Corporate Design: The Missing Business and Public Policy Issue of Our Time by Marjorie Kelly and Allen White




“How can corporations be designed so as to blend social, environmental, and financial mission at their very core?… This is the design challenge of the 21st century.”

“We think of the relentless pressure to deliver rising earnings and unending growth as somehow intrinsic to the very notion of the corporation, not realizing that it is in large measure the outcome of a particular corporate design. Other designs are possible. They are not the implausible dreams of idealists. They are, in fact, already functioning at substantial and successful companies.”

“New corporate architecture can help investors escape the bone-rattling roller coaster of stock market volatility. Ratcheting down the speed of speculation can help investors lower their risk and enjoy more reliable long-term returns. Reducing capital pressure goes hand in hand with enhancing environmental and social performance, directing corporate decision-making in ways that avoid growth at any cost and abuse of ecological and human resources. A new corporate architecture can bring working people relief from the pressure cooker of the modern workplace, where there’s little time for leisure and family life. Corporate design can be a key pivot point moving society toward sustainability and broader human well-being.”

 

Summary

This important report begins with a sharp insight on the true nature of the corporate world:

Business leaders operate today inside a corporate design largely inherited from the 19th century, with ownership and governing structures put in place during the horse and buggy era. In that time, when nature offered seemingly unlimited resources, we had not yet confronted the ecological limits we face today. In that era, when labor meant interchangeable strong backs wielding hammers and picks, employee knowledge and capacity to innovate did not yet represent the foundation of competitive advantage as it does today. In that time of hands-on ownership by company founders and direct investors, it was impossible to imagine today’s environment of dispersed and passive share-holding, where trading may occur in nanoseconds.

Yet, while these essential elements inside and outside the corporation have changed dramatically, surprisingly little has changed in the design of corporate forms. The dominant ethos retains a focus on short-term benefit to “owners,” regardless of how remote, passive, or transient they may be. Within this narrow purpose, we struggle to fit contemporary concerns.

Executives are forced to focus on costcutting, quarterly returns, and short-term quick fixes to boost revenues. Companies are drawn into mergers that benefit few, while short-term gains in share price give way to long-term losses for shareholders and layoffs for employees. Firms are unable to invest in environmental sustainability options that will pay off far down the line, instead feeling pressure to devote assets to buying back stock. There is an urgent need for corporate designs that free executives to focus on the long term, to recognize and reward the contributions of multiple stakeholders to corporate wealth creation, to protect companies from unwanted takeovers, to treat employee knowledge as an asset in financial statements, and to encourage rather than penalize critical research and development investments.

It then put forwards important questions regarding the challenge at hand:

  • How could a company design its governance structure to balance financial demands with a nonnegotiable social purpose?
  • How can social issue management move from the periphery to the core of company operations?
  • How to structure internal decision-making to give priority to long-term environmental sustainability instead of short-term cost-cutting?

In their following analysis of the deficiencies inherent in conventional corporate design, they put forward other piercing insights such as:

To date, mechanisms to hold corporations accountable to broader societal interests have had limited impact because they have addressed symptoms rather than root causes.

We can’t solve the problem of corporate design using past approaches to corporate reform. We can’t solve it by listing every possible harm a corporation might create or every positive contribution it might make and then writing laws to prohibit or mandate specific actions. Further, we can’t solve it by having corporations devote 1 percent of their profits to philanthropy, or by incentivizing adoption of piecemeal corporate social responsibility initiatives. Indeed, the inadequacy of such incremental approaches is what makes necessary the deeper, transformational approach of corporate design. Without frontally addressing the purpose of the corporation, the coming decades will default to business as usual, leading to an unacceptable future for people, the planet, and corporations themselves.

They then put forth principles that can be used to guide our effort in redesigning corporation:

  1. The purpose of the corporation is to harness private interests to serve the public interest.
  2. Corporations shall accrue fair returns for shareholders, but not at the expense of the legitimate interests of other stakeholders.
  3. Corporations shall operate sustainably, meeting the needs of the present generation without compromising the ability of future generations to meet their needs.
  4. Corporations shall distribute their wealth equitably among those who contribute to wealth creation.
  5. Corporations shall be governed in a manner that is participatory, transparent, ethical, and accountable.
  6. Corporations shall not infringe on the right of natural persons to govern themselves, nor infringe on other universal human rights.

And stated that,

The principles aim to redress the imbalance that has evolved over nearly two centuries of legal decisions and corporate practices, which together have expanded the rights of corporations without a commensurate expansion of their obligations.

The challenge is to rebalance rights and obligations, to release the capacity of the corporation to create wealth, and to contribute more broadly to human well-being.

To walk their talk, they present case studies of successful alternative designs of corporation, and map it out as “the fourth sector” after government, business and nonprofit as shown below.

Redesigning Corporation - The Fourth Sector

Realizing that corporate redesign is a complex issue that requires a team effort, they lay out the path forward for different sectors of the society to play a role in:

  1. Investors – Tackling short-termism.
  2. Large Business – Changes to incorporate stakeholder management.
  3. Small to medium business – Experimenting with new corporate designs.
  4. Civil society – Working to expand disclosure and social responsibilities of directors.
  5. Government – Requiring social reporting or pursuing charter reform.
  6. Labor – Controlling labor’s capital.
  7. Media – Changing business reporting.

In conclusion, this insightful report shows us the possibilities, benefits, and challenges of redesigning corporation to shape it into a force more positive in society.

Download and read the full report in PDF here.

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Published::
1.16.08 / 9pm
Category:
Democratic Democracy, Ecosocionomics, Global Governance, Means, Paths, Ends
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