Forbes India 15th Anniversary Special

The Conscience of Capitalism

When a citizen does wrong, you know whose ass to kick. When a corporation causes harm, who should take the rap?

Published: Jun 22, 2010 07:05:28 AM IST
Updated: Jun 22, 2010 02:30:10 PM IST
The Conscience of Capitalism
Image: Kapoor Baldev/ Sygma/ Corbis
TIME DOES NOT HEAL A victim of the Bhopal Gas Tragedy

At a meeting in Sweden recently of young people from around the world, a Nigerian woman shared the grief of her people. She said that, every year for the past 20 years, large quantities of oil, as much as that leaking into the Gulf of Mexico from the broken BP oil rig, have been spilling in her country from an MNC’s leaking pipelines and broken rigs. The waterways have become completely contaminated. The waters are so oily they even burn! Water for drinking and bathing is hard to come by. The health of the people has been badly affected. There are no more fish to catch. Agriculture is impossible. Livelihoods are destroyed. The US media is full of anger with BP for the oil spill in the Gulf of Mexico. She sympathised with the people of Louisiana whose concerns are known to the whole world now, but she wondered if they even knew what had been happening in Nigeria all these years?

The Indian media is filled with anger with Union Carbide and the tragedy of Bhopal. When a rare brown pelican was smothered in oil in Louisiana, the US President said he was looking for someone’s ass to kick in BP. The people of Bhopal, where thousands of human beings were killed, ask the Indian government why no one’s ass has been kicked.

These tragedies have raised emotionally charged issues of justice: Of who should be punished; and of double standards — one for the rich and another for poor countries. Beneath these issues are important questions about the responsibilities and liabilities of business corporations, especially multinationals, and about the roles of governments in regulating their behaviour and protecting public interests. These are also questions in the recent debates about who was responsible for the global financial crisis whose fallout has affected many common people. To these questions let us turn.

Thomas Friedman, author of the paean to globalisation, The World is Flat, had written an earlier book, The Lexus and the Olive Tree, that explained how the world is not yet flat. The Lexus car was his metaphor for globalisation: A universally desired product of technology, produced by a multinational corporation. The Olive Tree represented the deep roots in traditions and identities which resist the forces of globalisation. His conclusion was that the Lexus would prevail. It may some day, but it will be a struggle. Because the last few years have shown the strength of the Olive Tree’s roots in the demands of communities and nations for their rights to land, resources, dignity and respect.

With information and money sloshing across the world, accelerated by new communication technologies, institutions and ideas of globalisation are spreading across national boundaries. Meanwhile, governments — especially elected governments — must respond to the demands for justice and protection from people within their boundaries. Such are the demands for tribal rights and affirmative action, and even demands for new states.

Many of these demands, springing from histories of injustice, may not sound ‘rational’ to the economists and technologists propounding globalisation. However, with the rapid spread of ideas of human rights, multiplication in the numbers of NGOs fighting for various causes, an explosion of access to information, and very active media, governments ignore these demands at their peril.

At the same time, governments are urged by the global finance lobby and multinational corporations to open their boundaries further to attract investments. In the view of these lobbies, governments that do not make life easy for them are not progressive. Indeed, the chairman of Dow Chemicals, irked by new regulations imposed by the US government after the Enron and WorldCom scandals, said he dreamt of shifting the headquarters of his corporation to an island not subject to any government so that he could be free to make more profits for his shareholders! Thus the stage is set for clashes and governments must intermediate between the forces of the Lexus and the Olive Tree.

Ronald Reagan had said that government is not the solution, it is the problem. Too much rolling back of government contributed to the recent financial crisis in the US. Government did too little. It should have tamed the animal spirits in the market, its critics now say. Let us look, therefore, into the nature
of the beast that is to be tamed, viz. corporations.

The limited liability corporation is an invention of man: A device created to attract capital. The liabilities of investors are limited to encourage them to invest and take risks with their capital. Abraham Lincoln wrote in 1864 after the Civil War, “I see in the future a crisis approaching that unnerves me and causes me to tremble for the future of my country. As a result of the war, corporations have been enthroned and an era of corruption in high places will follow, and the money power of the country will endeavour to prolong its reign by working upon the prejudices of the people until all wealth is aggregated in a few hands and the Republic is destroyed.” Over the next 150 years, through a series of legal and ideological battles, corporations acquired all the rights of citizens to protection of properties and other freedoms. In addition, they obtained privileges of limited liability and other protections that human citizens do not have. This history has been documented by Ted Nace in an excellent book with a provocative title, The Gangs of America: The Rise of Corporate Power and the Disabling of Democracy. Thus we have institutions and laws whereby corporations can internalise and privatise profits while costs of damages to communities and the environment are externalised and socialised.

The Conscience of Capitalism
Image: Sean Gardner/ Reuters
Woes Continue The BP oil spill in the Gulf of Mexico

When a citizen does wrong, you know whose ass to kick. When a corporation causes harm, who exactly should take the rap? Moreover, unlike a person, as Nace points out, a corporation can do the Houdini — disappear and reappear in another body with a new name — and avoid being punished.
Such are the questions that President Obama and the American people, and also the Indian government and Indian people, are grappling with. Whenever the leaders of the US and India come together, as they will again when President Obama visits India later this year, they proclaim the partnership between the two largest democracies in the world. Along side such visits, business leaders from both countries also meet to promote investments and trade.

Should not these dialogues between government and industry leaders also be about the evolution of better institutions of democracy, and capitalism, and within that, the role of corporations? Because, as leaders of the largest democracies, they must also show leadership in the evolution of ideas and institutions.

Mankind has developed many powerful ‘dual use’ technologies that can do great good but, in the wrong hands, can do great harm too. These include nuclear energy and bio-genetics. Who can be trusted with their power? What safeguards must be in place? The large, limited liability corporation is also a powerful ‘dual use’ concept invented by man. The agenda for co-operation between the US and India is fraught with debates about these ‘dual use’ technologies.

Business needs freedom to take risks, innovate and increase wealth. Governments must protect their citizens and promote the common cause. Therefore, even as governments promote business, they must also regulate it. Business leaders resent regulation. They would rather be trusted to regulate their own behaviour. They must always remember that corporations are given a licence to operate by society, and that society can curb or even withdraw that license. The most egregious illustration of this is the conduct of the East India Company. It was given a charter by the Crown to trade in the East. The minutes of its board meetings in London show that the board was hardly concerned about the conditions of the people in the places in which the company operated. It was concerned about financing the missions; it charged its operators abroad to make profits; and it decided the dividends for the investors. When the conduct of the Company’s operators became intolerable, the people rebelled, and the Crown was compelled to withdraw the Company’s charter.

Self regulation requires a conscience. Corporations are the engines of capitalism. Wherein lies the conscience of the corporation — an inanimate, legal construct devised by man? That is the question at the heart of corporate governance. Does it lie in the board, which society should trust to ensure that the corporation causes no harm? If so, is the board equipped with the moral precepts, intellectual ideas and norms of conduct that will enable it to discharge its responsibility to society? The responsibility of the chairman of the board is to ensure that the board is so equipped. A capable board with a conscience can ensure that the corporation’s executive management is well equipped to act responsibly too.

Finally, as the woman from Nigeria said in Sweden, the people want the buck to stop somewhere. They are tired of buck-passing. Great leaders admit the buck stops with them.

(by Arun Maira The author is a member of the Planning Commission)

(This story appears in the 02 July, 2010 issue of Forbes India. To visit our Archives, click here.)