to corporate responsibility.

The second reason why not to back down from the liability clause is that the objections or resistance to the change in corporate goals can be used to further the objective of corporate responsibility. The resistance is not something to be scared of or to be discouraged by. It is a positive indicator of the power of The Code. The resistance can be fierce and powerful and can be used to raise awareness and encourage discussion of corporate responsibility. The idea of changing the goals of corporations to include other stakeholders and the public interest created a lot of attention in the Minnesota state legislature resulting in three separate versions of the same idea in three separate bills. This is great because it gets people thinking and talking about corporate responsibility.

The concern that with the liability clause it will be very difficult if not impossible to pass The Code in all 50 states is irrelevant. C4CR is attempting to redefine the goals of corporations. Mandating behavior through public law cannot do this. Getting The Code passed will not have an effect on corporate behavior unless corporate culture has changed. Without the resistance, The Code will have no real impact and there will be no real change.

 

 

Problem Statement

Therefore, The Code’s value is not in getting it passed in all 50 states, but in raising the issue of corporate responsibility in both supporters of The Code and those who are resistant. This begs the question:

What does C4CR do with the support and resistance it generates through The Code to effect corporate responsibility?

 

Corporate Responsibility: A System’s Perspective

Although the idea of passing The Code in all 50 states is compelling, ultimately, I do not believe it will shift corporate behavior. The Code, in and of itself, is valuable because it expresses a powerful idea. The power of this idea has inspired the creation of C4CR and generated support for C4CR in pursuing The Code. As more and more support is generated it can be channeled to an array of activities that contribute to the shift towards a responsible corporate world.

In this paper I present a set of strategies that C4CR could adopt. In order to determine which strategies to recommend, I use Donella Meadows hierarchy of leverage points from her work, "Leverage Points, Places to Intervene in a System" . Leverage points are, "…places within a complex system (a corporation, an economy, a living body, a city, an ecosystem) where a small shift in one thing can produce big changes in everything." Meadows presents a hierarchy of leverage points consisting of twelve groupings (see Figure 1). I will use these groupings as I discuss each strategy. These groupings are not meant to be an authoritative hierarchy but rather, a work in progress, "…an invitation to think more broadly about the many ways there might be to get systems to change." Likewise, my paper is an invitation to think more broadly about the various ways there might be to get corporations to be responsible to non-shareholders.

 

 

Figure 1

Places to Intervene in a System

(in increasing order of effectiveness)

    12. Constants, parameters, numbers (such as subsidies, taxes, standards

    11. The sizes of buffers and other stabilizing stocks, relative to their flows.

    10. The structure of material stocks and flows (such as transport networks, population age structures)

    9. The lengths of delays, relative to the rate of system change

    8. The strength of negative feedback loops relative to the impacts they are trying to correct against

    7. The gain around driving positive feedback loops

    6. The structure of information flows (who does and does not have access to what kinds of information

    5. The rules of the system (such as incentives, punishments constraints)

    4. The power to change, add, evolve, or self-organize system structure

    3. The goals of the system

    2. The mindset or paradigm out of which the system—its goals, structure, rules, delays, parameters—arises

    1. The power to transcend paradigms

From: Meadows, Donella, "Leverage Points; Places to Intervene in a System", Sustainability Institute, 1999, p.3

 

 

 

The hierarchy of leverage points will be my guide in discussing the various issues involved in corporate responsibility. The most effective leverage point is "The power to transcend paradigms". Therefore, I begin my analysis by a discussion of two paradigms that seem in conflict. I then look at how each paradigm informs the corporate behavior through the concepts of shareholder primacy, corporate personhood and the triple bottom line. Shareholder primacy and corporate personhood arise from one paradigm and the triple bottom line from the other. The discussion of these concepts leads to various strategies to change corporate behavior and makes use of the interplay of leverage points, specifically, how each strategy employs public law to shift corporate behavior towards responsibility.

Paradigms Paradox

The number two most effective leverage point is the paradigm that informs the system. Shareholder primacy and corporate personhood are two concepts that arise from the idea of separateness. This idea is the generally accepted and is so prevalent and omnipresent that it is hard to even see it. It can be summed up by competition, survival of the fittest and war. It extends to our relationship to natural world in which we see nature as something to be conquered and subjugated for our own uses. This relationship with nature mirrors the relationship that we have towards one another, in that, we conquer one another and subjugate one another. This is the dog-eat-dog world where only the strong survive. It is a world of skepticism and cynicism where one’s profit comes at the expense of others or the environment. It is a world based on fear, a world of competition. The chasing of shareholder value maximization at all costs is a reflection of this paradigm.

The other idea is that we are all connected and that cooperation, collaboration and partnership can lead to great prosperity for all. This paradigm gives rise to living harmoniously with the natural world. It is the understanding that we are intricately interconnected and interdependent to one another and the planet. Living from this set of ideas one realizes that harming any part of the living system called Earth means harming the entirety of Earth. A gain on my part that harms another is no gain at all. It is reflected in the ideas of human rights and the Earth Charter. It is a world based on love, a world of collaboration. The vision of C4CR arises from this paradigm.

These two ideas seem conflicting but neither one is 100% correct nor 100% wrong. By using both ideas, we can see that life is a challenge with much difficulty and one must learn to be an individual. On the other hand, one is never quite independent and is reliant upon those around them for their prosperity. There is collaboration, harmony and interpenetration in all things, including the merging of these two worldviews. To be able to transcend these two seemingly conflicting ideas is to be able to use the first leverage point, "The power to transcend all paradigms."

Shareholder primacy and corporate personhood are two concepts that inform the fifth most effective leverage in a system, "The rules of the system." Triple bottom line approach is an effort to change "The structure of information flows" in the system- the sixth most effective leverage point. In the next section, I will discuss each of these concepts and how they impact other leverage points in the system.

Shareholder Primacy

Although there is nothing in a corporate charter, which mandates directors to maximize shareholder profit, from the first use of limited liability to protect investors in expeditions to the New World, corporations have been used to protect the interests of the shareholder. The notion of shareholder primacy was born with the corporation, and is enshrined by the 1919 Michigan State Supreme Court case of Dodge vs. Ford Motor Company, which so clearly stated, "A business corporation is organized and carried on primarily for the profit of the stakeholders. The powers of the directors are to be employed for that end." Shareholder primacy places shareholders as the owners of the corporation. The accounting practices of corporations address solely the interest of the shareholder and reaffirm shareholder ownership and primacy.

Shareholder primacy is further reinforced by the performance measures of corporation, the accounting statements. With the concept of shareholder primacy, corporations are able to use the stock market to direct the generated wealth of corporations to those who own the corporations, the shareholders. Employees and the environment, which contribute and are an integral part of the wealth generation equation, are servants of the corporations. Employees at least receive compensation for their service, but there is rarely compensation for the environment.

The accounting equation is rather simple and pits shareholder income against employee income. In a standard income statement we have:

PROFIT = REVENUE – COSTS

 

Profit can be divided into shareholder or capital income and retained earnings, while costs can be divided up into costs of material and employee income:

RETAINED EARNINGS + CAPITAL INCOME =

REVENUE –(COSTS OF MATERIAL + EMPLOYEE INCOME)

According to this equation employee income and shareholder income are in conflict to one another and an increase in one will cause a decrease in the other. Yet, this is not always the case. There are numerous times where this is true, but there are also times when increasing employee income will increase the overall productivity and profitability of the entire corporation increasing capital income as well. Therefore, this equation is not truth but a useful means to account for the behavior of a corporation. Behind this equation is the idea that corporations exist to maximize shareholder value. This is the third most effective leverage point on the Meadows’ hierarchy, "The goals of the system".

The accounting equation is useful because it is a tool to communicate the performance of the corporation in terms that are meaningful to the shareholders. Directors have a way of informing shareholders of the progress of the corporation, a way especially catered to the interest of the shareholders. Moreover, with the accounting equation, directors have a clear goal to pursue, the bottom line.

In the systems perspective, the accounting equation is a leverage point that defines and reaffirms "The rules of the system"-- the fifth most effective leverage point. The accounting equation arises from shareholder primacy and serves to reinforce shareholder primacy. Shareholder primacy or shareholder profit maximization defines "the goal of system"-- the third most effective leverage point. Shareholder primacy and the accounting equation reflect and reinforce one another. The leverage points work together and strengthen one another to determine the behavior of the system.

Shareholder primacy is a major obstacle to corporate responsibility and is entrenched in the generally accepted accounting methods. Although the link between shareholder primacy and the accounting methods is strong, the accounting statements are not the only considerations when determining the value of shareholders.

Shareholder value is determined by the exchange of shares on the stock market. These exchanges are based on ideas about the future value of the shares of a corporation. For example, Costco registered a 25% profit gain, but their shareholder value decreased by 4%. This is because the market determines the price of a stock based on the perceived future value of the stock. If a corporation is making sizeable profits but is behaving in a way that the market deems bad for the future value of shares then shareholder value for said corporation will decrease. Because Costco pays its workers more than Wal-Mart there is the fear that Costco’s operational budget will cut into its future profitability.

It is an idea about the future value of the shares of the corporation that determine the success of directors in managing their corporations. Profits are a great way to measure the success of a corporation yet even on Wall Street it is not the only factor that determines what is valued.

The discrepancy between shareholder value and the bottom line is an important and encouraging indication that the stock market has the ability to perceive a double bottom line. In other words, the market already looks at other factors other than the bottom line in order to determine the worth of a corporation. However, shareholder primacy remains a major obstacle to corporate responsibility. Challenging shareholder primacy is essential to bringing about corporate responsibility. As corporations move away from shareholder primacy towards a more stakeholder perspective new accounting methods will have to be employed. The triple bottom line is the beginnings of such developments.

Triple Bottom line Accounting

The triple bottom line is the idea that in doing business there are additional goals other than turning a profit. The three lines represent, financial, social and ecological considerations. Some speak of double bottom lines and quadruple bottom lines. These seem silly because there is no real second, third, fourth or fifth bottom line. These other bottom lines reflect non-monetary goals and there is no agreement as to how to measure them. Plus, if they were actually (quantifiable) bottom lines they could be added to the original bottom line to form a new single bottom line. The double bottom line is not a real thing; it is an idea or a guiding principle, one that exists in the stock market, even if it reflects the idea that paying your workers more will lead to reduction in future profits.

In Cradle to Cradle, William McDonough reports that in theory the social, ecological and financial goals are equally considered, in reality, the financial bottom line is given more consideration than the social and ecological bottom lines. This is not surprising because shareholder interests remain the primary driving force for management.

McDonough’s solution is a Triple Top Line. From the beginning the social, financial and ecological goals are given equal consideration. His experience, in design, has shown that the financial, social and ecological can complement on another achieving greater value in all three. His experience reinforces the paradigm that it is possible to live in harmony with one another and our natural environment.

Triple bottom line accounting is a response to corporations wanting to account for non-financial goals. Whatever their motivations, as long as corporations maintain shareholder primacy, there is a danger that the triple bottom line will be co-opted to maximize the financials goals of corporations. Responsible corporate behavior is often presented to corporate managers and directors as in the best interest of the corporation. Responsible behavior will enhance the profitability and ultimately benefit the financial bottom line. This might be true, but as McDonough’s experiences show, financial goals receive more consideration. The triple bottom line is not enough. Shareholder primacy must be challenged and replaced with a stakeholder perspective.

Corporate Personhood

Corporate personhood is another concept that must be challenged and discarded if corporations are to be more responsible. Corporate personhood is the idea that corporations are fictitious persons that claim the same rights and protections that citizen receive from the Constitution. In the systems perspective, corporate personhood has been created and used to limit government’s ability to control corporate behavior. The control mechanisms of systems are the seventh and eighth categories on the leverage point hierarchy, "The gain around positive feedback loops" and "The strength of negative feedback loops relative to the impacts they are trying to correct against."

By acquiring the same rights as citizen, corporations have been able to use the Constitution to grow in influence and power. The Fourteenth Amendment was intended to guarantee the access to legal due process for freed slaves. But in practice, it served to protect the legal due process of corporations as Justice Hugo Black attests to: "Of the cases in this court which the Fourteenth Amendment was applied during the first fifty years after its adoption, less than one half of one percent invoked it in protection of the Negro race, and more than fifty percent asked that it benefits be extended to corporations." The use of the Fourteenth Amendment allowed corporations to exploit the right to free speech and the right to privacy guaranteed under the First and Fourth Amendments, respectively.

The First Amendment guarantees freedom of speech, which includes the rights of citizens to lobby their representatives in government. As an individual citizen, I am capable of writing letters to my representatives, meeting with them or their aides every so often, and supporting them financially. On the other hand, corporations are able to exert a lot more influence on legislators. Through their superior financial means they are able to ensure that their interest are well represented. Although they are limited by the amount they can contribute to campaigns, corporations have their own discretion to determine how much they will spend on lobbying. Lobbying is one example of corporations taking advantage of Constitutional protections guaranteed by the First Amendment to avoid government controls.

The Fourth Amendment protects citizens from illegal search and seizure. By claiming their right to privacy corporations have been able to avoid random inspections, which severely limits the ability of government and the public to monitor activities that might be harmful to the public. Specifically, corporations have used this to avoid environmental and occupational health and safety inspections. Further, under privacy rights corporations are able to protect their financial records, which could be of interest to the public, especially in light of all the corporate accounting scandals.

In our systems model, corporate personhood erodes the government’s ability to control behavior in the system. The leverage points impacted by corporate personhood are the control mechanism of negative feedback loops and the strength of positive feedback loops. A classic example of a negative feedback loop is the thermostat. The goal of the system is to stabilize at a certain temperature, room temperature- 68°. The heater turns on when it is cold and stops when the thermostat registers the desired result- 68°. In this way the temperature of the room is controlled. Similarly, one of the functions of government is to control the market place to allow for free enterprise. The government employs many forms of control to allow for society to function. These controls allow for a balance of private and public interest and are integral to a healthy, prosperous society.

Negative feedback loops are very important in that they help control positive feedback loops. Positive feedback loops are self-reinforcing and many reward the winners and enable them to be even bigger winners. These kinds of loops are called "success to the successful". It is the role of government to weaken these loops. Progressive income tax, estate tax, and high-quality public education are examples of government controlling these kinds of positive feedback loops.

Corporate personhood has enabled corporations to use their immense financial resources to take advantage of the democratic system. Meadows explains:

"[D]emocracy was invented to put self-correcting feedback between the people and their government. The people, informed about what their elected representatives do, respond by voting those representatives in and out of office. The process depends upon the free, full, unbiased flow of information back and forth between electorate and leaders. Billions of dollars are spent by leaders to limit and bias that flow. Give the people…the power to pay off those leaders, get the channels of communication to be self-interested corporate partners themselves, and none of the necessary negative feedbacks work well. Market and democracy help each other erode."

Later she adds: "Rich people collect interest; poor people pay it. Rich people pay accountants and lean on politicians to reduce their taxes; poor people can’t. Rich people give their kids inheritances and good educations; poor kids lose out." Since corporations are people too, this makes them the richest people in the world. Thanks to corporate personhood corporations can buy government and weaken. Government, instead of balancing the ‘success to the successful’ loop, becomes just another instrument to reinforce it.

Shareholder primacy and corporate personhood are two elements of current corporate practices that inform and impact corporate behavior. They both are obstacles to corporate responsibility. Next, I will present six strategies that address these obstacles and help bring about corporate responsibility.

 

 

Strategies

 

Reclaim Democracy: Undo Corporate Personhood

In Unequal Protection, Thom Hartmann calls for citizens to lobby their local governments for legislation that will specifically challenge constitutional protection of corporations under corporate personhood. In a correspondence between attorney Daniel Brannen and Thom Hartmann, Brannen states that local legislation will be:

"…giving the Supreme Court an opportunity to correct a legally incorrect ruling [corporate personhood]. That’s the way constitutional jurisprudence develops. For a long time the Supreme Court sanctioned the concept of separate but equal facilities. Eventually, the Supreme Court overruled this concept, but it took local action to get a case before the Court to give it a chance to correct itself."

In more general systems terms this strategy changes "The structure of information flows" in the system, the sixth most effective leverage point. The idea here is to have citizens lobby their local representatives to enact legislation that protects citizens and other non-corporate groups; thereby, limiting the activities of corporations. The power here is in voting. Active citizens provide information and pressure to elected representatives to address their interests and concerns. This strategy is addressing the breakdown of democracy through the financial superiority of corporations over citizens. Through greater localized citizen’s activism government can be revived and the system balanced.

One city, town or county that passes such legislation will protect itself from harmful corporate practices. This will have a great local impact, yet national or globally the impact would be insignificant. But, if legislation started to appear in numerous places, corporation’s resistance to these laws would bring the issue of corporate personhood to the Supreme Court. This would be the opportunity to overturn corporate personhood having a tremendous impact that would change "The rules of the system" – the fifth most effective leverage point. C4CR could take part in this effort and advocate for legislation to rescind corporate personhood.

The wto & nafta

 

The next strategy would be to go after the WTO and NAFTA. WTO and NAFTA have limited the effectiveness of democratic systems by further weakening national and localized law. These treaties change "The rules of the system." These treaties were adopted, ironically, as a result of a weakened government and serve to further erode the power of government, thereby, giving corporations more power to exert their will.

Treaties, such as the WTO and NAFTA, not only make international law, but domestic law as well. According to the United States Constitution, all treaties adopted are the "law of the land". This makes the WTO and NAFTA powerful agreements that can have a profound impact on society.

Through a process called Harmonizing and the Dispute Resolution Panels (DRPs) corporations have been able to strike down numerous laws around the world—laws enacted by democratically elected governments and with the support of its citizens to protect the right of workers or the environment. The DRP’s:

"…largest effect has been to put corporations on level ground with national governments…[T]he DRPs are among the most powerful groups in the world—they can force government to repeal or change laws that were legally passed by the people of those nations, an enforce their judgments with penalties, sanctions and fines. Even with all this worldwide power, the DRPs are not democratic, not elected by the people, not controllable by voters of any nation, and they don’t meet in public."

Hence, the WTO and NAFTA, are a real and imminent threats to democracy and the power of government to provide the necessary controls on corporations.

In recognition of this immense power of treaties, the Constitution requires that treaties be ratified by two-thirds of the Senate. Since that is nearly impossible to achieve on such contentious issue as NAFTA and WTO, fast-track authority was developed. Using an, "…obscure provision of the 1974 Trade Act that gave the president the right to negotiate trade treaties and then let him submit them to Congress for a straight up-or-down vote," NAFTA and WTO became the "law of the land" in November of 1994. Once again we see corporations manipulating Constitutional law to undermine government’s ability to protect the public interest.

The draconian DRPs nullification of publicly support protective laws, in the name of harmonization, give corporations too much power posing a serious threat to the democracy and freedom of the United States and the world. It is precisely the threat of corporations having too much power that was an impetus for the American Revolution. Add to that, the circumvention of the Constitution of fast-track authority and you have the makings of a great Constitutional law case. The elevation of free trade to mythic proportions, using it as the primary criteria for settling trade disputes undermines responsibility. Thus, creating an obstacle for C4CR in achieving responsibility to workers, the community and the environment. C4CR could advocate for repealing or changing the WTO and NAFTA. This would serve to change "The rules of the system" – the fifth most effective leverage point. Amending the WTO will have a global impact; change the rules for all the 147 member nations.

Charter Revocation

Another response to the issue of corporate responsibility is the revocation of a corporation’s charter in the state incorporated. Charter revocation is a strategy, "…provoking debate and discussion about the corporate form, as well as removing the individual corporation that has a history of breaking the law." Additionally, it sends a clear message of appropriate corporate activities.

In A Citizen’s Guide to Corporate Charter Revocation Under State Law, Thomas Linzey stresses the importance of education the Attorney General and the public about charter revocation as an option to address the harm of an individual corporation, as well as, addressing future harms. The Attorney General is the public official who has the power to revoke the charter of a corporation. Educating the public and public officials that charter revocation could be used to address current and future harms strengths government ability to control corporate behavior. Revoking charters will have a chilling effect on corporate malfeasance. Directors and managers will know that certain behaviors endanger the existence of the corporation.

C4CR could target corporations for charter revocation and begin a discussion with the public and Attorney Generals. This kind of action will fall under the sixth, seventh and eighth most effective leverage points. The education of the public and the public officials is a change in the structure of information flows (6th), while the threat of revocation serves as a negative feedback loop (8th) to decrease corporate misdeeds (7th).

The Code for Corporate Responsibility – The Code

The work C4CR has done and continues to do with The Code spans five groupings of leverage points. The Code arises from the second most effective leverage point- the paradigm informing the rest of the system. The Code believes that corporations can be instruments to bring about a just, peaceful and sustainable global society. I believe this is why The Code is so compelling. Because it arises from a different paradigm, The Code sets out to change the goals of corporation, the third most effective leverage point.

As discussed earlier, The Code aims to change behavior by using the threat of liability to encourage corporation to focus on reducing public harms. This threat is a strong negative feedback loop, the eighth most effective leverage point. It serves to minimize the harm of corporate activities, lessening the gain around the positive feedback loop of corporate growth- the seventh most effective leverage point. Finally, the structure of information flows, the sixth most effective leverage point, has changed as citizens have begun to engage more actively with their representatives in state government.

Stakeholder Governance

Stakeholder governance is a direct challenge to shareholder primacy. It redefines the owners of the corporation to include non-shareholders. Examples of stakeholder governance exist in both Japan and Germany. Stakeholder governance continues to prove itself as an effective means for improving the performance of corporations. Further, an incentive to persuade shareholders to move towards stakeholder governance would not cost a lot.

In Japan, not only are employees included in stakeholder governance but customers and suppliers participate as well. "It has become standard practice among Japanese companies to exchange small amounts of stock with lenders and business partners as a gesture of goodwill, sincerity and commitment". This has created a situation in which 60 to 80 percent of all shares are generally un-traded leaving only 20-30 percent of all shares in circulation. This serves to hold management accountable to its business partners as well as the investors.

The German system of co-determination provides a variety of measures to engage employees in decision making for companies. Through legislation, companies of particular size and kind are forced to include employees on boards. Legislation, also, authorizes the representation and participation of workers in determining, "…work rules, working time (including overtime), health and safety, recruitment, transfer and dismissal of individual employees."

Even within the United States, there is evidence in support of stakeholder participation. According to a 1987 General Accounting Office of the US government, firms that included employees as owners through Employee Share Ownership Programs (ESOPs) performed better than they would have without it. ESOPs registered an increase of 52% in productivity growth rate.

Stakeholder governance sounds great, but how do we get from shareholder primacy to stakeholder governance? Shann Turnbull, an Australian entrepreneur and professor believes in creating incentives for corporations to incrementally introduce stakeholder governance. He goes into detail about how this could be done and all the various benefits of such activity. His vision is grand and he sees a stakeholder economy, "that allows 100 percent of voters to directly participate in the ownership and control in private sector wealth creation." With only a small minority of citizens able to exercise control and decision-making in most industrialized countries, a stakeholder economy would allow for greater say among citizens in the quality of services provided creating the potential for greater social and environmental equity.

Through incentives encouraging corporations to move to stakeholder governance, corporations would arrive at various levels of stakeholder governance, some with only a small percentage of their ownership and control out of the hands of investors and others with a more balanced and integrated stakeholder tapestry. C4CR could advocate for these kinds of measures.

Stakeholder governance brings other players into the governing of the corporation and signals new rules, the fifth most effective leverage point. In and of itself, stakeholder governance changes the goal of corporations to include the interest of workers, and would require a change in the flow of information, as workers get involved in governance of the corporation- the third and sixth most effective leverage points. Finally, the ability of corporations to choose the level of stakeholder involvement gives corporation the power to evolve or self-organize, the fourth most effective leverage point. Although, stakeholder governance seems to have a lot of impact, the leverage points only effect one corporation at a time.

Public Pension Funds & Socially Responsible Investment

If stakeholder governance can provide the mechanism to affect one corporation at a time then public pension funds provide an opportunity to affect many corporations at one time. Due to their enormous financial holdings, public pension funds have an impact on the behavior of many corporations. Their public nature provides an opportunity for corporate responsibility advocacy. Through asserting responsibility as shareholders public pension funds could impact the system through a variety of leverage points.

The public pension funds are some of the biggest shareholders. California Public Employees Retirement System (CalPERS) boasts $166 billion in assets; TIAA-CREF $149 billion in assets; and, The New York State and Local Retirement Systems: $115 billion in assets. Although these three are some of the larger public pension funds, ‘small’ pension funds range in the billions and can have a considerable impact. The power and force of union pension funds also have a significant influence and are being used to support worker’s rights.

Both public pension funds and union pension funds are in positions to represent non-shareholder interests. Trustees, who act as owners of the assets of public pension funds, can use their power, as shareholders, to advocate for corporate responsibility. Although their role is economic, trustees receive their authority from the public sphere and assume power through direct elections, elections by the membership, or appointment by the Governor or other executive.

CalPERS is the industry leader of public pension fund. They are the most well-known shareholder activist. CalPERS shareholder activism has primarily addressed poor performing companies proving that, "…good corporate governance leads to improved long-term performance… CalPERS cannot just be a passive holder of stock but an active share owner that takes its responsibilities seriously." With such financial might as $166 billion, when CalPERS wants something management tends to listen.

Public pension funds can be used to shift corporate behavior by introducing other social and ecological performance indicators in the fund management decision-making equation (triple bottom line accounting). In the summer of 2000, an amendment to the United Kingdom Pension Act required all United Kingdom occupational pension funds to disclose the extent that social responsibility plays in investment decisions. Legislation on the national or state level could require triple bottom line disclosure or trustees could be targeted directly to demand a triple bottom line approach.

Either way the leverage points at work serve to change the goals of the system, the third most effective leverage point, bringing in social and ecological concerns. And, the development of the involvement of shareholders in the governance of corporations constitutes a change in the structure of information flows, the sixth most effective leverage point. Since public pension funds constitute trillions of dollars of investment and thousands of corporations, pension funds are in a position to impact corporate responsibility.

 

 

Concluding Remarks

I used Donella Meadows’ hierarchy of leverage points to analyze the effectiveness of the six strategies I presented in this paper. Each strategy uniquely affects different parts of the whole system Earth and varies in the scope of its impact. For example, changing the WTO and stakeholder governance both change the rules of the system (5th). In addition to changing the rules of the system, stakeholder governance also changes the goals of the system (3rd). Within the realm of a single corporation, stakeholder governance reinforces corporate responsibility more effectively than changing the WTO. Yet, when taking into consideration that repealing the WTO impacts, not one corporation but many, it is clear that the WTO strategy would have a great impact. Not only would it impact corporations, but also it will impact 147 governments and billions of citizens. The table below lists the six strategies, identifies the leverage points the strategies push, and indicates the scope of each strategy’s impact.

 

Table 1 – Strategies: Leverage points and Scope

 

Reclaim Democracy/ Corporate Personhood*

The WTO & NAFTA

Charter Revocation*

The Code*

Stakeholder Governance

Public Pension Funds

Leverage Points

5, 6

5

6,7,8

2,3,6,7,8

3,4,5,6

3,6

Scope

National, Local**

Global

Local**, State

Local**, State

Individual

State, National & Global

*Rescinding corporate personhood will change the rules of the system having a national impact.

**The activism required in reclaiming democracy, pursuing charter revocation and promoting The Code all impact the structure of information flows at the local level.

Places to Intervene in a System

(in increasing order of effectiveness)

  1. The strength of negative feedback loops relative to the impacts they are trying to correct against

  1. The gain around driving positive feedback loops

  1. The structure of information flows (who does and does not have access to what kinds of information

  1. The rules of the system (such as incentives, punishments constraints)

  1. The power to change, add, evolve, or self-organize system structure

  1. The goals of the system

  1. The mindset or paradigm out of which the system—its goals, structure, rules, delays, parameters—arises

  1. The power to transcend paradigms

Adapted from: Meadows, Donella, "Leverage Points; Places to Intervene in a System", Sustainability Institute, 1999, p.3

There will be other considerations when deciding on which strategies to pursue. Unfortunately, the scope of my research and analysis did not allow it. Regardless, the next step for C4CR is to engage in the strategic planning process. Someone needs to plan the process itself and facilitate the meetings. The process can be an intensive afternoon, day, weekend or week-long retreat, or it could be a series of meetings. There are many things to consider when developing an organization. There are numerous resources such as books, guides and web sites to assist those engaging in a strategic planning process. I hope this paper will be of assistance when considering all the aspects of C4CR, not just the strategies for corporate responsibility.

Bibliography

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CalPERS, California Public Employees Retirement System, http://www.calpers.org/

Citizen Works - http://www.citizenworks.org/enron/corp_code.php

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