Companies: a force for evil or for good?

If companies are so important, why don’t we seem to like them?

It is fair to say that Joel Bakan is no fan of profit-making companies. Bakan describes the corporation as a ‘pathological institution’ that wields ‘dangerous levels of power over people and society’.

Bakan’s concern lies mostly with large companies, especially those with global reach. But the fundamental disconnect he sees between the ‘rationalised greed’ built into companies and the ‘public’s interest’ applies generally. All companies are potentially evil, some are just better at it.

Bakan argues that the current role companies play is unsustainable and that some form of reckoning is due. His views are, perhaps, a little extreme. But they are not uncommon. For Bakan, and those like him, major change is needed and the faster the better.

Echoes of Bakan-like concern sat behind the Occupy movement of the early 2010s. Occupy was triggered by government actions that seemed to protect the very companies protestors saw as responsible for the Global Financial Crisis. They had a point. Some companies, notably Lehman Brothers, did collapse and some company executives lost their jobs and freedom. But many other companies lived on, thanks to the support of government.

Even advocates of market-driven capitalism see a need for change. Rebecca Henderson, for example, thinks companies need to focus more on benefiting all stakeholders — not just owners. If this could be achieved, she argues that business could ‘help save the world’.

It is almost 20 years since Bakan’s book was first published and more than 10 since the Occupy movement’s moment in the global spotlight. No reckoning has taken place or seems likely. While many companies are placing more emphasis on making a broad contribution to society, business is no closer to saving the world.

Calls for a reckoning may have subsided from global consciousness but concerns about companies still simmer. Locally, Qantas’ recent travails suggest that serious discontent is not far from the surface.

The bunny-hopping kangaroo

Qantas is one of Australia’s most iconic companies. It has projected itself, and been seen, as much more than a pathological money maker. Yet even Qantas has flown into unexpectedly turbulent skies recently. Perhaps its moral navigation instruments were on the fritz.

For Qantas’ owners and managers, it must feel like the current storm has come from nowhere. After all, the company had just recorded a record-breaking profit after three years of pandemic-induced losses. But rather than a national celebration, the result has triggered a wave of anger and the early exit of its CEO.

The proximate causes of this anger are varied. Customers are angry about the prices they have paid and the service quality they have received while Qantas rebuilt profit. Citizens are demanding the company repay government assistance it received during the pandemic. Questions are being asked about whether Qantas is being unfairly protected by government from fare-reducing competition. Debate also surrounds the appropriateness of executive remuneration and the treatment of Qantas workers.

Even shareholders (owners) seem to have some concerns.

Qantas is in no danger of crashing and will likely find smoother conditions ahead. In the meantime, its main response has been seeking to rebuild confidence with customers. The logic of this seems impeccable. After all, don’t companies owe their primary loyalty to the customers who buy their products and to the owners who supply their capital?

The questions currently being asked of Qantas (and government) all seem reasonable. They are a normal part of the ongoing debate needed in a good society. What is more surprising is the level of heat in the discourse. Nothing Qantas has done goes close to the type of egregious corporate behaviour documented by Bakan and others.

Qantas’ experience suggests that concerns remain about the exact role profit-making companies should play in our society. The gap between societal expectations and company behaviour may not as large as Bakan suggests. But some level of disconnect seems to exist. Making profits does not seem to be enough. How they are made also matters.

A quirky history

Concerns about companies are nothing new. What has changed over time is the nature and source of those concerns. Indeed, in a delightful quirk of history, the greatest defenders of corporations today — liberal economists — were once amongst its strongest critics.

Adam Smith, who is generally seen as the father of market economics, was one. Fathering economics must have been a big job because Smith never married (he was not known to be gay) and had no children. But we digress.

The companies of Smith’s time were somewhat different to those of today. Companies were individually ‘chartered’ by government and generally given exclusive rights over an area of, often trade-related, activity. Each charter was supposedly designed to align company interest with public interest (one of Bakan’s key concerns).

Whether this alignment was actually achieved in practice is a different matter. The most famous, infamous might be more accurate, of these companies was the (British) East India Company. ‘The Company’, as it became known, was one of the most immorally rapacious entities in history. It was certainly not a bastion of public interest activity.

For Smith, companies had two problems. One was the monopoly power and relationship with government it established. The other — which remains a core feature of companies today — was the separation it created between management and ownership.

Smith’s view was that ownership and management should not be separated. His thought was that company managers would not pay sufficient regard to the interests of owners, leading to ‘negligence and profusion’ (waste) rather than efficiently created profit. History suggests it was not one of Smith’s better judgements.

While Smith was a detractor, Karl Marx (the very same Karl Marx of Communist Manifesto, Das Kapital and breathtakingly bushy beard fame) was a quiet supporter of some form of company. His starting point was surprisingly similar to Smith’s. But rather than seeing the separation of management and ownership as a problem, Marx thought it would better align management decisions with worker interests. History suggests that this judgment was also a little askew.

Looking at companies today, it is tempting to believe that both Marx and Smith might want their words back. To be fair though, evidence of both views exists. Smith, for example, would likely see his concerns reflected in what is pejoratively titled woke capitalism. Marx, on the other hand, might (although, one suspects it would be grudgingly) see his position reflected in the emphasis some companies are voluntarily placing on worker well-being.

For those interested, Marx had ‘at least’ seven children. Abstinence (he was also a notoriously heavy drinker and smoker) and math (seemingly) were not his strengths. It might also be that parenting communism allowed for more free time and better parties, than parenting market economics.

Utopia, Limited

A later, and more melodic, criticism of companies came from the Savoy theatre in London’s West End.

The Savoy, which opened in 1881 two years before Marx’s death, was built to showcase the talents of theatre legends W S Gilbert and Arthur Sullivan. Its stage was the first to exclusively use a new-fangled invention — electric lighting. At the time, the British Empire was in full pomp and the world (well much of it anyway) seemed to lay at the feet of a stern and long grieving Queen Victoria.

In 1893, G&S shifted their satirical gaze from seafaring types to companies. The result was the operetta Utopia, Limited which was also known as The Flowers of Progress. The show was modestly successful, having an initial run of 245 performances. G&S’s greatest success — The Mikado — had an initial run of 672.

Utopia, Limited was not just about companies. It also took a broad swipe at the arrogance of the British Empire in its dealings with other nations. While in many ways typically Victorian, G&S could also be rather edgy.

Two features of the company attracted G&S’s ire. The first was the notion that companies represented a legally created form of (non-sentient) life. The other was that owners of a bankrupt (dead) company could retain the benefits of past profits while leaving company creditors unpaid. Adam Smith, who had long shuffled off stage, would have recognised both concerns. You can almost imagine him applauding in the front row.

Utopia, Limited was written and performed at a particularly important time in the history of the company. Through much of the 1800s, British legislation had evolved to support the creation of limited liability companies without the need for any form of government charter. This legislation set the basic rules for forming and operating a company but was agnostic about what the company actually did.

It was the beginning of the age that led to Bakan, Henderson, and Qantas. To draw from Gilbert’s libretto, a new form of life — the modern company — had been ‘set free’. It is likely that no one, certainly not Smith and Marx, could have foreseen what would happen next.

The birth of the modern company

Two new lifeforms were set free in 19th century Britain — one was legal and non-sentient, the other sentient but fictional. The first — the limited liability company – would come to dominate modern society, and the other — Frankenstein’s monster — would be rejected by it.

The genius behind the fictional lifeform was Mary Godwin. Godwin led a bohemian life. Her mother was a feminist philosopher and her father a political one. As a teenager, she had an affair with the then-married, and by all accounts rather naughty poet, Percy Shelley. They later eloped.

The idea for Frankenstein’s monster was formed during a wet summer spent on the banks of Lake Geneva. The monster, ‘Adam’, was emotional, well-mannered, and well-educated. Companies, by contrast, are arguably none of these things. Rejection of Frankenstein’s creation, first by its creator and then by the family of the blind man who educated him, set up a devastating sequence of events.

The difference between society’s fictional treatment of Frankenstein’s creation and the actual treatment of companies could not be greater. To say the modern company was embraced by society would be an understatement. Nowhere was this truer than in the United States of America.

After the final curtain had closed on Utopia, Limited, a fierce contest was taking place in the US. It was not quite the competition between companies for customers Adam Smith might have hoped for. It was not even competition over where companies operated. Rather it was competition between US states to be the place where companies were registered.

Chief amongst the combatants were New Jersey and Delaware. Both sought to lure lucrative company registrations through a combination of friendly legal arrangements and long-term tax advantages. This triggered what was, to many eyes, a race to the legislative bottom. Delaware ultimately won. Even today, a single building in Delaware is the registered address for almost 300,000 companies from all over the globe.

Legislative change in the US was driven by competition and a youthful land-of-the-free exuberance. In Britain, the behaviour of the East India Company and the disastrous South Sea Bubble of 1720 created more cautious change. The difference would help shape the world.

The great experiment

Views on the outcomes of what we might call the US great corporate experiment varied.

One early judgement came from US president Rutherford B Hayes. Hayes, whose facial fuzz was Marx-like in abundance, was concerned about the concentration of wealth and political power companies were bringing. In 1886, he wrote ‘this is a government of the people, by the people, and for the people no longer. It is a government of corporations, by corporations, and for corporations.’ Hayes, by the way, represented the same political party as Donald Trump. How times have changed.

Twenty-five years later a very different view was expressed by the then President of Columbia University, Nicholas Murray Butler. Butler saw the limited liability corporation as the ‘greatest single discovery of modern times’, more important than harnessing steam or electricity. It was a bold statement. But he may well have been right.

In Butler’s mind, the company’s contribution was more than economic. He argued that the social and ethical contribution of companies were ‘manifestly’ positive as would its impact on politics be ‘once we understand and know how to use it’.

Butler’s judgements, it must be said, were somewhat hit-and-miss. He won the Nobel Peace Prize for his work running the Carnegie Endowment for International Peace. But he was also a longstanding supporter of fascism and an admirer of Adolf Hitler. Nobody is perfect, but even so.

What Adam Smith saw as a problem Butler saw as an advantage. For Butler, the magic of the company was as a vehicle for large-scale cooperation. By removing the unlimited liability, the company allowed large numbers of unrelated people to collaborate in a common (profitable) endeavour safe in the knowledge that their exposure to loss from the behaviour of others was fixed.

From almost nothing, large companies sprung up across the US fuelling economic progress in a way never before seen. The result was a ‘gilded age’ of US prosperity. Technology had certainly played its part, but so had the company. It was a marriage made in heaven.

Controlling the monster

The wealth the combination of companies and new technology created was enormous.

One beneficiary was a young assistant bookkeeper. John D. Rockefeller was the son of a con artist and deeply pious mother (imagine the dinner conversations). He became the richest man in modern history. At its peak, Rockefeller’s net worth was equal to between 1.5% and 3% of total US GDP. His holding company (Standard Oil was a complex corporate trust) was registered in, you guessed it, Delaware.

Rockefeller’s fortune was built on two things: oil and monopoly power. By his late 20s, Rockefeller owned the biggest oil company in the US. By 40, he had bought out so many of his competitors that he controlled 90% of the US oil business. Along the way, he reportedly became the most hated man in America.

Thanks to our friend Adam Smith the economic and political problems created by monopolies were well understood. In response, the US government passed legislation designed to curb monopoly power in 1890. The act was known for its proposer, John Sherman.

The Sherman Act was ultimately used in 1911 to break up Rockefeller’s empire. Ironically, many of the resulting companies were subsequently absorbed into other entities (Amoco was bought by BP and Esso is now part of ExxonMobil). But two — Chevron and Penzoil — remain separate companies today.

Rockefeller may no longer have controlled the oil market, but he remained mind-bendingly rich.

A moral question

The Gilded Age set forth a kind of cat-and-mouse game between the creators of the company (government) and the entities they had set free. Anti-trust laws were only part of a complex regulatory relationship that evolved as government sought to promote the benefits and curb the excesses of its legislative golden-egg-laying creation. It is a game that continues today.

Beneath it all remained a moral question. What, if any, duty did this new lifeform owe to the society which created it? Was it simply to make a profit for its owners by fair means or foul? Was it to comply with the law and nothing more? Or did companies owe society something more?

In 1970, the towering intellect and modest physical stature of Milton Friedman strode into the fray.

Friedman was the antithesis of Marx. Not only were his economic views very different, but so was his hairstyle. The little hair Friedman had was scrupulously controlled, as was the more bouffant hair of Ronald Reagan and Margaret Thatcher, both of whom Freidman advised. It seems that political theories of socialist control and capitalist freedom do not necessarily extend to personal grooming. Of course, it may also be that hair control is the ultimate act of economic freedom.

Friedman’s overarching argument was simple. Only people can have social responsibilities. Companies, as an artificial person, cannot. They should act legally in pursuing profits but owe society nothing more.

Friedman’s view sprang, in part, from the relationship between managers and owners that had so exercised Marx and Smith. Freidman (like Smith) thought that managers had a duty to act solely in the interest of owners. Decisions by executives to pursue broader social aims were inconsistent with this duty and involved imposing a tax on owner profits.

The nuance in Friedman’s thinking was that owners could unanimously agree to forgo profits to achieve an agreed social end. But, he argued, unanimous agreement would not be possible in most companies due to shareholder diversity. He also felt that social responsibility was often used by managers as a cloak to pursue their own interests.

Friedman’s broader views are often reviled today as neo-liberalism. They certainly sit uncomfortably against the type of public expectations revealed in relation to Qantas and the 2019 banking royal commission. They also suggest that, implicitly anyway, the only way for society to prevent bad behaviour from companies is to regulate them. More regulation was the very last thing Friedman wanted.

Friedman’s views also contrast to the differing, and more modern, visions of Joel Bakan and Rebecca Henderson.

For Bakan, government needs to assert a higher level of democratic control over companies to ensure they act in the public interest. He also argues that national governments also need to work together to challenge neo-liberalism as the prevailing political philosophy behind the treatment of companies.

Henderson’s reimagining of capitalism centres on company owners and managers placing more emphasis on achieving broader societal objectives. She argues that owners and managers (aided but not controlled by government) need to establish a ‘deeply rooted’ set of common values that can drive profitable, purpose-driven firms that can save the world.

Despite their differences, the visions Henderson and Bakan outline both seem closer to today’s zeitgeist than Friedman’s. Henderson’s view broadly aligns with the idea of woke capitalism. Bakan’s views can be seen in national efforts to impose stricter environmental requirements on companies and international efforts to prevent global tax havens.

Ultimately, however, they describe conflicting visions of the future of the company. One emphasises government, the other emphasises private markets. Their agreement only lies in the need for change.

Companies as good citizens

It is hard to imagine the world without limited liability companies. They exist everywhere, even in socialist China. There are around 334 million companies in the world today — one for every 24 people.

Nicholas Murray Butler would quietly nod at this result approvingly. Butler thought corporations were the single greatest discovery of modern times.

Not everyone thought companies were a good idea. Adam Smith described limited liability as an unjustified government subsidy to company owners. His point is often forgotten. Unjustified or not, limited liability can rightly be seen as a subsidy.

Narratives

Modern debate about the role of companies is defined by three broad narratives.

Joel Bakan represents one. Bakan sees companies as pathological money-makers that are destroying the world. He thinks that companies need to be better controlled by government to ensure they act in the public interest.

Rebecca Henderson represents the second. Henderson sees companies as a force for good that could help save the world. She thinks that government needs to shape the nature of capitalism to unlock the potential of companies to solve society’s greatest challenges.

Milton Friedman represents the third. Friedman sees companies as amoral entities whose activities unlock the benefits of private markets. He advocates maximal freedom for companies from government control and sees company pursuit of social responsibilities as a furphy.

All three narratives have supporters and have at least some intellectual merit. But each involves a very different vision of the role companies and government should play in our society.

What about the evidence

Bakan and Henderson both draw on evidence to support their claims. Friedman’s argument is more strictly philosophical. Ultimately, however, the evidence is not conclusive (it rarely is). It is fair to say that the selection and interpretation of the evidence by Henderson and Bakan reflect their own ideological preferences.

Ideology aside (to the extent this is possible), four broad propositions seem to emerge from the evidence.

Proposition 1:  Without the company to provide a basis for large-scale collaborative risk-taking, the world would be far poorer economically. The productivity-enhancing benefits of technology, innovation and competition would not have spread so quickly or so widely. The choices we enjoy as consumers today would be much more constrained.

Proposition 2:  With the good brought by companies has come harm. Companies are certainly capable of evil. Unconstrained pursuit of profits has resulted in some companies acting against the public interest. The benefits of limited liability have also seen some people grow much, much richer than those around them.

Proposition 3:  Companies may not be inherently good or inherently evil, but they are inherently selfish. They, and the lobby groups representing them, seek to promote (sometimes unconsciously) a version of public interest that suits their own interests. Selfishness also results in companies seeking influence over government decisions and their economic heft makes them a significant political force.

Proposition 4:  Companies (as a lifeform) are highly resilient. Their success owes much to what John Micklethwait and Adrian Wooldridge call an ‘amoeba-like’ ability to adapt. This includes being able to respond quickly and effectively to shifting market-based opportunities and changes in government rules.

Modern challenges

Much has changed since the 19th-century birth of the modern corporation. Some companies are now so large and powerful, they seem beyond the control of any national government. Platform companies have emerged, dissolving regulatory arrangements built for a different era. Technology is allowing corporations to reach into (and potentially manipulate) our lives in ways that once existed only in the world of science fiction.

Our priorities as a society have also shifted. The local and global consequences of environmental harm are better understood. Demand for better care has given rise to a human services economy that bears little resemblance to the market-based world imagined by Adam Smith and Milton Friedman. Creating fairness and reducing inequality have risen in importance — in some nations anyway. Global events have reduced faith in the international trading system, creating a desire for greater national self-reliance.

Company ownership has likewise shifted. Institutions (largely companies themselves), rather than people, are the modern face of company ownership. Thanks to superannuation, most of us are owners of corporations we have never heard of, let alone thought deeply about. Ownership decisions are often determined by a faceless world of investment managers and algorithms. Those who are angriest with Qantas might even own part of the company and not be aware of it.

Institutional investment brings a different dynamic to the owner-manager relationship. It weakens the connection between managers and human company owners. This, in turn, emphasises the bridging role played by company directors, most of whom were themselves former company managers. One suspects that Adam Smith’s economic spidey senses would be tingling at the thought.

Back to Qantas

Qantas, in some ways, is an unusual modern company. Its history is deeply embedded in the Australian psyche. It has had periods of government ownership and is legislatively required to be majority Australian-owned. It ranks third (Vegemite is first) in a list of iconic Australian brands and is often seen globally as the face of Australia.

Qantas’ business is more influenced by government decisions than most companies. Its historically close relationship with government is a core advantage. It is something the company invests heavily in, including via Chairman’s Lounge memberships.

In other ways, Qantas is a typical large company. It has a global presence and is seen by government as too big to fail. The top 10 owners of Qantas are all institutions. Its largest owner controls less than 2% of the company. Each Qantas director has been a senior company manager elsewhere.

Qantas has chosen to be at the forefront of a number of social causes. Company managers doubtless saw this as both the right thing to do and a source of competitive advantage. But it has also opened the company up to increased public scrutiny. It may be one reason why negative reactions to Qantas’ latest, record-breaking, profit have been so strong.

Few companies are as bold as Qantas in pursuing social causes. But most want to project an image (and reality) of being more than amoral profit makers for their owners. In doing so, they are responding to an implicit expectation from society. Today’s companies may not need to save the world, but they do need to be good societal citizens.

Companies as good citizens

The idea of corporations as good citizens has attractions. It creates a parallel expectation to the one we have for people. To avoid being a bad citizen people need to comply with the law. But to be a good citizen they need to do something more.

What corporations see as being a good citizen varies, just as it does in the human population. For many, good citizenship means doing something extra for their customers while making a profit. For others, it means actively supporting and funding worthy community movements.

In choosing, a degree of selfishness is apparent and reasonable. Few (if any) companies support social causes that they feel would harm long-term (legal) profit-making potential. Nor should they. Profit, appropriately made, is a critical ingredient to the way our society works. The overall good it has delivered can be seen everywhere.

The harder question is who gets to determine the choices companies make between avoiding being a bad citizen (the required minimum) and being a good citizen (a desirable free choice). Adam Smith and Milton Friedman would both argue that these are appropriately decisions for the company’s human owners. They make a fair point.

Some thoughts for the future

For a range of reasons, we seem to be moving into a more active era of policy-making in relation to the company. Change may not be as world-defining as the creation of the modern company was in the 19th century. But it is likely to be both significant and important.

Governments appear to be placing a greater focus on preventing the harm corporations can create. Efforts to address the monopoly power of platform businesses and anti-competitive practices from globally dominant firms are part of this. So too is a global effort to address some race-to-the-bottom tax and regulatory arrangements. Environmental regulation is another, as is a focus on AI and cyber security.

The role of corporations and markets in achieving social ends is also being rethought. In the care sector, in particular, mixed results from market-based reforms are causing past approaches to be reconsidered. Mixed results have also been apparent in environmental schemes.

As a vehicle for satisfying human demands, and creating global wealth, the company has proved an outstanding success. A fear of killing society’s golden economic goose has often made policy makers cautious. Friedman and his ilk have added a (contestable) ideological dimension to this caution.

Some level of caution from government is appropriate. Going too far in stifling the freedom of companies is a recipe for less innovation and growth. But there is also reason to believe government may have been too cautious in setting minimum requirements for company behaviour in the past. History has shown companies to be more resilient and able to evolve than their lobby groups often suggest.

Ultimate responsibility for maximising the good and minimising the bad companies bring must rest with government. After all, as Gilbert and Sullivan operatically observed, it was government that gave companies life and set them free. Ideology has a role to play (it always does), but government decisions also need to reflect a careful examination of how companies are evolving and what this may mean for the future.

Looking forward, perhaps the deepest question policy makers face is the enduring one that so engaged Smith, Marx, and Friedman — how to ensure that the interests of company managers and their human owners remain aligned. The privilege and benefits of limited liability were designed to flow to a company’s human owners. It seems only reasonable that they be responsible for determining how an individual company approaches being the good citizen we seem to want companies to be. In today’s complex corporate world, this may be easier said than done.

Qantas may currently feel otherwise, but public scrutiny and debate need to be an important part of this process. After all, companies may be owned by some of us, but their behaviour and performance is important to all of us.

First published in The Mandarin September 2023.