Profit Over People

Holovat 1

Profit over People

The Corporate Greed Motive as the Case for CSR

by

Jimmy R. Holovat

ZicklinSchool of Business: MBA Industrial/Organizational Psychology

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Professor: Dr. Joel Lefkowitz

BaruchCollege

PSY9786: Ethical and Legal Issues in Industrial/Organizational Psychology

Submitted: 13 December 2006

Outline

Thesis:The corporate form of business organization is fundamentally flawed due to the motivation to pursue profit above all else.

1.Introduction to the corporation

1.1.The corporate form of business

1.1.1.Proportion and power

1.1.2.Pervasive and invasive

1.1.3.The wage gap

1.1.4.Corporation as an organization

1.2.Fundamental assumptions

1.2.1.Human morality

1.2.2.Ethics and business

1.2.3.False assumptions

1.3.Corporation as a person

1.3.1.The FourteenthAmendment

2.The problem

2.1.The corporate paradox

2.2.The profit motive

2.2.1.Thesis statement

2.2.2.Human motivation

2.2.3.The socialization of evildoing

2.3.The greed flaw

2.3.1.The self-destructing system

3.The causes

3.1.The “bottom line”

3.2.Liability and accountability

3.2.1.The legal mandate

3.2.2.Dodge v. Ford

3.2.3.Socially responsible outlaws

3.2.4.Immoral morality

3.3.The externalizing machine

3.4. The corporate “personality”

3.4.1.The harm of globalization

3.5.The shareholders

3.6.The CEO

3.7.Who is to blame?

4.The evidence

4.1.Monsanto

4.1.1.Terminator seed technology

4.2.Initiative Media

4.2.1.Targeting children in the U.S.

5.The problem unchecked

5.1.The “pornographication” of culture

6.Conclusions

6.1.The solutions

6.1.1.Brainstorming

6.1.2.Recent progress

6.1.3.The forces of corruption

6.2.CSR: Towards a better system

6.2.1.Legitimacy

6.2.2.“Reputational capital”

6.2.3.The issue life-cycle

6.2.4.Reflection

6.2.5.Conclusion

6.2.6.Hope for the future

Holovat 1

The term “corporation[1]” conjures up images of billionaires and boardrooms, stock markets and suit coats, and profits and power. Despite its immense public presence, however, the corporate form of business is not the most prevalent in the United States. Marianne M Jennings cites the 1997 U.S. economic census figures that “indicate that there are 1.6 million partnerships in the United States but 3.6 million corporations” (855). Robert Longley gives the missing part of the equation; “America has over 15.7 million one-person businesses accounting for over $643 billion in receipts annually.”[2] Thus, partnerships and sole proprietorships combined outnumber corporations in the US by 13.7 million. According to this data, corporations only make up about 17.2% of all US businesses. Given this fact, it is quite shocking when Jennings points out, “Corporations earn nearly 90 percent of all business profits” (855). This suggests that although the corporate form is the minority form of businesses in this country, it enjoys a majority of the economic power.

This narrow focus of power is the reason why corporations are so pervasive and invasive in our everyday lives. Joel Bakan insists, “Today corporations govern our lives. They determine what we eat, what we watch, what we wear, where we work, and what we do. We are inescapably surrounded by their culture, iconography, and ideology” (5). Since corporations wield such power, it is only logical to evaluate their impact on our world.

Several disturbing economic trends may be partly due to the increase in the power and scope of the corporate form of business over the last three decades. One such trend is the ever- widening wage gap. Deborah Solomon argues, “The U.S. economy is growing, but the poor and especially the middle class aren’t benefiting. The rich are” (A1). As evidence, she cites:

Since the last recession ended in 2001, the U.S. economy has grown nearly 15%, after inflation. Corporate profits have skyrocketed and the stock market has rebounded. Yet many Americans haven’t seen paychecks grow fast enough to keep up with rising prices. While incomes at the top rose, adjusted for inflation, the median household income fell for five years in a row before turning up in 2005 (A9).

If left unchecked, the wage gap may soon become a wage canyon. Should one honor the ideals of the Protestant work ethic and justify the fact that the richest Americans deserve to be treated with deference (assuming that one agrees that hard work is what resulted in those individuals becoming rich in the first place) or, as a society, should we strive to pull up those on the bottom rungs of the socioeconomic ladder by engaging in a “Robin Hood” mentality? Is it fair that those with more than enough means to facilitate a comfortable living continue to prosper and gain while those who struggle to afford the simple cost of living on a minimum wage salary find it more difficult to simply keep from becoming inured to a standard of living characterized by abject penury?

One economic indicator of the widening wage discrepancy between the rich and the poor is the wage gap between CEOs and the average worker. David Wessel reports that from 1940 to 1970, worker salary kept pace with CEO pay. One of the reasons, Wessel supports, is that businesses were fearful of labor unrest and the consequences of an organized assault from discontented workers; “For a while, fear topped greed” (A2). However, once the fear of organized opposition faded in the 1980s, CEO pay “skyrocketed” above worker salary as “Greed took over” (A2).

The CEO/worker salary gap has indeed skyrocketed and is continuing to do so. Joan S. Lublin and Scott Thurm found that since 1993, average CEO pay for large companies has quadrupled. More specifically, Lublin and Thurm note, “…the average CEO pay was 369 times as much as the average earned by a worker last year [2005], compared with 131 times in 1993 and 36 times in 1976. Meanwhile, the average U.S. paycheck has barely kept ahead of inflation in recent years” (A1). As for why CEO pay has increased so dramatically, Lublin and Thurm hypothesize that “boards, stocked as they often are with CEOs and retired CEOs, rarely need to be sold on pay packages” (A16).

In addition to this apparent conflict of interest and nepotism, Alan Murray adds that recent regulatory reforms and the rise in the number of CEO firings due to ethical breaches have actually worked to increase CEO pay. Incumbent CEOs see high risks inherent in succeeding former CEOs who have been laid off. Consequently, they often negotiate more advantageous employment contracts. Murray observes that these contracts “often contain hidden time bombs waiting to explode when an executive retires, or is fired, or sells a company” (Time to Tear up CEO Employment Contracts,A2). It is only natural for one to want to secure oneself against the risk of future unemployment. However, one must wonder whether the already large salary of the CEO is not compensation enough to last above and beyond that CEO’s tenure at any one corporation. Murray announces that CEOs “don’t need a safety net. Save that for the workers who often end up losing their jobs when these deals occur” (Time to Tear up CEO Employment Contracts,A2).

It is important to realize that a corporation is one form of an organization, and as such, it is composed of human beings. This would seem obvious, but the fact lends credence to certain fundamental assumptions that are necessary for the basis of this discussion. The first assumption I make is that people, as human beings, are fundamentally moral and ethical individuals at heart. Linda K Trevino and Katherine A Nelson offer, “There is much evidence to suggest that people act for altruistic or moral purposes that seem to have little to do with cost/benefit analysis” (24). Trevino and Nelson further argue that when discussing issues of ethics and business, one must make “an important assumption—that, as human beings and members of society, all of us are hardwired with a moral and ethical dimension as well as self-interested concerns” (25). Donna J Wood,Jeanne M Logsdon, Patsy G Lewellyn, and Kim Davenportcarry this assumption to a logical conclusion; “…most managers do not want to live their lives as opportunists, manipulators, thieves, or agents of environmental destruction…They want their lives and their efforts to count for something important…” (9).

Of course, the assumption that humans are fundamentally good is not a universally accepted maxim. There are individuals who argue quite the opposite; humans are fundamentally an animal of instinct and the natural state of humanity devoid of any social or governmental structure is chaos. Not the least known proponent of such an assumption is Thomas Hobbes:

Whatsoever therefore is consequent to a time of war, where every man is enemy to every man, the same consequent to the time wherein men live without other security than what their own strength and their own invention shall furnish them withal. In such condition there is no place for industry, because the fruit thereof is uncertain: and consequently no culture of the earth; no navigation, nor use of the commodities that may be imported by sea; no commodious building; no instruments of moving and removing such things as require much force; no knowledge of the face of the earth; no account of time; no arts; no letters; no society; and which is worst of all, continual fear, and danger of violent death; and the life of man, solitary, poor, nasty, brutish, and short (Hobbes, 1651, par 13.9).

Notwithstanding Hobbes’ theory that human beings are fundamentally driven by and primarily focused on fear, greed, and aggression and other theories tantamount to the same, I pursue the rest of this discussion by ascribing to the theory that humans are fundamentally ethical and moral individuals who experience the world through significant interpersonal relationships that require some degree or understanding of empathy and other associated values and morals.

The second assumption I must make is that ethics can have some role in the discipline of business. Evidence that supports this assumption comes from an article written by Daryl G. Hatano, which reveals four different theoretical schools that attempt to explain the extent to which ethics should be a part of business. Only one of the ideological perspectives (“inherence”) believes that ethics should be a completely separate topic from business. Two of the theoretical perspectives (“enlightened self-interest and “invisible hand”) admit that ethics has some place in the practice of business. The “social responsibility” school of thought shows the greatest support for the role of ethics in business, expounding the belief that the primary role of business is to benefit the greater society. The recent scandals that rocked Wall Street in 2002 lent credence to and renewed fervor in the importance of ethics in business.

Recently, the debate concerning the role of ethics in business has evolved into a battle between two seemingly opposing theoretical camps: Milton Friedman and proponents of laissez-faire capitalism vs. corporate social responsibility (CSR) and proponents of a multi-stakeholder framework. As the name would imply, CSR is concerned with the ethical and moral dimensions of business, particularly in the area of societal consequences. However, Friedman’s camp makes no compelling argument concerning the integral role of ethics in business[3]. Rather, the main concern of the Friedman school is a focus on the bottom line as a way to maximize shareholder profits. It is important to reiterate this point: Friedman’s theory does not stipulate that business should be completely devoid of ethics, (in fact, it should abide by all legal standards and be moral in this regard) but that the singular focus of businesses should be on the bottom line. Thus, if ethics can somehow be tied to the bottom line, it may enter the picture, even for a proponent of Friedman’s theory. As such, my original assumption that ethics has some place in a discussion of the discipline of business still holds water and the argument that should be the focus of the rest of this paper is the extent to which ethics should be a part of business theory.

At play in the argument concerning ethics and business is the battle between the pursuit of ever-increasing profits for stockholders (shareholders) and the pursuit of the protection of the welfare of society at large (stakeholders). These are seemingly contradictory notions, but they do not have to be as oppositional as is commonly perceived. Phred Dvorak expounds on the false assumption of the contradictory nature of ethics and business, “Christian managers say there’s no inherent contradiction between running a company—even a public one with its commitment to maximize shareholder value—and behaving spiritually. And lawyers say it’s generally not a problem to run a public company on faith-based principles, as long as the executives make those principles clear to shareholders…” (B1). In fact, the existence of socially responsible investing (SRI) firms reveals that stockholders themselves may find ethics to be an important part of what company they wish to profit from and support. Innovest, one such SRI firm, touts its purpose as “analyzing companies' performance on environmental, social, and strategic governance issues, with a particular focus on their impact on competitiveness, profitability, and share price performance.”

Furthermore, the assumption that good ethics is not correlated with good business (some even argue that good ethics is antithetical to good business) may also be false. This is still a controversial issue, however, as it is difficult to define ethics and to categorize companies along an amorphous ethical continuum. Financial analysts still do not agree on perfect ways to compare different corporations based on seemingly objectifiable differences such as financial earnings reports, thus it is no surprise that there is such heated debate concerning the rankings of corporations based upon the seemingly more subjective and intangible arena of social performance.

Compounded with this is the problem of supply chain management. Businesses, particularly larger corporations, do not function independent of other businesses. How far deep into the supply chain can a corporation be held responsible and ethically accountable? For example, has the paper on which this report been printed come from a tree that was part of a clear cutting in the Brazilian Amazon that has contributed to global warming and a loss of biodiversity? If such were the case, whose responsibility would it be? Whom do we hold accountable? Am I culpable? There are many levels: the end user, the office supply store, the distributor, the manufacturer, the supplier, the logging company, the entire supply chain of the machinery used to clear cut the forest, etc. How does one pinpoint the individual(s) whom perpetrated the ethical breach and how concentrated or diffused should the culpability be? Thus, though it may seem like an easy task to ascribe a “good” or “bad” ethical standing to a business based upon social performance, in practice, it is often complex and uncertain.

So, is good ethics good business? Trevino and Nelson admit, “We don’t have a perfect answer to this question” (40). However, they cite evidence suggesting “a positive relationship between corporate social responsibility and financial performance, especially when reputation-based measures of corporate social performance and accounting-based measures of financial performance were used” (41). (Their evidence is in the form of a correlation, however, and, as such, cannot imply a direct causal link.) Trevino and Nelson further offer that “companies with good corporate governance structures and policies (such as strong shareholder rights provisions) have higher profitability, sales, growth, market values, and higher stock prices” (41). They go on to present even more research that reveals a reciprocal relationship between social responsibility and financial performance “meaning that social responsibility leads to increased financial performance AND financial performance provides firms with more slack resources that they can then devote to social performance” (41). Such a reciprocal relationship offers evidence that CSR can not only be financially beneficial, but also economically sustainable in the long term. This is an important and dramatic revelation and more research should be conducted to further understanding in this area.

It may be obvious that a corporation is a social system made up of people. However, what is not so obvious is the fact that a corporation is, in and of itself, a legal person. How did our legal system come to this astounding conclusion? An 1886 Supreme Court ruling that applied the freedoms and protections guaranteed by the then newly created Fourteenth Amendment to the United States Constitution to the corporate form of business set the legal precedence that was necessary to grant the corporate form of business its legal status of a person. Virginia Rasmussen and Mary Zepernick argue, “Corporate ‘persons’ used this illegitimate status to gain Bill of Rights freedoms and protections, entering our electoral and governing processes well before indigenous peoples, women, African Americans, and other persons of color, well before most people without property” (16). In her interview for the documentary film, The Corporation, Zepernick comments that this was “particularly grotesque” in that the purpose of the Fourteenth Amendment was to preserve the rights of the slaves who were newly freed at the end of the Civil War era. She goes on to reveal that “between 1890 and 1910, there were 307 cases brought before the court under the FourteenthAmendment; 288 of these brought by corporations, 19 by African Americans.” This reveals an ironic paradox. In pursuing this decision, the corporation has succeeded in marginalizing those whom the Fourteenth Amendment was supposed to protect and usurped that protection for its own purposes.