There is an increasing gap between people and the corporations that exist to serve them. This short paper aims to examine the historical and current relationships between people and corporations, identify what problems exist in this relationship and (if possible) identify solutions. It does not examine small business, which has an entirely different dynamic.
Where sources are directly quoted, they will be identified at the point of quotation. Other sources will be listed at the end. This is not an academic paper, and so will happily rely on secondary sources such as Wikipedia. Finally, the source of much of the information here is years of reading and observation so cannot be clearly cited. If I have said something that you feel is missing adequate citation please let me know. Comments are welcome, and may be incorporated in updates if I feel like it.
A (very) brief history
Corporations have been around in one form or another for centuries. They became fashionable in the 17th century, when the capital costs associated with intercontinental trade were prohibitive. For example East India Companies, both British and Dutch, needed capital to be able to establish bases of operations, pay for shipping, employ large numbers of people, and buy and sell goods on a large enough basis to defray their expenses. In order to raise that capital, they sold shares in the company.
In the 400 years since then, business has only become more complicated. The cost of production and distribution of a large proporation of the products we now rely upon is too great for any individual to bear, and changes in laws during that period have encouraged corporatisation.
Why be a business?
There are now many benefits to incorporation. These can vary widely between jurisdictions, but I have provided a broad summary of just a few of those benefits:
- Size matters. Economies of scale are regularly referred to in excusing business mergers and growth. Less often referred to, but also important from the perspective of the business, are monopoly control, ability to manipulate markets to suit the business, and the ability to create cartels (whether official, such as OPEC, or unofficial, such as the petrol companies that somehow manage to raise and lower pump prices almost in concert);
- Sharing of risks. A sole owner is responsible for everything their business does. If the business is bankrupt, so is the owner. If a corporation declares bankruptcy, while the owners lose some or all of their investment their losses are generally limited;
- Continuity. A business owned by an individual does not promise a lot of continuity, and its customers will often be worried by that. Certainly individuals can bequeath family business to their offspring, but this does not always work. I've heard apocryphally that the first generation tends to build the business, the second to transform it into something bigger and better, and the third to live on past success. A manager, however, is hired and fired because of their skills, and can always be replaced;
- Tax breaks. Yes, businesses pay taxes. But there are plenty of deductions available to them that are not available to the individual operating a business. There are also opportunities to negotiate "a better deal" with the local government, if you have the...;
- Power. The larger a business gets, the more power it gains. This is natural, as it influences more and more people through employment and supplying their needs/wants.
A bit more about businesses
By their nature, businesses exist because of people. They exist to provide products and services to consumers (who are, coincidentally, people). Some businesses don't deal directly with people, but through intermediary businesses. Eventually, however, their purpose is to serve people.
Businesses employ people. Enormous numbers of people. In 2007, according to CNN's Fortune 500, the 50 largest US employers had nearly 12 million employees (with Wal-Mart employing nearly 2 million).
Businesses are owned by people. Even when a business buys another business, it is only acting on behalf of its ultimate owners, the shareholders.
So what's the problem?
Unfortunately, businesses do not alway operate in the best interests of people, and there's a very simple reason for this: businesses are required to act in the best interests of their shareholders.
What? That says they must act in the best interests of people. No, they must act in the best interests of their shareholders, and this is generally interpreted as "we need to make lots of money".
Fine, so that's good for the shareholders isn't it? Unfortunately, it generally isn't even good for the shareholders, but we'll get to why shortly.
So, businesses need to make money. That is seen as their primary aim. And unfortunately to achieve that they employ a range of good, bad and ugly options:
- Cheap labour. Yes, businesses need employees. Someone has to do the "stuff". Whether it involves testing Tickle-Me-Elmo's tickle, or sewing the brand name onto undies, either a machine or a person will do it. Generally the machine will cost more up-front but is cheaper to feed. On occasion, though, businesses notice that there are some people who are incredibly cheap to feed and move production to China/India/Vietnam/the next cheap place to make stuff;
- Expensive management. There is a disconnect between what an individual shareholder thinks a CEO is worth and what the CEO (and ultimately their employer) thinks. I have yet to see any useful argument to show how one employee is worthy of receiving up to 500 times what another employee is paid. But the CEO generally has the power to get the salary and the bonuses;
- Growth at all costs. The global economy is geared towards growth (and this is a subject for a future blog). Businesses in turn are expected by shareholders to grow. This means they continually review what gaps they might fill (or create) in markets, how to reduce spending, and how to do the other guy out of a sale;
- Consumerism. Now this can't necessarily be blamed entirely on businesses, but they should bear a large share of the blame. Businesses don't just meet previously unmet demand, they create new demand. They have to, or they couldn't grow. This means that in Australia there are more mobile phones than there are people;
- Too much power. Big businesses employ large numbers of people. They can, if they choose, move those jobs elsewhere. They can effectively tell people who to vote for (especially if they are in the business of news). Businesses can dictate terms to governments, and if a government is anti-big business it will not survive.
So what to do?
Governments have fiddled around the edges of fixing business for many years. Unfortunately, they are too scared or too owned by large corporations to do too much. But much needs to be done.
- Redefine the purpose of incorporated businesses. The purpose of "providing a return for shareholders" does not adequately reflect the requirement of businesses to operate as part of a modern society. Goals should include profitability, sustainability, and community. That is, if a business fails to meet defined social standards it should pay for that failure
- Enforce regulation, and get rid of self-regulation. Self-regulation doesn't work. Nobody wants to punish themselves. In the meantime, regulators have grown increasingly close to the industries they are regulating. Yes, it's more expensive to have independent regulation. The results are worth the price, though
- Stop letting businesses write laws. Copyright periods have been extended to enable businesses to make money for a bit longer. Is this in the interests of the consumer/person? Patent laws are patently inadequate - just watch the fight between Apple and all comers over tablet computing
- Stop corporate funding of politicians. Surely we can do better than the best politicians money can buy? At the same time, business needs to be removed from political processes. Business is an artificial construct, not a stakeholder.
Other sources:
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