How Corporate Law Inhibits Social Responsibility The Fundamental Principles of PROUT The Six Factors for Social Progress PROUT Compared with Capitalism and Communism -- How Corporate Law Inhibits Social Responsibility A corporate attorney proposes a ‘Code for Corporate Responsibility’ in USA state law by Robert Hinkley After 23 years as a corporate securities attorney-advising large corporations on securities offerings and mergers and acquisitions - I left my position as partner at Skadden, Arps, Slate, Meagher & Flom because I was disturbed by the game. I realized that the many social ills created by corporations stem directly from corporate law. It dawned on me that the law, in its current form, actually inhibits executives and corporations from being socially responsible. So in June 2000 I quit my job and decided to devote the next phase of my life to making people aware of this problem. My goal is to build consensus to change the law so it encourages good corporate citizenship, rather than inhibiting it. The provision in the law I am talking about is the one that says the purpose of the corporation is simply to make money for shareholders. Every jurisdiction where corporations operate has its own law of corporate governance. But remarkably, the corporate design contained in hundreds of corporate laws throughout the world is nearly identical. That design creates a governing body to manage the corporation-usually a board of directors-and dictates the duties of those directors. In short, the law creates corporate purpose. That purpose is to operate in the interests of shareholders. In Maine, where I live, this duty of directors is in Section 716 of the Business Corporation Act, which reads: ...the directors and officers of a corporation shall exercise their powers and discharge their duties with a view to the interests of the corporation and of the shareholders.... Although the wording of this provision differs from jurisdiction to jurisdiction, its legal effect does not. This provision is the motive behind all corporate actions everywhere in the world. Distilled to its essence, it says that the people who run corporations have a legal duty to shareholders, and that duty is to make money. Failing this duty can leave directors and officers open to being sued by shareholders. Section 716 dedicates the corporation to the pursuit of its own self-interest (and equates corporate self-interest with shareholder self-interest). No mention is made of responsibility to the public interest. Section 716 and its counterparts explain two things. First, they explain why corporations find social issues like human rights irrelevant--because they fall outside the corporation’s legal mandate. Second, these provisions explain why executives behave differently than they might as individual citizens, because the law says their only obligation in business is to make money. This design has the unfortunate side effect of largely eliminating personal responsibility. Because corporate law generally regulates corporations but not executives, it leads executives to become inattentive to justice. They demand their subordinates "make the numbers," and pay little attention to how they do so. Directors and officers know their jobs, salaries, bonuses, and stock options depend on delivering profits for shareholders. Companies believe their duty to the public interest consists of complying with the law. Obeying the law is simply a cost. Since it interferes with making money, it must be minimized-using devices like lobbying, legal hair-splitting, and jurisdiction shopping. Directors and officers give little thought to the fact that these activities may damage the public interest. Lower-level employees know their livelihoods depend upon satisfying superiors’ demands to make money. They have no incentive to offer ideas that would advance the public interest unless they increase profits. Projects that would serve the public interest--but at a financial cost to the corporation--are considered naive. Corporate law thus casts ethical and social concerns as irrelevant, or as stumbling blocks to the corporation’s fundamental mandate. That’s the effect the law has inside the corporation. Outside the corporation the effect is more devastating. It is the law that leads corporations to actively disregard harm to all interests other than those of shareholders. When toxic chemicals are spilled, forests destroyed, employees left in poverty, or communities devastated through plant shutdowns, corporations view these as unimportant side effects outside their area of concern. But when the company’s stock price dips, that’s a disaster. The reason is that, in our legal framework, a low stock price leaves a company vulnerable to takeover or means the CEO’s job could be at risk. In the end, the natural result is that corporate bottom line goes up, and the state of the public good goes down. This is called privatizing the gain and externalizing the cost. This system design helps explain why the war against corporate abuse is being lost, despite decades of effort by thousands of organizations. Until now, tactics used to confront corporations have focused on where and how much companies should be allowed to damage the public interest, rather than eliminating the reason they do it. When public interest groups protest a new power plant, mercury poisoning, or a new big box store, the groups don’t examine the corporations’ motives. They only seek to limit where damage is created (not in our back yard) and how much damage is created (a little less, please). But the where-and-how-much approach is reactive, not proactive. Even when corporations are defeated in particular battles, they go on the next day, in other ways and other places, to pursue their own private interests at the expense of the public. I believe the battle against corporate abuse should be conducted in a more holistic way. We must inquire why corporations behave as they do, and look for a way to change these underlying motives. Once we have arrived at a viable systemic solution, we should then dictate the terms of engagement to corporations, not let them dictate terms to us. We must remember that corporations were invented to serve mankind. Mankind was not invented to serve corporations. Corporations in many ways have the rights of citizens, and those rights should be balanced by obligations to the public. Many activists cast the fundamental issue as one of "corporate greed," but that’s off the mark. Corporations are incapable of a human emotion like greed. They are artificial beings created by law. The real question is why corporations behave as if they are greedy. The answer is the design of corporate law. We can change that design. We can make corporations more responsible to the public good by amending the law that says the pursuit of profit takes precedence over the public interest. I believe this can best be achieved by changing corporate law to make directors personally responsible for harms done. Let me give you a sense of how director responsibility works in the current system. Under federal securities laws, directors are held personally liable for false and misleading statements made in prospectuses used to sell securities. If a corporate prospectus contains a material falsehood and investors suffer damage as a result, investors can sue each director personally to recover the damage. Believe me, this provision grabs the attention of company directors. They spend hours reviewing drafts of a prospectus to ensure it complies with the law. Similarly, everyone who works on the prospectus knows that directors’ personal wealth is at stake, so they too take great care with accuracy. That’s an example of how corporate behaviour changes when directors are held personally responsible. Everyone in the corporation improves their game to meet the challenge. The law has what we call an in terrorem effect. Since the potential penalties are so severe, directors err on the side of caution. While this has not eliminated securities fraud, it has over the years reduced it to an infinitesimal percentage of the total capital raised. I propose that corporate law be changed in a similar manner--to make individuals responsible for seeing that the pursuit of profit does not damage the public interest. To pave the way for such a change, we must challenge the myth that making profits and protecting the public interest are mutually exclusive goals. The same was once said about profits and product quality, before Japanese manufacturers taught us otherwise. If we force companies to respect the public interest while they make money, business people will figure out how to do both. The specific change I suggest is simple: add 26 words to corporate law and thus create what I call the "Code for Corporate Responsibility." In Maine, this would mean amending section 716 to add the following clause. 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 safety, the communities in which the corporation operates or the dignity of its employees. This simple amendment would effect a dramatic change in the underlying mechanism that drives corporate malfeasance. It would make individuals responsible for the damage companies cause to the public interest, and would be enforced much the same way as securities laws are now. Negligent failure to abide by the code would result in the corporation, its directors, and its officers being liable for the full amount of the damage they cause. In addition to civil liability, the attorney general would have the right to criminally prosecute intentional acts. Injunctive relief-which stops specific behaviours while the legal process proceeds-would also be available. Compliance would be in the self-interest of both individuals and the company. No one wants to see personal assets subject to a lawsuit. Such a prospect would surely temper corporate managers’ willingness to make money at the expense of the public interest. Similarly, investors tend to shy away from companies with contingent liabilities, so companies that severely or repeatedly violate the Code for Corporate Responsibility might see their stock price fall or their access to capital dry up. Many would say such a code could never be enacted. But they’re mistaken. I take heart from a 2000 Business Week/Harris Poll that asked Americans which of the following two propositions they support more strongly: Corporations should have only one purpose--to make the most profit for their shareholders--and pursuit of that goal will be best for America in the long run. Or Corporations should have more than one purpose. They also owe something to their workers and the communities in which they operate, and they should sometimes sacrifice some profit for the sake of making things better for their workers and communities. An overwhelming 95 percent of Americans chose the second proposition. Clearly, this finding tells us that our fate is not sealed. When 95 percent of the public supports a proposition, enacting that proposition into law should not be impossible. If business people resist the notion of legal change, we can remind them that corporations exist only because laws allow them to exist. Without these laws, owners would be fully responsible for debts incurred and damages caused by their businesses. Because the public creates the law, corporations owe their existence as much to the public as they do to shareholders. They should have obligations to both. It simply makes no sense that society’s most powerful 'citizens' have no concern for the public good. It also makes no sense to endlessly chase after individual instances of corporate wrongdoing, when that wrongdoing is a natural result of the system design. Corporations abuse the public interest because the law tells them their only legal duty is to maximize profits for shareholders. Until we change the law of corporate governance, the problem of corporate abuse can never fully be solved. http://www.proutjournal.org/economy/economy2.html -- The Fundamental Principles of PROUT The Progressive Utilization Theory (PROUT) incorporates a unique understanding of human potential, history and class dynamics, as well as a broad social, political and economic perspective. Despite its expansive scope, however, the essence of PROUT can be reduced to a number of basic principles. P R Sarkar, the author of the theory, summarized it in sixteen principles. The following five are regarded as the most fundamental. They embody the multi-dimensional approach of PROUT, addressing the physical, mental and spiritual needs of individuals and society at large. 1) No individual should be allowed to accumulate any physical wealth without the clear permission or approval of the collective body. Several points are embodied in this statement. The most important point is that ownership lies with the collectivity, while the individual has a right to usage only. Society shall have the right to determine to what extent private ownership will be accepted. The over accumulation of wealth by an individual may easily deprive others. Similarly, the misuse of wealth and resources by an individual may also bring harm to the collectivity, or at least hinder its general affluence. Therefore, the right to accumulate wealth cannot be accepted as final. Individual liberty, in the economic sphere, must be in balance with the collective well-being. This refutes the basic notion of capitalism, which allows virtually unlimited liberty for individual accumulation. This also refutes communist theory that prescribes uniform salaries to all, regardless of labour and merit. In the Proutist philosophy, absolute uniformity of wealth is viewed as idealistic and unpsychological, while unchecked accumulation is also to be avoided. This principle also implies that the very notion of ownership may vary considerably according to the collective psychology. Obviously different notions have existed in this regard. A comparison between modern Western concepts of private ownership with those of various tribal societies of the past and present illustrates a difference in viewpoint. This first principle of PROUT essentially assures that the extent of private ownership will be in adjustment to the well-being of the collective. Note that no particular mechanism for determining ownership is specified, for such methods are also not absolute - it is only the general principle which is unchanging. This principle is the basis for PROUT embracing economic democracy insofar as the notion of collective ownership implies a democratic approach to the utilization of resources. 2) There should be maximum utilization and rational distribution of all mundane, supramundane, and spiritual potentialities of the universe. This statement supposes the existence of material as well as more subtle resources, which should be fully utilized and distributed in a rational manner. For the maximum utilization of physical resources, constant scientific endeavour must be made to understand the latent potentials of the physical world. No one would have imagined the latent potentials of the atom a few decades before its energetic potential was harnessed, regardless of how one may feel about the uses made of the discovery. Newer and better ways must be found to get maximum benefits from minimal resources, reducing environmental impact and increasing efficiency. Constant endeavour to find uses for different resources (such as the medicinal use of plants) will increase the potential standard of living. However, depending upon the distribution of wealth, a high standard of living for the general population may or may not be guaranteed. Hence rational distribution of wealth is necessary. Though different opinions may exist upon what is considered rational distribution, clearly a need-based (starting with minimum necessities for all), rather than profit driven economy will lead to a more rational (and more equitable) distribution of wealth. This principle of PROUT contains the philosophical basis for the guarantee of the basic needs. This is achieved by providing employment opportunities in those industries that produce products and services to meet these needs and by ensuring that the jobs created in the economy provide adequate purchasing power to secure the essential products and services. Rational distribution, as opposed to equal distribution, may also include the recognition of special needs and reward for special abilities. The idea of increasing or maximum amenities over time is derived from this principle. Indeed, many of the basic principles of the PROUT economic system are based upon the ideal of maximum utilization and rational distribution - including cooperatives, decentralization, etc. The inclusion of supramundane and spiritual resources within the scope of maximum utilization and rational distribution acknowledges subtle layers of existence. Utilizing the arts for development of the subtle mental faculties may be an example of supramundane utilization. Higher supramundane and spiritual potentialities should also be developed (one can refer to Sarkar's books on Microvita, Yoga Psychology and other topics for his views on these potentialities). Though perhaps not obvious now, Sarkar envisions a time when these potentialities can also be utilized for the collective benefit, and hence the same approach should be followed as with physical resources. The utilization of the subtlest resources will require systematic research into the nature of consciousness itself. 3) There should be maximum utilization of the physical, metaphysical, and spiritual potentialities of the unit and collective bodies of human society. The second principle referred to utilizing the objective world, crude and subtle, while this principle refers to the utilization of human potential in the physical, metaphysical and spiritual spheres. Development of the collective and individual potentialities are equally important, and the two are inexorably linked. The physical, intellectual and spiritual potentialities of individuals must be used in a constructive way, and maximum effort must be made for their all-round development. In a similar way the collective strengths of different groups should be utilized according to their circumstances. Those with outstanding abilities should be given maximum scope for utilizing their skills and creativity, while additional effort is to be made for the development of the innate potential of all. In order to develop the potentialities of all, existential fear must be removed by the guarantee of the minimum requirements of life. Only then can people at large have the mental ease needed for psychic and spiritual growth. Free and ample educational opportunities must be made available to all. There should also be opportunities in the workplace for the development of new skills and expertise, which should then be creatively utilized. The development of the collective mind has, of course, the development of the individual mind as a base. Special effort should be made to include factors in the educational system that will help ensure the development of the collective mind, such as socio-economic consciousness, ethical conduct, service mindedness, social awareness, and spirituality. Most of the socio-cultural Proutist ideas pertaining to education, language and the arts are elaborations upon this fundamental principle. 4) There should be a proper adjustment amongst these physical, metaphysical, mundane, supramundane and spiritual utilizations. This principle asserts that the previous two principles must be applied in a balanced and integrated way. Neither should physicality and the material world, nor metaphysical, supramundane and spiritual potentialities be developed to the exclusion of the others, or society will exist in a state of imbalance and meet with degeneration. People must be encouraged and challenged on various levels, otherwise widespread idleness or lethargy and apathy may develop. For example, increasing purchasing power is the best method of meeting people's needs and guaranteeing them on the physical level rather than handouts which would be both impractical and destructive to initiative. "Proper adjustment" in this context also means that people's role in society should be determined in a balanced way. As a general rule, employment should be guaranteed which is both agreeable and suitable to people, drawing upon their inherent talents and interests. It is generally recognized that intellectual and artistic skills are comparatively rare as opposed to physical skills, while spiritual wisdom is even more rare. Society should require comparatively less mundane service from those utilizing their higher mental and spiritual faculties for the benefit of society, following a balanced policy. Sarkar feels that it is imperative for the leaders of society to be developed intellectually and spiritually and to be physically fit as well, which certainly requires a degree of all-round development. The concept of the six factors (see below) is somewhat akin to the spirit of this principle. What is required is the integration of many aspects of human life in a balanced way. 5) The method of utilization should vary in accordance with the changes in time, place, and person, and the utilization should be of a progressive nature. This fifth principle holds that new and better methods of utilization should be continually developed in accordance with scientific and human development, considering changes in human psychology, the physical environment, etc. For instance, in accordance with maximum utilization, better ways should be found to harness the energy of manual labour, increasing efficiency. But of course, this should lead to increased productivity and decreased work hours, not a loss of jobs. Economic, social and political policies must be adjusted to human needs, and there should be efforts for their continual improvement in a progressive, humanitarian way. Scientific research must be guided by progressive ideals as well. An anti-technological attitude is certainly antithetical to human development. Some may argue that the environmental impact of technology is such that it will eventually destroy our ecological balance. It may be more reasonable to conclude that this state of affairs is the result of the regressive utilization or misutilization of science. Progressive utilization of science necessitates continual effort to assess and mitigate the environmental impact of new technologies. The progressive utilization of mental potentialities may include increased computer assistance, new developments in art and philosophy, improved educational methods and the like for general progress. Progressive utilization in the higher sphere of life may include the development of new intuitional techniques for self-realization or spiritual practices, and the harnessing of the spiritual inspiration and transformative power of self-realized individuals in a better way. Sarkar surmises, "Through struggle, society will have to move forward towards victory along the path of all-round fulfilment in life." (Ananda Sutram). -- The Six Factors for Social Progress P R Sarkar The first factor is that there should be a spiritual ideology in the life of both the individual and the collective body. Much of one's energy is misused due to the ignorance of one's own self and the destination towards which a person is moving. This misuse of energy is bound to cause destruction. The second factor for the progress of society is spiritual culture, a process of spiritual practices. Everyone has got a physical structure. The problem with every individual is to produce more and more mental pabulum or ectoplasmic stuff by the body and then to convert it into consciousness. There should be a proper process for this conversion. Spiritual cult consists of the conversion of the five rudimental factors into ectoplasmic stuff and then into consciousness through a special scientific process. This is a process of metamorphosis. Spiritual culture therefore, is indispensable. But only spiritual ideology and spiritual philosophy will not do. The third factor is a socio-economic theory. There should be a priori knowledge regarding the social structure, the distribution of wealth and its growth. For want of this knowledge there can't be a solid ground for the construction of the social edifice. The fourth one is social outlook. All living creatures in this manifest universe are the children of the same Cosmic Entity. They are the progeny of the same Supreme Progenitor. Naturally they are bound in a thread of fraternal relations. This is the central spirit. A socio-economic theory is of no use but for this fraternal feeling. The implementation of this theory is an impossibility without genuine spiritual practice and effort. The fifth factor for the progress of society is for it to have its own scripture. There is a need for the company of elevated persons (spiritualists) in all spheres of life. The authority which provides for this can be called scripture. It is not religion, but rather it is that which elevates society by dint of intuitive value founded on elevation of the mind. The last but not the least important factor for the progress of society is for it to have its own preceptor. -- PROUT Compared with Capitalism and Communism To distinguish PROUT clearly from communism and capitalism, the significant differences between these respective systems are reviewed below. Human development: Human development under communism is primarily concerned with the political and economic spheres of life. Under capitalism there is a pluralistic expression of personal freedom, with no clear conception of human potentiality. PROUT promotes the integrated development of the full human personality. Freedom: Human liberty under communism is limited by the primacy of the interests of the state. Under capitalism, a licentious freedom of expression is permitted, but not a freedom from want and material insecurity. In practice, capitalist societies will restrict freedom of expression when this expression challenges the interests of capital. PROUT grants full freedom of psychic and spiritual expression, but recognizes the need for society to place limits on individual hoarding of wealth. Without this limitation, collective interests will be violated and universal freedom from want cannot be guaranteed. Privileged Interests: Communism privileges the interests of the party and state. Capitalism gives primacy to property rights, and thus privileges the class controlling capital. PROUT gives central importance to promoting the common welfare while protecting ecological integrity. Progress: Both communism and capitalism regard material development as the basis of progress. PROUT defines progress as the increase in inner fulfilment of individuals. While this is primarily a spiritual conception of progress, PROUT recognizes that material and intellectual development is necessary as a foundation for seeking spiritual fulfilment. Culture: Communism compels culture to be consistent with state ideology. Under capitalism, mass culture primarily serves commercial interests. As a result, it is creative but not authentic, energetic but often destructive of higher values. PROUT sees need for culture to emerge out of regional and ethnic experience, and for these diverse cultures to instil values which empower the human psyche. Motivation: Communism emphasizes income equality at the expense of individual productivity. Capitalism's system of incentives motivates high productivity, but the excess of its monetary rewards wastes collective wealth, encourages greed, and disrupts social unity. PROUT strives for balance: maximizing the efficacy of incentive while minimizing social inequality. Environment: Both communism and capitalism lack a clear value context for environmental protection. PROUT has adopted the value framework of Neo-Humanism, which affirms the inherent, existential value of all life. Both communism and capitalism are unsuited to sustaining environmental integrity because they emphasize short term gain of profit or productivity and ignore long term costs of environmental degradation. PROUT's planning system (bottom to up) aims to create ever higher orders of balance, and therefore inherently protects biodiversity and promotes ecosystem vitality. Planning: Under communism, economic planning is highly centralized and controlled by the state. Capitalism centralizes the major part of economic planning in the hands of huge, transnational corporations. PROUT decentralizes planning authority to the level at which people are most aware of economic problems and potentialities - co-operative enterprises - and therefore best able to plan for their common welfare. Labour: Workers in both communist and capitalist economies are alienated due to lack of ownership or control of their workplace. PROUT's enterprise system is based on worker participation in decision making and cooperative ownership of assets - fundamental conditions which increase motivation and enhance possibilities for personal fulfilment. Economy: Communism's command economy is responsive to production quotas. Capitalism's free market economy is profit motivated. PROUT's economy is consumption oriented. It seeks to increase consumer purchasing power and availability of consumer goods as the means for maintaining economic vitality and meeting people's amenity needs. --