Corporations Without Conscience

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"The greatest pyramids ... are made not of stone but of people: they are the vast bureaucracies that constitute society's core, and they function not necessarily to get the "job" done but to reward the personal loyalty of those at the bottom to those at the top."  -  William Langewiesche, The Atlantic, 2001 November

Adam Smith's first major work was not "The Wealth of Nations" but a book on ethics: "Theory of Moral Sentiments."

As an ethicist he understood that the mechanism of the "invisible hand" would be most efficient if self-interest was restrained by conscience. With remarkable prescience Smith warned that corporations (in his day called joint-stock companies) could slip the restraints of human conscience. In our day this is pretty much what has happened. Corporations have taken on a life of their own, entities without a conscience with the potential to wreak havoc on the societies that have created them.

This isn't the place to document the detrimental effects of corporations on society, the political process, the environment, etc. The journalist William Greider does an admirable job of this in his book "One World, Ready or Not - The Manic Logic of Global Capitalism." Here attention will be focused for the moment on one question: What is it about corporations that allows them to slip the restraints of human conscience?

William Langewiesche has provided the key to answering this question: "Corporate bureaucracies function not necessarily to get the 'job' done but to reward the personal loyalty of those at the bottom to those at the top." The power to reward loyalty is the currency of the corporation. And this power is also used to command obedience.

The subject of obedience to authority will be linked forever to Stanley Milgram's obedience experiments of the 1960's. His conclusions in his own words were: "The results as I observed them in the laboratory are disturbing. They raise the possibility that human nature cannot be counted on to insulate men from brutality and inhumane treatment at the direction of malevolent authority. A substantial proportion of people do what they are told to do irrespective of the content of the act and without limitations of conscience so long as they perceive that the command comes from a legitimate authority. If in this study an anonymous experimenter could successfully command adults to subdue a fifty year old man and force on him painful electric shocks against his protests one can only wonder what government with its vastly greater authority and prestige can command of its subjects."

A little editing of Milgram's conclusion will put it in better context: "A substantial proportion of people do what they are told to do [by an anonymous experimenter] irrespective of the content of the act and without limitations of conscience so long as they perceive that the command comes from a legitimate authority. One can only wonder what [a corporation] with its vastly greater authority and prestige can command of its [employees]." This sobering assessment goes a long way in explaining how corporations slip the restraints of human conscience. There is just one problem. "A substantial proportion of people" isn't good enough for a full explanation.

Dr. Thomas Blass's website on Milgram and his work, www.stanleymilgram.com , cites 65 percent as the proportion of people who delivered the maximum shock to their unwilling victims. (The experiments were rigged. The "victims" were in on it and no shocks were actually delivered.)

So what about the 35 percent of people who won't subordinate their consciences to authority? Well, consider how an employee rises through the levels of a corporate hierarchy. At each level ability, loyalty and obedience can be rewarded with a promotion. If at any level conscience interferes with loyalty or obedience then the employee likely won't be promoted further. So we have an employee screening process that selects for ability, loyalty and obedience but selects against conscience. As Leo Durocher put it, nice guys finish last.

To summarize, corporations slip the bounds of human conscience because of two conditions. The first condition involves human nature. Milgram's obedience experiments empirically show that a substantial proportion of people are willing to subordinate their consciences to authority. The second condition involves corporate nature. Corporations use an employee screening process that selects for ability, loyalty and obedience but selects against conscience.

It is noteworthy that two words have not been used in this discussion: "power" and "corruption." It has not been necessary to appeal to Lord Acton's axiom and indeed it is probably not generally true that power corrupts those who wield it. Rather, the association between power and corruption is more likely due to a flawed screening process that tends to select non-conscientious people to positions of power.

If the employee screening process is flawed by a tendency to select against conscience, then the obvious remedy is to fix the screening process. The key to doing this is the line above: "If at any level conscience interferes with loyalty or obedience then the employee likely won't be promoted further." Why not? Because it is in the self-interest of superiors to command the loyalty and obedience of their subordinates.

But what if employees were promoted not just on the basis of loyalty and obedience but also on the basis of conscientiousness? To do this the role of superiors in the employee promotion process would have to be diminished. It necessarily follows that as the role of superiors decreases the role of peers and subordinates would increase. There is a name for this. It is called democratization.

The aftershocks from the Enron/Andersen/Wall Street scandal are providing an historic opportunity to challenge one of the most unexamined beliefs in business culture, that corporate government must be strictly authoritarian in nature.

During Europe's Middle Ages the divine right of kings and the feudal order went unchallenged. It took the Renaissance, the rise of the bourgeoisie, and the Enlightenment to legitimize the idea of government responsible to the people.

During the debate over the US Constitution, Madison, Hamilton and Jay wrote the Federalist Papers to make the case for a centralized yet democratic federal government. The time is ripe for the world's most innovative thinkers on the subject of corporate governance to rethink the issue from first (i.e. democratic) principles with the aim of producing the corporate governance equivalent of the Federalist Papers.