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Monday, February 11, 2008

On Rethinking The Corporation, Or, Incentivizing Decency: Can It Be Done?

It is the central tenet of corporate theology: the maxim that corporations exist for one purpose maximize profits for their shareholders.

We are forever feeling the impact of this “damn the torpedoes, full speed ahead!” kind of thinking; and we are forever wishing that we could do something about it.

Well, what if we could?

Today’s conversation suggests we can...and that we can use the power of the market to “incentivize” (cool corporate buzzword, eh?) the sort of behaviors we seek from corporations—and that we could end up with a stronger economy in the process.

Before we get too far, a disclaimer. This is an admittedly unfinished concept that may contain all sorts of unanticipated consequences, and I encourage all of you to think through this and point me to my errors of thought. That said, here we go:

Under the current theology, the only members of society that corporations have any incentive to consider are the corporate management class itself, shareholders, who have the power to impose discipline on members of the corporate management class, and governmental players, who have the power to give and to take away...and who are often themselves, at various points in their careers, members of the corporate management class—maybe even from your own corporation.

There are no real incentives in the system that encourage corporations to bring workers into the management process, nor is there an incentive for corporations to consider the communities that are affected by corporate mobility—at least, not once the local tax incentive has been collected. There is no incentive for corporations to become environmental advocates, nor champions of “social health”.

To create such incentives, this proposal would create a second class of corporation: a “social conscience” corporation, which would maintain its beneficial tax treatment and enhanced legal status based on the attainment of certain social goals.

Corporations could voluntarily choose to assume this new form of “legal personhood”, or they could remain a “legal person” in much the same way as they are today. With this proposal, however, there is one big change in the “traditional” corporation: it would not retain all of the rights and freedoms that today accrue to “legal personhood” in today’s corporate structure...making them a “limited legal person”, if you will.

To illustrate the idea more completely, imagine first how a “social conscience” corporation might work: corporate charters would have to reflect the concept that this form of corporation has a fiduciary duty to not just the shareholders, but also the corporation’s workers, and the surrounding community as well as the world environment.

The board of directors of such a corporation might have some of its seats reserved for worker representatives, and some of its seats reserved for community representatives.

A means of measurement of attained goals would be required, and one possibility would be that corporations of this type trade “conscience credits” (donate x % of corporate profit to community services and earn so many credits) in much the same way “carbon credits” are being traded today. A “conscience market” could be created that matches those who seek corporate “conscience” assistance with available corporations, and also to facilitate inter-corporate trading.

Maintaining a “no-layoff, no outsourcing” policy could earn a corporation lots of could voluntary efforts to remediate environmental damage caused by others. Investing in employee education could create credits, and you can probably imagine other incentives that we might want to develop.

Did a community offer your corporation tax incentives, and now you’re considering moving? That would be a “conscience cost”, and such a corporation would lose “conscience credits”.

A corporation of this type, in the event it possessed no credits, could be forced into “conscience bankruptcy”, where it would either have to create a “workout” plan or face liquidation, in much the same manner that corporations work through “capital bankruptcy” today.

Corporations who choose this structure would maintain all of the other legal protections afforded any person-actual or “legal”-in the American legal system.

There would be a tax incentive, as well. Profits from such a corporation would be taxed in the same manner as capital gains are treated today.

Now it’s time to flip the coin:

The officers and directors of “traditional” corporations would continue to maintain a fiduciary duty only to shareholders; and they would be free to make corporate decisions with no regard for the impact of their actions beyond that single duty, if they should choose to do so.

Here’s the cost:

--Corporate profits from this type of corporation would be taxed as ordinary income for the shareholders...and these corporations would also be taxed on “retained capital” assets (cash and cash equivalents) as well as declared “profits”.

--“Traditional” corporations would no longer have the legal status they have today. For example, they would no longer be protected under the First, Fourth, and Fifth Amendments...meaning law enforcement could conduct snap searches of corporate property...corporations would not have the free speech rights they today claim (meaning deliberate untruth itself could be criminalized)...and corporations would not be able to refuse demands by regulators to testify as to the nature of their activities (of course, the “real persons” who might have committed any illegal acts would still maintain their personal protections—but the corporation, as a “limited legal person”, could be compelled to testify against them).

This proposal envisions no change in the form or function of municipal corporations.

So that’s the idea: “traditional” corporations would be free to continue to act as they always have-with new legal restrictions and a changed tax structure.

“Social conscience” corporations would exist as well, receiving tax benefits and the full protection of the Constitution as a way to “incentivize” socially desirable behaviors.

Whaddaya think?
An idea whose time has come, or more liberal hoity-toity?
I’ve reported, you decide.

AUTHOR'S NOTE: this conversation began as a pair of back and forth comments between myself and Anglico over at the BlueNC site, which i encourage you to visit "early and often".

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