Socializing costs and limiting responsibility -- not the typical phrases applied to modern business but these are the original intents behind the ability to incorporate. From a legal perspective, the corporate structure was designed to limit the personal liability of corporate officers relative to their companies' actions.
Corporations were granted the full legal rights of an individual. Many people would agree that rights come with responsibility, yet some modern corporations have embraced their status as "legal persons" while shirking the associated responsibility.
Pollution, toxic waste, deforestation, greenhouse gas emissions and unsustainable agricultural practices are just a small sampling of the environmental damage that can be attributed to corporate behavior. People haven't fared much better. Union busting, layoffs and the use of sweatshop labor illustrate how some corporations have viewed people -- their own workforce and the community at large -- as a line item on a balance sheet.
Economists have a charming word -- externalities – that is used to refer to things like the environment and people. Externalities are items that don't end up on corporate financial statements. Costs associated with damage to the environment or the people affected by a corporation's behavior become public. Yet, the profits remain private.
Currently, corporations are legally bound to act in the interests of maximizing shareholder value but they also can be held legally liable by their shareholders. Even when corporate officers want to act in the best interests of the environment or the community, shareholders can take legal action to prevent this in the name of shareholder value. In other words, a corporate entity can be held liable for acting in any way that doesn't maximize revenue, but the individuals within a corporation are shielded from liability associated with these actions. The result has been a focus on short-term share price versus long-term health of the community at large. Even the long-term sustainability of the actual corporations can suffer in the name of short-term profit.
"It's important that we change light bulbs, but it's also important that we change laws," according to a central tenet of Al Gore's current message. In California, a small group of business leaders, the New Voice of Business, has taken that message to heart. AB 2944, the California Business Leadership and Innovation Statute, will soon be heard by the California Assembly Judiciary Committee. The intent of the statute, sponsored by Assemblyman Mark Leno (D-San Francisco), is to allow corporations to consider the consequences of their actions on their workers, community and environment when making business decisions without fear of shareholder litigation. There are 30 other states, besides California, that have adopted or are currently considering "constituency statutes" like AB 2944.
Businesses like Ben and Jerry's and Patagonia were famously founded with sustainability ingrained into their business model from inception. Yet, sustainability is no longer a niche market. In 1999, DuPont announced they would reduce greenhouse gas emissions 65 percent below 1990 levels. The company recently delivered on this commitment, while saving $3 billion and achieving a 340 percent increase in their stock price over the same period.
Another mainstream example is Lehman Brothers’ recent prediction that the U.S. Congress will soon enact legislation that will increase the cost of carbon dioxide emissions. The company is now working with clients to prepare for the potential new regulatory environment.
Whether sustainability is driven from an executives' passion, customer concerns or fear of new regulations, an increasing number of corporations are embracing the concept of doing well by doing good. These companies are proving that businesses can consider the externalities of how their business practices affect the environment, communities and people who work for them, as well as make a profit doing so. This is how change happens and is central to the philosophy of the sustainable business movement.
The real point of AB 2944 is giving corporations the leeway to act in accordance with the values of their organization and maintain their core mission and brand equity, even after they've gone public or been acquired by a large conglomerate.
It's a small step. It'd be great if this were being considered at a federal level. It'd be even better if we moved towards a system that places a cost on the effects corporate ehavior has on externalities. That's the idea behind a cap-and-trade system, an idea that has been endorsed on the conceptual level by every remaining presidential candidate. ichard Sandor and the folks at the Chicago Climate Exchange aren't waiting for the politicians – they're creating that market as we speak.
AB 2944 is a step in the right direction -- an effort to allow corporations the freedom to express their own humanity. As the proverb goes, every journey begins with a single step.
Matthew Madden is currently enrolled in the Presidio School of Management Sustainable MBA program. He has spent the last 15 years in the technology and telecom fields helping corporations identify new market opportunities and developing products to meet those needs. He thinks the most exciting innovations are now happening in the various fields of sustainability.