Why Corporations Behave Badly

November 14, 2012

I once worked for a company whose slogan was “Working for Shareholders”. As an employee, I thought it was a callous motto but at least they didn’t pay us lip service with such platitudes as “Our employees are our greatest assets” or “Customer satisfaction is our number one goal.”

In fact, as a public company they were only restating their legal obligations. Any company’s foremost obligation is to its shareholders. The directors and managers are assigned the task of creating value for them by law. So, does this mean that companies have the obligation to cut corners, pollute and take advantage of their employees if it creates more “value” for the shareholders?

Of course, companies also have the obligation to comply with other laws which limit those bad acts. But these are the regulations that bring out the free market radicals. According to this philosophy, the free market will punish those companies that pollute, produce dangerous or shoddy products or abuse their employees. Unfortunately for them, history has not supported this approach. Unfettered corporate greed has created some bad consequences for some actors no doubt, thinking back (not so very far) to several market crashes. But workers, customers and society usually pay the price.

So it’s this requirement to create value for the owners that makes corporations resist new health care mandates, environmental regulation, safety precautions, employment rules and all those other “nanny state” traits – and which is exactly why we need them. Prior to the rise of unions and wage and hour laws, companies used to hire children, make them work 12-15 hour days under dangerous and unhealthy conditions and pay them pennies. Adults weren’t treated much better. Companies who did not take that approach had a hard time competing (and employees didn’t have better choices), so the market wasn’t going to correct them. It took laws to make them stop, despite the efforts of union busting Pinkerton agents.  Unions have lost relevance to most of us, but we should remember that they did us all a great service once upon a time – that is unless you are only an investor and have never worked for a living.

The loudest corporate defiance since the election has been about Obamacare, where a few companies (e.g., Papa John’s Pizza and Applebee’s) have already announced that they will have to fire employees instead of provide them with the required health insurance (or pay the measly fine). If this is really what they need to do to create value for their shareholders, then this is what their corporate charter requires. So far, it doesn’t seem to be affecting Domino’s, Denny’s and other large restaurant chains. And for those of us who would rather frequent a locally-owned restaurant, the 50 employee threshold on the health insurance requirement will actually make them more competitive.

Environmental regulation is often cited as a reason that Democrats are bad for business. Making companies take expensive steps to keep waste from polluting the earth is in contradiction to creating the most wealth for shareholders. But, some companies have learned that creating less waste decreases production costs thereby increasing net profits – too bad finding the ways to decrease waste wasn’t important until waste disposal became a legal issue. And, it took a lot of damage to the earth before most people became aware that something needed to be done about stewardship to our planet.

The recent announcement by Murray Energy that the Obama administration’s “war on coal” is forcing that company to lay off employees misses the bigger picture – the market impact that cheaper, cleaner natural gas has had on the coal industry and the fact that the Clean Air Act was signed into law by Richard Nixon. The first rules regulating mercury emissions from coal fired power plants were issued in the 1960s, which led to development of far more power stations fueled by alternatives to coal. This has been coming for fifty years. It appears Charles E. Murray was literally banking on Romney bailing out his already failing industry. Maybe we should appreciate that Murray Energy has hung on so long under these market conditions.

And the list goes on with other regulatory categories. The tension is built into our corporate code when “value” is only interpreted to mean monetary wealth. However, if shareholders accept that “value” includes social responsibility, corporations don’t have to behave badly to create value.

Cindy Wolf is a Colorado lawyer with more than 25 years experience representing large and small domestic and multinational companies. Her expertise is in corporate law and commercial contracting, with an emphasis on technology licensing and the Internet. She can be reached at cwolf.esq@gmail.com.

This publication is provided for informational purposes only. It does not constitute legal advice. There is no implicit guarantee that this information is correct, complete, or up to date. This publication is not intended to and does not create an attorney-client relationship between you and the author.