Book Review: Corporation 2020

A recent TEEB for Business report estimated that the world’s 100 largest corporations do $7.3 trillion in damages each year to the global environment. These “externalized” costs are not borne by the business itself, but by society as a whole. Changing the way that corporations do business is critical to solving global environmental crises such as climate change. In the book Corporation 2020, Pavan Sukhdev presents a vision of how corporations can make this change.

Author of Corporation 2020: Pavan Sukhdev

A 1919 Michigan Court ruling formalized the role of a corporation: “A business corporation is organized and carried on primarily for the profit of the stockholders.” As long as this norm holds, corporations will continue to pursue private profit at the expense of the public good. Sukhdev writes: “According to urban legend, Willie Sutton, the immaculately dressed bank robber who robbed more than a hundred banks over a forty-year career, was once asked why he robbed banks and succinctly replied, ‘Because that’s where the money is.’” Since corporations don’t pay for pollution and other socialized costs from their activities, there is a profit motive to pursue polluting activities.

Sukhdev says that the modern corporation has four distorting characteristics: size, leverage, advertising, and lobbying. The number of “large” (greater than 0.1% of global GDP) corporations has grown from under 20 in 1970 to over 120 in 2010. Being large allows corporations to reduce transaction costs: rather than trading with other corporations, a corporation can simply redistribute resources internally. Sukhdev calls the modern corporation a “price arbitrageur par excellence” because it obtains labor, capital, and resources wherever they are cheapest to be sold wherever demand is highest.

The second characteristic, leverage, is related to size. Taking on debt allows a corporation to grow. Debt is available to larger corporations at a cheaper price, creating an advantage for large corporations while squeezing out smaller ones. When corporations with lots of debt become very large, they can be “too big to fail” because they pose a systemic risk to the economy. As we saw in the financial crisis, the government may have to prop up a failing big corporation – another benefit of size.

Save the World (photo credit Victor Grigas)

Advertising “converts wants into needs, sometimes creating new needs that are nothing more than brand desires, with no functionality.” Even though advertising makes up a relatively small part of global spending, it has an enormous impact on creating demand for consumer products. Greater consumption, in turn, puts more pressure on natural resources.

Last, corporate lobbyists persuade government to create preferential laws, regulations, taxes, and public investments; the goal is to realign public institutions to benefit private interest. For example, when the Waxman-Markey “cap-and-trade” climate change bill was being considered by Congress, energy-intensive industries spent over $100 million on public relations and hired 2,340 registered lobbyists to protect the fossil-fuel industry. A watered down version of the bill was able to pass the House, but not the Senate. Lobbying in natural resources sectors is a clear case of redistributing public goods to private interests; in the United States, mining companies are given rights to mining resources at below market rates.

When a corporation is large, it has advantages in leverage, advertising, and lobbying. This creates a positive feedback loop where the efficiencies and power of a large corporation allow it to become even larger. As a corporation grows and grows, it has (in most, but not all cases) larger and larger negative externalities. The legal structure of the modern corporation and the tools it has to make profits are incompatible with addressing environmental crises.

So what’s to be done?

Greenpeace.svg
Greenpeace.svg
A big part of Sukhdev’s message is how and why corporations voluntarily reduce the negative externalities associated with their business. One of the largest destroyers of tropical forests in the world, the Indonesian pulp and paper company APP, announced a new “no deforestation” policy. The commitment came after a long campaign by Greenpeace successfully vilified APP. APP saw that the costs to its brand name and reputation were greater than the benefits from continued deforestation. APP is one of many companies that have taken steps to reduce its environmental impact in order to improve its public image.

Asia_Pulp_&_Paper_logo
Asia_Pulp_&_Paper_logo
Other corporations are taking a more holistic perspective and starting to account for the damage they do to the environment. In 2011, PUMA, the shoe company, measured their supply chain’s impact on water, land-use change, air pollution, and climate change. These negative externalities were valued at $188 million and were concentrated early in the company’s supply chain. PUMA says it will use this information to reach its goal of reducing its impact across its supply chain by 25 percent by 2015. Measuring externalities is the first step for companies to reduce them – “you cannot manage what you do not measure.”

However, shaming companies into better behavior and improved environmental accounting tools will only get us so far. Sukhdev argues that “despite the correlations between sustainability and corporate success, endogenous change (the idea that corporations can and should drive sustainability ‘from within’ because it is good for them) may not be enough.” The raison d’etre of a corporation is to make its shareholders profits, regardless of other costs.

Sukhdev calls for a number of solutions. Ending subsidies for companies that do environmental harm is a first step towards leveling the playing field. Next, taxing goods according to the damage they do to society would discourage harmful economic activities. A coal power plant, for instance, would have to pay for the social cost of the carbon emissions (amongst other damages) associated with power production. Finally, Sukhdev makes the case that the structure and objective of a corporation needs to be completely reformed. Rather than pursuing profit for shareholders, corporations should serve the public benefit – a social corporation. Increased regulation and creative taxation can help to reduce corporations’ impact on the environment, but Sukhdev argues that current corporate model is fundamentally incompatible with sustainability.

While I mostly agree with Sukhdev, he doesn’t provide a convincing road map of how we’re to get from the shareholder, profit-driven model of the corporation to his social corporation. As Corporation 2020 recognizes, large corporations have an enormous amount of economic and political power that they are unlikely to give up voluntarily. In addition to increasing a corporation’s size, advertising and lobbying also give it immense influence. Bold leadership, both in the public and private sectors, is a good start, but won’t be enough to get to the radical changes that he is proposing. My feeling is it will require pressure from millions of people who have never heard of Sukhdev or his book.