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Firm Commitment by Colin Mayer

This article was inspired by Colin Mayer's Firm Commitment . If you enjoy this article then consider purchasing or borrowing the book.

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How to Reinvent the Corporate Model

“Commitment and control lie at the heart of the corporation and achieving the right balance between the two is critical to its success.”

Corporations possess the power to generate wealth for their owners while providing benefits to communities; however, they also have the power to destroy the environment, cause large layoffs and harm the community. Today, the corporation is more likely to harm than to help. In one survey, directors of Fortune 200 companies were asked if they would destroy grown forests or release a dangerous toxin into the environment for the sake of making profits. Out of the 34 surveyed, 31 would harm the environment for money. As shareholder value has become the priority of the corporation, the ethical intentions of corporate founders go unnoticed.

The idea behind the corporation would seem to offer immediate benefits. Divvying up power amongst shareholders rather than placing monopolistic control in the hands of one, possibly unethical, owner prevents disastrous decisions.

Unfortunately, shareholders are no longer interested in long-term commitment, with the corporation serving as a dependable route to get rich quick. Nothing really can prevent shareholders from demanding harm to the environment or community for profit. Government regulations have proven useless, and a bad reputation doesn’t affect shareholders who get rich and get out quickly.

The trend of corporate irresponsibility started when the balance between upper management and shareholders became skewed. When management tries to please shareholders with short-term profits, the future of the corporation is ignored. Governments blame executives when corporate scandals occur, since punishing large numbers of investors is difficult. Though executives should be held accountable, allowing shareholders to push for risky corporate decisions and go unpunished demonstrates to prospective investors that they too can push unethical agendas and remain unaffected when these ideas fail.

In order to address the problems caused by corporations, the corporate structure must undergo change. Three steps can allow a firm to become self-regulating:

  1. Clear establishment of corporate values – Unless management demonstrates an uncompromising dedication to the ethical vision established by the corporation’s founder, shareholders will easily push risky projects.
  2. Formation of a “board of trustees” to protect corporate values – Shareholders will be more likely to put long-term involvement in the corporation, when higher management stands on firm principles. A board of trustees can ensure that the shareholders pull on management isn’t too great.
  3. Long-term investors should have control over the corporation – Give voting stocks to those committing their money to the corporation for a certain length of time. Shareholders won’t encourage reckless behavior when they are tied to the fate of your firm.

Government regulations do not deter unethical behavior in corporations. If taxation were based on a firm’s decisions—rewarding those that serve a social function and punishing those that exist solely for private gain—this would be more effective form of regulation than the current system provides.

Publicly traded corporations impact us all, so learning to fix problems within them has far ranging benefits.


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