Can selfish corporates be regulated to change?

The campaign focus of Senator Elizabeth Warren, now the frontrunner for the Democratic nomination, is on the State taking control of big corporations. The attack on Big Corp should not surprise; Warren is a former progressive corporate law professor. Also history is repeating itself; twice before corporations have dominated the world before eventually being reined in by the State.

Modern corporate law and governance began in early November 1657 in a darkened room in Leadenhall London. A meeting of representatives of investors in the English East India Company determined the oath that would be taken by the incoming directorate. The investors were a mixture of elite established merchants and the small stockholders; nouveau riche entrepreneurial London shopkeepers and sea captains who had prospered through trade,

The new oath was a response to the previous dominance of the Company by the elite, who had run the Company in their own interests rather than the interests of all the Company including the small stockholders. In the new oath directors swore to be faithful and true to “ the good estate of the adventurers (shareholders) in this present Stocke.” The Governor and Committees had to “be carefull to see and provide that an equall and indifferent hand be carried in the government of this fellowship and in the affaires thereof to all the adventurers

The story does not have a happy ending. The East India Company prospered to the extent that it went on to ravage, rule and irrevocably change half the world becoming the biggest multinational corporation the world has ever seen. Eventually it was reined in; India came under the Crown control in Victoria’s reign. Similarly in the U.S. in the late 19th century the oil and railroad corporations that had amassed vast wealth in the first gilded age were also ultimately reined in by regulation; the antitrust laws that have become modern competition law.

We live in a second gilded age. Tech corporations are gobbling up new forms of value in data and converting it to capital. Our gilded age is also tarnished by the threat of climate change mostly caused by carbon emitting corporations. Wealth locked in corporations is contributing to inequality. Multinational corporations seem unstoppable and uncontrollable; 71 of the 100 richest entities in the world are reportedly no longer countries.

Can existing corporations themselves change? Yes, but only to a limited extent. The 1657 oath began the primary obligation of directors to act in good faith and the best interests of the company. In considering the best interests of the company as an entity, it is undeniably true that directors can legitimately look beyond short term profit maximisation for existing shareholders. The interests of the company extend to its reputation and good will, how it is perceived; all forms of value and also to negotiating the environment it operates in; taking account of public opinion and concerns, and social mores. Less benignly it includes lobbying Government in its own interests.

And there is the rub. Corporations will do and be good only to the extent their directors believe the forms of value contained in the corporation will be protected or ultimately enhanced.

The Presidential campaigns by Bernie Sanders and Warren, and recent statements by Jeremy Corbyn in the U.K. mean regulatory intervention may be inevitable. Let us hope for smart and considered regulation. Ideas are good ideas because they improve our lives. Would we really give up our mobile phones, Netflix, Uber? Not willingly. Corporations can generate value from good ideas because they are uniquely equipped to capture, isolate, and scale those ideas. The corporate form through history has often been a vessel used to improve lives; climate change may ultimately be controlled through good ideas generated through corporations. As selfish entities corporations have the potential to operate in ways that can prove detrimental to their various environments and to us but they also have the potential to harness and generate other forms of value that benefit us. One of the grand questions of our age is how we as natural persons can control and deconstruct the artificial persons that now dominate the world without tearing down the entire edifice.