Putting the Brakes on the Corporate Model

Syndicated columnist and Fox News commentator Cal Thomas wrote a provocative and surprising article that appeared March 3, 2010, in the Inland Valley Daily Bulletin. The headline reads “Toyota’s troubles stem from choosing profit over quality,” and Thomas unabashedly recommends embracing excellence over short-term profits.

It is a measure of how far removed this country is from the culture Thomas suggests that the new CEO of Xerox Corporation was quoted recently as saying that “growth” was her number one priority. Not quality copies. Not customer service. Not corporate citizenship. Not exemplary employee relations. Growth, pure and simple. (Sure, these things are not mutually exclusive. But neither are they 100% consistent. Sooner or later, secondary objectives give way to the more urgent, important priority.)

One of the reasons American corporations typically choose profit over all other (competing) objectives is that they are legally required to do so. That’s right. Not long after the Supreme Court ruled in 1886 that corporations were entitled to protection under the Fourteenth Amendment, a judge decided in the case of Dodge v. Ford (and the principle has never been overturned) that “a business corporation is organized and carried on primarily for the profit of the stockholders.” And what is it that American stockholders want? Dividends and a higher stock price, hopefully sooner rather than later. What produces these results? Profit.

How ironic (and unfortunate) it is that Toyota’s massive current crisis was caused, by its own admission, by a switch from the traditional Japanese model of high quality to the Western desire for growth and profit.

Could it be that the speed control mechanisms on American corporations are malfunctioning, resulting in out-of-control self-interest and a consequent loss of quality and service?

Any ideas on how to apply the brakes? Well, for starters, we could repeal the law upon which Dodge v. Ford was based, or better yet require corporations to consider the public interest, as well as the shareholder interest, when making key strategic decisions.

I can hear the screams of the free market capitalists already!! But consider this: under the current system, too many corporations produce negative externalities (that’s “bad stuff” like pollution and unsafe products, to you non-economists) because doing so produces higher profits for their shareholders (and not incidentally, bigger bonuses for the top executives). Extrapolate to the not-too-distant future, and this movement, unabated, will result in wealthy stockholders and the homeless alike wondering what happened to the quality of life. Poisoned air is an equal opportunity killer. Ironically, unsafe consumer products mostly kill the people with sufficient resources to buy them.

Ron Wolff

Ronald Wolff publishes the blog Musings from Claremont, where this article first appeared. Republished with permission.