Taming the Corporate Beast

For as long as there have been corporations citizens have fought to
limit their power and make them more accountable to the public. Two
of the most innovative strategies to emerge in recent years — the
corporate charter movement and social auditing — are encouraging,
but they also demonstrate just how tough it can be to rein in the
corporate beast.

Corporate charters. This movement, led by environmentalist and
labor activist Richard Grossman and his Provincetown,
Massachusetts-based Program on Corporations, Law and Democracy,
seeks to embolden citizens and lawmakers to toughen — or rather
enforce — state corporate charter laws. These laws, which have
been on the books for decades, give legislatures the power to limit
corporations’ activities and revoke their right to do business in
their state.

Grossman acknowledges that, in an era of intense interstate
competition for jobs and corporate tax revenues, few state
governments are likely to pull the plug on any major employer.
Still, he says, the question of who really governs the country —
citizens or corporations — must be addressed. ‘By what authority
are they participating in elections, by what authority are they
lobbying politically, by what authority are they in our schools?’
he asks. ‘We’ve been engaging people all over the country in these
questions.’ And only when citizens begin looking seriously at
reforming corporate charters will companies sit up and take
notice.

To show how powerful these tools can be, Grossman points to the way
some corporations have persuaded legislatures to write additional
protections into state charter regulations to shield them from
hostile takeovers. These particular charter changes-, known as
constituency statutes, can now be used in 29 states to protect
corporate directors from shareholder lawsuits if they make a
decision — from mergers and acquisitions to plant closings — that
may be beneficial to workers or the local community, but not
necessarily to the pocketbooks of stockholders. In a 1987
Pennsylvania case, for instance, the court ruled that Commonwealth
National Financial Corporation could approve a merger with Mellon
Bank even though the bid was lower than that of its other suitor,
Meridian Bancorp. Citing the state’s constituency statute, the
court ruled that the board was not shirking its fiduciary duties
because its employees would have greater opportunities with Mellon
than with Meridian.

This may not represent a radical transfer of power — citizens
still don’t have the right to sue if their needs are ignored —
but, as Marjorie Kelly, editor and publisher of Business Ethics,
has written, strengthening constituency statutes could usher in ‘a
kind of Copernican revolution . [in which] stockholders are no
longer the exact center of the corporate solar system.’

What would such a democratic capitalism look like? Grossman says
its effects would be dramatic. ‘The whole question of what is
private and public in terms of property and decision-making would
change,’ he explains. ‘Technology and product decision-making would
have to be a much more public process.’

Social audits. Not all corporations, of course, are slaves to the
bottom line. In fact, some companies are so concerned about their
impact on the world that they voluntarily undergo comprehensive
evaluations of their operations by independent auditors. These
audits, based primarily on social and environmental factors, were
popularized three years ago by Ben & Jerry’s and The Body Shop
in response to criticism of their reputations as socially
responsible companies. Now, a number of mainstream companies —
including every major accounting firm — are embracing the concept
as well.

The Body Shop’s 1995 audit, which was performed by Kirk Hanson,
longtime director of the Business Enterprise Trust at Stanford
University, demonstrated both the promise and the perils of this
trend. Hanson measured the Body Shop’s performance using the
so-called ‘social indicator’ method pioneered by ethical investment
firms. This method gives greater weight to a company’s policies on
popular political issues (i.e. animal testing, human rights, energy
conservation) than it gives to its performance in areas directly
affecting its stakeholders (such as employee relations, corporate
governance, product quality). Hanson gave the company low marks in
the more traditional areas of social responsibility — wages,
working conditions, product quality, management accountability —
while praising its environmental efforts and publicity campaigns
about social issues. ‘Overall,’ he wrote, ‘The Body Shop
demonstrates greater social responsibility and better social
performance than most companies of its size.’

In response to Hanson’s report, Curtis Verschoor, an accounting
professor at DePaul University and leading advocate of social
auditing, argues that Hanson’s audit was seriously flawed and
should not be looked upon as a standard for the future. As
Verschoor explained in a monograph he co-authored with journalist
Jon Entine,’It appears that Hanson puts aside his own concerns
about its honesty and ethics to embrace Body Shop’s contentions
that it should be judged by its intentions and the decibel level of
its social campaigns, not its social performance.’

More thorough and subjective social audit models do exist. Among
the most popular are the social balance sheet, which integrates
financial and social reporting by assigning a dollar value to a
company’s social impact, and benchmarking by objectives, which
compares actual company performance with stated objectives. These
methods are the primary tools of the accounting firms that are so
aggressively pushing corporate social auditing into the mainstream
business world. They’re not perfect, Verschoor admits, and in the
absence of credible, recognized standards of ethical behavior, they
will inevitably be inconclusive. Still, it’s a positive step. ‘Even
if these audits are only done by a few people on a voluntary
basis,’ he says, ‘it will lead the way to more socially responsible
behavior on the part of corporations.

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