The Social Cost of Corporations

Recent events, both in India and elsewhere, have thrown the spotlight on the roles and responsibilities of companies in society. In an interesting article “The Conscience of Capitalism” in Forbes India, Arun Maira discusses (in a non-technical fashion) the difficulties in pinning responsibility for wrongdoing by a company.

Pertinently, he notes that while the “limited liability corporation is an invention of man” and a “device created to attract capital”, we also have “institutions and laws whereby corporations can internalise and privatise profits while costs of damages to communities and the environment are externalised and socialised”.

He notes:

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.

This is similar to the difficulties judges earlier encountered in finding corporations guilty of crime. The statement by Edwin Thurlow, 1st Baron Thurlow (1731-1806) comes to mind: “Did you ever expect a corporation to have a conscience, when it has no soul to be damned, and no body to be kicked?”

To a large extent, this only carries historical value because the ability of companies to be punished for crime has developed over the years, and has been recognised in India even for offences involving mandatory imprisonment and fine. Supreme Court’s decision in Standard Chartered Bank v. Directorate of Enforcement is noteworthy on this count.

Returning to Arun Maira’s observations, here are some further excerpts:

Mankind has developed many powerful ‘dual use’ technologies that can do great good but, in the wrong hands, can do great harm too. … The large, limited liability corporation is also a powerful ‘dual use’ concept invented by man. …

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. …

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.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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