Are Corporations Inherently Corrupt?




[Editor's Note: The ENRON scandal has raised serious questions about the integrity of our business community and even whether it might be the case that corporations are inherently corrupt. The problem appears to be embracing the principle that the only social obligation of corporations is maximizing the profits of their stockholders. This piece appeared in READER WEEKLY (14 February 2002), pp. 18-19.]




The decision by former Enron chief executive, Kenneth Lay, to decline to testify before Congress regarding the apparent fraud and deception practiced by his company, whose discover led to its collapse, has profoundly troubled many of our elected representatives. According to the Duluth News Tribune (February 4, 2002), Senator Byron Dorgan, D-ND, for example, has observed, in response to new disclosures, "It is almost a culture of corruption", where "Once you start peeling away the layers of this onion, it starts to look pretty ugly."  The especially troubling question remarks such as these may raise in the minds of Americans is the possibility that corruption might be inherent to corporations.


After all, if corporations are inherently corrupt, then we should have every reason to expect that this Enron may be followed by many other Enrons and that there is really no good reason to suppose that the situation should get better on its own.  Indeed, the thought has crossed more than one rational mind that, if corporations as prominent as this one have been able to exert such vast influence in political and economic affairs, then perhaps the only reason we haven't heard of more cases of this kind--apart from the occasional savings and loan scandal, for example--has been a function of ignorance, where we haven't known because our nation's press has failed to keep us informed.


What are Corporations?


The reasons, however, may run deeper than that.  One problem that has arisen within this context has been a matter of understanding what the word "corporation" should be understood to mean.  The alternatives range from that of a nexus of contracts to a person, where the first reflects a function of corporations (to enter into contracts) and the second a legal fiction (since a business is not a person).   One place to start to come to grips with this problem is the dictionary, which offers the following conception(s):


 (D1)   corporation  =df 1 a legal entity, consisting usually of a group of people

                                    who have a charter granting it perpetual life, that is

                                    invested with many of the legal powers given to individ-

                                    uals:  a corporation may enter into contracts, by and sell

                                    property, etc. 2 a group of people, as the mayor and alder-

                                    of an incorporated town, legally authorized to act as an

                                    individual. 3 any of the political and economic bodies

                                    forming a corporative state, each being composed of the

                                    employers and employees in a certain industry, pro-

                                    fession, etc.  4 a large, prominent belly  (Webster's

                                   New World Dictionary, 3rd College Edition 1988).


Imagine my surprise to discover that, contrary to my sincere belief that corporations are not persons, there are definitions, such as 4 above, according to which a mere part of a person can qualify as a corporation, especially since I had never before thought of myself from that point of view!  The evidence in my case may be indisputable, but the sense at stake here is not 4 but rather 1, which identifies corporations with a group of people who are organized for the conduct of business by entering into contracts, which assigns the function (entering into contracts) with those who exercise it (the owners).


The owners of corporations are not necessarily the same as their officers or employees, of course, except in cases in which the officers or employees own stock in the company. A rather important distinction must therefore be drawn between "stockholders", who are the owners of the company in the strict sense, and "stakeholders", who are persons or other entities having interests that may be affected by its conduct of business, for better or for worse.  That includes employees, customers, creditors, and suppliers as well as stockholders, not to mention the community, the environment, and the world.


Just to sharpen our focus and avoid misunderstanding, the conception of corporation that appears to matter within this context can be captured by the following definition:


 (D2) corporation  =df a legal entity consisting of an arrangement of people and

                                  property (roles and assets) interacting together for the

                                  purpose of conducting business by a nexus of contracts.


Although this definition may appear to be neutral with regard to the question before us, it fails to take into account the historical context of the times.  As Marjorie Kelly, The Divine Right of Capital  (2001), has astutely observed, the standard conception of corporations--the prevailing paradigm within American society--accepts the crucial principle that "the only social responsibility of the corporation is to make a profit", which was initially enunciated by a Nobel Laureate in Economics, Milton Friedman.


Lest we not recognize the importance of this principle, Kelly elaborates its meaning:

      In corporate society, good is what is in the interest of stockholders.  That is the

      primary criterion of morality.  It means the corporation has the right to do

      financial violence to its employees or the environment (conducting massive

      layoffs, clear-cutting forests), or to attack other corporations (brutal competition,

      hostile takeovers), if that increases the well-being of the ruling tribe, the



Indeed, according to Kelly, prominent philosophers, including Karl R. Popper, have characterized (what he calls) "the totalitarian theory of morality" as maintaining that "good is what is in the interest of my group; or my tribe; or my state".  Thus, such states, for example, are permitted to attack other states, or to do violence to their own citizens, if it benefits the ruling tribe.  Or, alternatively, such corporations are permitted to attack other corporations, or to do violence to their own employees, if it benefits the stockholders.  These states and corporations are explicitly amoral.


What Makes Something Immoral?


If Popper is correct, then corporations certainly appear to be inherently corrupt. But is he correct?  The answer depends upon which theory of morality is correct. There are many claimants to that role, including subjective theories, family-value theories, religious-based theories, and culture-related theories, according to which actions are right when you (your family, your religion, or your culture) approve of it.  So if you (your family, your religion, or your culture) approve of incest, cannibalism, or sacrificing virgins to appease the gods, such actions cannot be immoral.  They are moral, necessarily.


All of these approaches make morality a matter of power, where right reduces to might. If someone approves of killing, robbing, or raping you, you have no basis to complain on the ground that those actions are immoral, if subjectivism is correct. Similarly for family, religion, and culture-based alternatives.  Every person, every family, every religion, and very culture is equal, regardless of their practices, respectively, if such theories are true.


As James Rachels, The Elements of Moral Philosophy (1999), explains, on any of these accounts, the very ideas of criticism, reform, or progress in matters of morality no longer apply.  If attitudes about right and wrong differ or change, that is all there is to it, even when they concern your life, liberty, or happiness.  If some person, family, or group has the power to impose their will upon you, these theories afford you no basis to complain.


Philosophers have therefore sought to establish some less-relative and more-objective framework for understanding morality, including what are known as consequentialist and non-consequentialist theories.  According to consequentialism, an action is right if it produces as much GOOD (usually taken to be happiness) as any available alternative.  But the problem remains of deciding FOR WHOM that happiness ought to be produced.


According to Ethical Egoism, for example, an action is right if it brings about as much happiness for you personally as any available alternative.  Consequences for others simply don't count.  So Ted Bundy, John Gacy, and Jeffrey Dahmer, for example, are home free--morally speaking--though few juries would be likely to be impressed by the argument that killing gave them more happiness than any available alternative.


According to Limited Utilitarianism, moreover, an action is right when it brings about as much happiness for your group as any available alternative.  This is good news for The Third Reich, the Mafia, and General Motors.  If no available alternative(s) would produce more happiness for Nazis than territorial acquisition, military domination, and racial extermination, then those qualify as moral actions if Limited Utilitarianism is true.


Classic Utilitarianism, among consequentialist theories, is the only one that dictates encompassing the effects actions have upon everyone rather than some special class.  But this virtue does not guarantee the right results.  If a social arrangement with a certain percentage of slaves, say, 15%, would bring about greater happiness for the population as a whole--because the increase in happiness of the masters outweighed the decrease in happiness of the slaves--then that arrangement would qualify as moral.  Necessarily!


So if theories that qualify manifestly immoral behavior as "moral" ought to be rejected, perhaps a non-consequentialist approach can do better.  According to what is known as Deontological Moral Theory, actions are moral when they involve treating other persons with respect.  More formally expressed, it requires that other persons should always be treated as ends (as intrinsically valuable) and never merely as means (instrumentally).


This does not mean that persons can never treat other persons as means, which usually happens without thereby generating immorality.  The relationship between employers and employees is clearly one in which employers use their employees as a means to conduct a business and make profits, while employees use their employment as a means to make a buck and earn a living.  Within a context of mutual respect, this is moral conduct.


When employers subject their employees to unsafe working conditions, excessive hours, or poor wages, however, the relationship becomes exploitative and immoral, which can also occur when employees do not perform their duties, steal from their employers, or abuse the workplace.  Similar considerations apply to doctors and patients, students and faculty, or ministers and congregations, which may explain our dismay at their betrayal.


Are Corporations Inherently Immoral?


If these considerations are correct, then it would appear to be the case that corporations qualify as limited utilitarian entities.  When exemplified by states such as Germany during The Third Reich, they qualify as instances of what Popper calls "the totalitarian theory of morality". Since corporations are not states, however, it would seem to be more appropriate and less prejudicial to classify the morality exemplified by these entities instead as limited utilitarianism.  Since they satisfy the conditions that define an indefensible moral posture, it seems to follow that they also qualify as amoral, at least in the sense that their behavior does not have to satisfy conditions of morality.


The conclusion that corporations are inherently immoral appears very plausible, but it might be a good idea to investigate the matter further to ascertain whether or not corporations can be moral, in which case they are not necessarily inherently corrupt. If we assume the prevailing paradigm of corporations as profit maximizing entities, then since profits are generated as the difference between net income (as a function of prices for products or for services) and net costs (of producing those products or services--schematically, where profits  =  ( prices  -  costs )--the principle of profit maximization implies the obvious desirability of inflating prices and deflating costs.


Costs themselves tend to be a function of the cost of natural resources, the cost of human labor, and (local, state, and federal) taxes.  To increase profits, therefore, at least three broad avenues of approach are available related to decreasing costs, namely:  (a) decrease the cost of natural resources; (b) decrease the cost of human labor; and (c) decrease the cost of (local, state, and federal) taxes.  Alternatively, increase prices to the optimal point where sales produce maximal profits, where the term "profits" should properly be construed broadly to include such forms of profit as retained earnings, stock options, reinvestments in companies, and such).


The modes of operation that tend to maximize profits thus include (a) decreasing the cost of natural resources by, for example, (i) exploiting the environment, (ii) converting public land to private use, and (iii) evading the expenses of pollution cleanup or costs of environmental restoration; (b) decreasing the cost of human labor by, for example, (i) paying minimal wages, (ii) offering minimal benefits (health coverage, dental plans, and such), and (iii) opposing the organization or diminishing the influence of labor unions that engage in collective bargaining.


Alternatively, (c) decrease the cost of taxes, for example, by (i) resisting paying corporation taxes, (ii) seeking to reduce income tax rates and (iii) attempting to abolish inheritance taxes; or (d) increase the price of your product, for example, by (i) reducing competition, (ii) promoting monopolies, and (iii) manipulating markets (by contriving shortages, disseminating misinformation, and the like). These techniques are morally acceptable to corporations because, as limited utilitarian entities, they are obligated to consider the consequences for no one but themselves.  The consequences of their acts for others simply do not matter.


Indeed, the situation is so drastic that corporations operating as limited utilitarian entities can even resist supporting the social safety net that has been developed since the days of The New Deal, including unemployment insurance, workmen's compensation, Social Security, Medicare, Medicaid, and similar programs, which tend to defeat profit maximization for at least three reasons:  (1) they increase the cost of (local, state, and federal) taxation; (2) they create alternatives to low-paying, menial jobs; and (3) they thereby empower the workforce with options. 


The current trend toward globalization appears to extend the reach of American corporations around the world, where the potential benefits are enormous as a as a new form of (or a new name for) colonialism and imperialism, for example, by (1) reducing the cost of natural resources; (2) reducing the cost of labor; and (3) reducing the cost of (local, state, and federal) taxation.  Thus, it should come as no surprise that the diminution of sweatshops in the United States should be taking place with a commensurate increase in sweatshops around the world!


What Can Be Done?


It should be apparent that, when their conduct is controlled by the principle of maximizing profits, corporations are inherently corrupt.  The problem results from the operation of corporations on the basis of Friedman's principle rather than from the definition of corporations themselves.  Consequently, it may be said that corporations are inherently amoral, which means that they can, but are not obligated to, operate on the basis of principles of morality that involve treating other parties with respect.  The situation can be changed, therefore, only by adopting a different paradigm than the prevailing corporate paradigm.


Kelly, for example, suggests that corporate responsibilities should be redefined to maximize benefits, not merely to stockholders, but to stakeholders, where the responsibilities of corporations include taking into account the consequences of their actions for the parties that they affect by not violating their rights.  From a moral point of view, this is analogous to abandoning limited utilitarianism and adopting deontological principles as binding on corporations in their relations with stakeholders and only seeking to maximize profits to an extent consistent with deontological morality.  This represents a change in corporate paradigms.


 The stakeholders, remember, include every party with interests that are affected by the actions of the corporation, that is, which is causally affected, for better or for worse, by its mode of operation, including employees, customers, suppliers, and stockholders, but also the community, the environment, and the world.  This approach forsakes short term gains for long term planning, where decisions are made taking into account the answers to questions such as the following three:

         *  How do corporate actions affect the qualify of life of employees?

         *  How do corporate actions affect sustainability over the long run?

         *  How do corporate actions affect the survival of the human species?


Such a change represents a shift toward corporations that serve the public good and do not merely promote private greed, as we have seen in the case of Enron.




Jim Fetzer is a professor of philosophy at the University of Minnesota, Duluth.




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