Chapter 1

The Uncertain Relation between Business and Society

The corporation in America was first and foremost a political expression performing a public economic function. The colonies transplanted a mercantilist European society. The central tenet of mercantilism was the integration of the social order within the nation-state, which had become the parochial and secular substitute for the declining Roman Catholic church. The advancement of the state was intended to contribute to the welfare of its people, and that political objective affected the character of the state's instrumentalities. Thus, in colonial America, no less than in the metropolitan countries of Europe, the state created corporations for public purposes. The purely private business affairs of the colonists, more restricted in scale and scope, were carried on chiefly by individuals or by unincorporated joint-stock companies of a local nature.

The Corporation in the Early United States

Neither independence nor Adam Smith's great antimercantilist polemic The Wealth of Nations, which emerged in the same year, wrought any radical change in public attitudes toward the corporation as a political instrument. Mercantilist views on the need for government to promote the social welfare hung on in the newly created United States for fifty years or more. No longer, however, were there the preclusive powers of an overseas imperial government, nor did the new federal government exercise much of an inhibitive role. Under the constitutional principle of states' rights, state governments moved into the business of chartering their own corporations. Each corporation required a special act of the state legislature, tailored to the specific purpose being promoted.

By the turn of the nineteenth century more than three hundred business corporations had been created. Two-thirds were concerned with inland navigation, turnpikes, and toll bridges. The remainder included insurance companies, commercial banks, and public services (e. g., administering the water supply and docks). As the historian Stuart Bruchey observed: "These business corporations were no more exclusively profit-seeking associations than the chartered joint-stock companies with which the English had pioneered in the settlement of America. They were, in fact, quasi-public agencies of the state." He quoted a Massachusetts charter of 1818 that created "a corporation and body politic" for the purpose of milling flour. The special privileges accorded such corporations were premised on the social services they rendered: the dedication of private capital and entrepreneurial effort to the public interest. Other investigators have underlined this political character of the early corporation. John P. Davis, in his classic two-volume history of the corporation, noted that "it was not considered justifiable to create corporations for any purpose not clearly public in nature; each application was considered by itself, and if favorably, was followed by a legislative act of incorporation." Oscar Handlin commented that "at its origin in Massachusetts, the corporation was conceived as an agency of the government, endowed with public attributes, exclusive privileges, and political power, and designed to serve a social function for the State."

After 1815 an increase in economic opportunity projected the country into what, in contemporary terminology, would be called the takeoff into sustained economic growth. The moving West became more closely integrated with the industrially expanding East. A surge in immigration, especially of the Irish and Germans, increased the pool of both consumers and workers. A concomitant, yeasty egalitarianism led to movements in the several states for abolition of property holder or taxpayer status to qualify for the vote; admission of new states, formed out of the western territories and populated with rugged individualists, expanded an assertive electorate.

This spread of economic opportunity gave rise to a new class of economic adventurers in single-minded pursuit of wealth. The cult of the self-made man became the national symbol. In those heady days the self-created businessman was the very embodiment of democracy, contrasting with the members of the older eastern aristocratic families who had inherited their privileges. The changed climate was not without effect on the political concept of the corporation.

First, the practice of issuing corporate charters by special legislative act came to be viewed with suspicion and distaste. For one thing, it smacked of privilege: individuals with well-placed contacts, favorable social standing, and economic advantage clearly had an inside track on a state's grant of corporate rights. Even though that grant was premised on the rendering of a public service it nevertheless entailed private profit and benefit. Egalitarian sentiment supported a legislature representing all equally.

A second shift in social attitude toward the corporation was perhaps even more important. In the spirit of the times economic development, a national objective, was a goal that could be promoted by Everyman. Adam Smith was coming into his own, winning recognition that the butcher, the baker, the candlestick maker -- all seeking their private gain -- were contributing to the national wealth and thus serving a public purpose. In serving a public purpose, they, too, merited the advantages of incorporation. In Davis's words, "Not only was it difficult to distinguish between public and private, but the view that individuals should have the freest possible opportunities to create wealth encouraged the presumption that every business was of public importance in the respect that it might increase the aggregate wealth of society." Private enterprise had become public purpose.

The consequence for the corporation of this changing social context was remarkable. Although there had been some early flirtation with general incorporation laws, obviating the necessity of special legislative acts, movement in this direction now swelled. At least half a dozen states had passed general incorporation laws prior to the Civil War. And the notion that public purpose was served by private profit seeking gave ample rationale to this more open access to the corporate form, with its attendant advantages.

Private profit seeking has characterized societies in almost every age, as R. H. Tawney pointed out, but what was new about the nineteenth-century development, and especially its American expression, was the unabashed identification of private with public good and the widespread embrace of material advancement as embodying the highest democratic good. This value orientation shaped both American society and the American landscape. Law and business practice emphasized the privacy of person and property and gave to the corporation the constitutional rights of those persons who had formed it. After all, the federal constitution had made no special provision for such an institution. Business relations -- the relations between the institutionalized person of the corporation and the real persons with whom it dealt -- rested on voluntary contract, volition assumed to be equal on both sides. Such voluntary relations were largely unsupervised by the state as to their effects on the contracting parties or on third parties -- even whole communities. Cities and nature, people and resources, became appropriate arenas for the economic exploits of private adventurers, whether single entrepreneurs or incorporated associates.

Expanding Corporations and Their Impact

The consequence of this transformation of the corporation from public service provider to private profit seeker became more evident after the Civil War with the development of a national market based on an expanding transportation network. The more enterprising corporations grew in size, enlarged their financial base, and changed their organizational form and managerial functions. In effect the corporation, which sought to seize the economic opportunities offered by the amalgamation of pockets of population into a vast and virtual empire, had to pull up its local roots, separating itself from a community in which its managers were familiar civic figures, subject to the constraints of neighbors' opinions, and loosening ties with the state that issued the corporate charter. Abandoning this limited field of operations, the national corporation could obtain its charter in any state as a license to do business anywhere in the nation. Autonomous in its actions under the permissive philosophy of private initiative, the national corporation, with its subsidiaries and satellites, was free to move in and out of communities as suited its operations. With its behavior justified by the political principle that whatever contributed to economic development achieved public purposes, the national corporation could view social communities and the physical environment as malleable materials to be shaped to its own pecuniary advantage.

The enormity of this continental challenge spawned a race of titans capable of measuring up to the new standard. Cities like Detroit, Gary, Chicago, St. Louis, Omaha, and Denver could be thrown up almost like stage sets, outfitted to satisfy corporate balance sheets. Technology -- building from Eli Whitney's insightful use of interchangeable parts in the early nineteenth century -- was pushed at an accelerating pace; one discovery paved the way for another. In an early version of Mao's hundred blooming flowers, backyard laboratories sprang up wherever there were backyards. Soon the basement inventor was replicated on a vast scale within the nationalizing corporations: Steinmetz and General Electric became the paradigm.

New industries emerged -- automobile, rubber and tire, electrical, pharmaceutical. The race of titans gave way to more impersonal and institutionalized divisions of the large corporations, each with a mission and a budget -- to invent, to develop commercially, to produce efficiently and profitably, to create appetites for the more and the different. Raw and processed materials followed the same pattern -- steel mills that quickly dwarfed those of England, from which they had taken their inspiration; oil derricks hastily assembled to bring the new fuel to use abundantly and quickly, if also wastefully; massive machinery, eventually towering like Gothic cathedrals in the wilderness, for the purpose of extracting coal and minerals and in the process creating mountains of slag that would be left ominously behind. Like the materials-producing industries, the new manufacturing plants generated wastes on a scale proportionate to their output. Wastes could be discharged into rivers and lakes, deposited in landfills, or buried. In some instances the violation of social amenities was blatant enough to evoke -- not always effectively -- resentment and resistance: automobile graveyards stacked with the rusted bodies of junked cars; nauseous odors in the vicinity of plants using certain chemicals; and water so contaminated that the chlorination to make it safe for drinking made it unpalatable. In other cases toxic wastes buried in the ground or left in dump sites found their way, after the passage of years, into underground streams, where they endangered the health of nearby residents. The potential hazard may never have been suspected: the dump was available and there were few restrictions on the private use of land (there still are not in many states).

Thus, large-scale corporate industry affected society in two ways: the direct impact of the production process on the social and natural environment -- the use of people and nature as resources for the benefit of the autonomous corporation, whose private gain was identified with public good; and the health hazards, pollution, and environmental despoliation for which no corporate responsibility -- until recently -- was assessed since these activities breeched no right of contract or fair usage of property and were incidental to the production process, which was itself wanted (corporate profits, workers' jobs, and community taxes all being at stake).

Moreover, the adverse effects of technological processes are often disputable: "Is the routine use of antibiotics in animal feed breeding medicine-resistant bacteria that will eventually cause untreatable diseases in humans?" Business Week asks. "No one seems to know for sure....The stakes are huge. Although the $170 million annual market for animal-use antibiotics represents insignificant fractions of the total sale of such drug giants as American Cyanamid, Pfizer, and Diamond Shamrock, it forms the backbone of their agricultural sales divisions....The nagging question, however, is whether continuing the use of feed antibiotics will yield cheap meat at the expense of good health." An elderly woman living near a former industrial dumpsite that harbors residual asbestos, benzine, and other toxic substances, says perplexedly: "Chemicals are everywhere. One test will show that it's dangerous, one test will show that it's not. In this day and age, who do you believe?"

The knotty problem of weighing economic advantage against social disadvantage, particularly in the face of scientific uncertainty, is perhaps most clearly illustrated by the case of nuclear power. But recent years have witnessed an increasing number of like industrial dilemmas: the effect of certain spray propellants on the ozone layer; the hothouse effect of carbon dioxide from increased coal burning to conserve scarce and expensive oil; the widespread use of herbicides containing dioxin, which has been called the most powerful carcinogen known; and a Pandora's box of suggested horrors capable of being visited on humankind by genetic engineering for industrial purposes. The unknowns involved are vigorously debated by scientists.

In the face of such scientific riddles, courts have at times taken the position that "the lives and health of people...in the circumstances of modern industrialism, are largely beyond self-protection." But if this is so, who has responsibility for the public? Is responsibility rested in the corporation, whose value system stresses autonomous decisions directed to the business's own advantage? Is responsibility rested in the hands of government agents, who would have to create a vast network to oversee all corporate activity, granting or refusing their imprimatur often on the basis of inadequate or conflicting information? Is industrialization on a large scale a force so elemental, almost like nature itself, that it cannot be controlled in any meaningful sense?

Leo Marx surveyed the attitudes of American writers of the nineteen and twentieth centuries with respect to the impact of industrialism on society and constructed a vivid historic allegory entitled The Machine in the Garden. From its discovery America embodied the myth of the garden -- an Eden existing in reality. The myth had two versions: one, a primitivistic view -- nature untouched, unspoiled, and provident; the other, a cultural view -- nature left to itself tending as much to wilderness as to garden and requiring human care to realize the pastoral vision.

Into this idyllic conception of the New World intruded, in time, the machine, the steam engine, and above all, the railroad. The Industrial Revolution had started in England, it was true, but there the machine intruded into a formed, socialized setting, with classes, customs, and commerce already in place. In America, it intruded into the unspoiled Garden, the myth-dream of a recovered Eden.

For a while, the opposition between the two cultures -- the pastoral and the technological -- went unrecognized. The machine could be regarded as a product of the Enlightenment, enjoyed and praised for its capacity to supply harnessed power, allowing the husbandman to practice even more successfully his rural pursuit-divorced in thought from an urban, factory culture. Even when the recognition came that a machine society introduced competing values and social relations, there developed the philosophic-poetic-artistic vision of "the middle landscape." The machine could be harnessed to tasks that would improve the pastoral society -- but it must be restrained at the point where, if allowed to expand further, it would itself dominate society.

Following this conception, the frontier West epitomized the barbaric wilderness of nature untamed. Europe was the overcivilized, overcommercialized, overurbanized, and overmechanized domain where the new technology had been allowed to rule. In between -- geographically, psychologically, and socially -- lay settled America, still in a controllable stage of development: the middle landscape avoided the undesirable extremes.

The vision was static, and as technology expanded its hold under the driving force of unrestrained individualistic competition, American writers sought to confront the vision and the reality, the machine in the garden, in a way that reconciled pastoral sensibilities with modern technological advances. But reconciliation was impossible. American literature became distinguished by the dialectic, the discomfort, the disillusion of a deeply felt need to hold fast to natural goodness in the face of irresistible institutional forces. As Marx concluded his illuminating study: "To change the situation we require new symbols of possibility, and although the creation of those symbols is in some measure the responsibility of artists, it is in greater measure the responsibility of society. The machine's sudden entrance into the garden presents a problem that ultimately belongs not to art but to politics.

Social Challenges to Corporate Autonomy

If corporate industrialism has had adverse as well as benign effects on society, requiring a reappraisal of their relationship, it is no less true that society has been undergoing transformations that have influenced the business corporation. These have largely to do with the pressures of population on resources and space. Relative scarcity has always been an issue, to be sure, but in most countries before industrialization the problem was contained by early indoctrination in an appropriate allocation of scarce goods by social class and function; since the spread of industrialization this problem has been finessed by the promise of economic growth in which all could share, even if not equally. Only within the past few decades -- indeed, chiefly within the last decade -- has the notion of absolute scarcity been debated. If we can safely say that few now subscribe to the concept of a definite limit on economic growth, we would have to add that many -- including many reputable scientists -- affirm that economic growth does have limits, even though not easily specified, and that continued indiscriminate growth may waste irreplaceable resources and permanently despoil the environment. It is the one measure of the seriousness with which we now view resource limits that air and water -- once classic examples of free goods -- have come to be appreciated as having their price, sometimes a high one.

The soaring costs of energy in all forms have engendered the fear of a declining standard of consumption. Pressures to sustain economic growth -- to maintain jobs and income, if not to add to affluence -- have resulted in the use of lower quality, less accessible, higher cost raw materials (the Ricardian effect), raising prices and frustrations. The optimistic belief that new technologies will provide substitute products and processes is at best an article of faith and at worst ignores potentially damaging consequences of the substitutes (the industrialization effect just noted). There has been a growing intellectual acceptance, even in some business circles, that the rate of economic growth cannot and should not be sustained at past levels; at the same time, we are reluctant to explore the significance of this conclusion.

But one consequence seems unavoidable. If growth can no longer be counted on to provide for all the major wants, private and public, of a society, or to sustain all the peripheral members of a society at a level that keeps a lid on mutinous outbreaks, especially in congested urban centers, then some specification of a nation's most serious needs -- its social priorities -- and some direction as to how goods are to be allocated among society's members are needed. The appropriate word is planning. Planning may be comprehensive or piecemeal, compulsory or advisory, long-run or short-run, but whatever its form, planning means identifying priorities in the production and distribution of economic resources. It is here that political decisionmaking challenges the autonomous corporation.

It was easier in an earlier day to support individualism, including economic discretion, as the expression of a more basic philosophical freedom. But in our times -- in the process of change from pastoral society to massive industrialism, from small-scale, open settlements to large, packaged populations, from amateur experimentation with keys on kites to scientific applications having major impact far from their source, with populations pressing hard on resources and resorting to modern forms of massed political power to cut themselves into the distribution of consumer goods -- the autonomous corporation, free as an individual in its business decisions, has become an anachronism. A philosophy of privatism that extends to the large business corporation is no longer tenable.

Corporate managers who bitterly assail the accumulating federal regulations with which they must cope contend, and with vehemence, that they have long since lost their privacy, at least since the New Deal.

The heavily individualistic tenor of caveat emptor has been largely supplanted by a myriad of class-oriented consumer protection laws, and employment relations, which once were a matter of individual agreement between master and servant, have been circumscribed by regulations setting minimum wages, prescribing safety and health regulations, and prohibiting discrimination based on race, sex, age, creed, and national origin as Congress has moved to protect consumers, workers, and minorities as classes.

But such protective legislation still accepts the basic premise of corporate autonomy. The legislation provides a framework within which the business firm can operate as it chooses or cease to operate if it chooses. The burden of governmental regulation has grown phenomenally in response to social pressures, proscribing certain corporate conduct but without modifying corporate objective. The difference was noted by David Rockefeller, chairman of the board of Chase Manhattan Bank: "Today, society's heightened expectations of an improved life are increasingly coming to bear upon private institutions, as well as traditional public institutions. Major corporations are being asked not merely to support, but to help devise and carry out basic strategies to eliminate social ills." The Committee for Economic Development (CED), a businessman's organization, came to much the same conclusion. Maintaining that society increasingly turns to business corporations for help in solving major problems, CED explained: "Out of a mixture of public frustration and respect for the perceived efficiency of business organizations, there is a clear tendency to look to corporations to take up the slack resulting from inadequate performance of other institutions, notably government." For whatever reasons, "broadened expectations of business have been building up for some time."

Today it is clear that the terms of the contract between society and business are, in fact, changing in substantial and important ways. Business is being asked to assume broader responsibilities to society than ever before and to serve a wider range of human values. Business enterprises, in effect, are being asked to contribute more to the quality of American life than just supplying quantities of goods and services. Inasmuch as business exists to serve society, its future will depend on the quality of management's response to the changing expectations of the public.

Given their autonomy, corporations even within a regulatory framework are structured to realize profits efficiently. If this autonomy is called into question -- not just through a redrafting of the regulatory contours but through a public sharing in the definition of objectives -- profit efficiency, however much leavened by enlightened public relations, can no longer claim to be the singular corporate strategy. It is not so much unchecked corporate power or adverse consequences of corporate power that are at issue but the appropriate uses of corporate power, particularly with respect to major social objectives that can be presumed, on the strength of an evolving political philosophy, to take precedence over individual desires.

Public and Private Purpose

The question of society's right to override private discretion goes back to earlier attempts at social legislation -- minimum wages, maximum hours, child labor restrictions, for example -- in a day when individualism and voluntarism were considered the bedrock of western democracy and the U.S. Supreme Court could assert that to strike down such inhibiting legislation was not to destroy the public good but to exalt it. That issue, involving the police powers of the state, has for some time been resolved in favor of the state. The point now being raised is different. Concern has shifted from the restraint of actions the corporation might have initiated if its privacy had been unchecked; now the focus is on the definition of actions the corporation actually undertakes or could undertake if corporate decisions were determined by criteria that the corporation left to itself would not choose to follow.

The distinction can be seen when applied to America's premier industry, the automobile industry. Left to their own devices the auto manufacturers' objective would be to sell as many ears as they profitably could within whatever regulatory framework involving safety, pollution control, and gasoline conservation Congress might erect. The more ears the better. But if their objective were set in the light of social desiderata, Detroit might become involved in a vigorous effort to reduce the population of automobiles by developing alternative means of transportation that would satisfy public needs at lower social costs, even if the profit potential were less.

Many leaders in the corporate world have testified that large corporations are in fact being pushed to adopt new strategies involving social purpose. As the CED commented, "The evidence strongly suggests that these are solid and durable trends, not momentary frustrations or fads, and that they are likely to increase rather than diminish in the future."

A New Strategy, A New Structure

Nevertheless, support for new strategies will remain largely wind and words unless there are changes in the structure of the corporation to facilitate them. That proposition has been effectively elaborated by Alfred Chandler, Jr., in Strategy and Structure: Chapters in the History of Industrial Enterprise. Concerned with the growth of the contemporary corporation, he concluded from a detailed examination of the period prior to World War II that changes in opportunities and needs from one period to a succeeding period dictated starts in corporate strategy. And "there seems to be no question that a new strategy created new administrative needs." Delays in developing new institutional devices perhaps reflected executive preoccupation with day-to-day affairs or failure to recognize the organizational problems impeding the success of a new strategy. Resistance to change may also have stemmed from perceived threats to the executive's own organizational or psychological security. In any event, sooner or later the needed structural change had to be forthcoming if the enterprise were to pursue the new strategy efficiently. In the period Chandler examined, new strategies were necessitated chiefly by changes in population, national income, and technology -- conditions over which the individual corporation had no control but to which the corporation was obliged to adapt.

Here is where the corporation is challenged today. The changes that are compelling a new corporate strategy are to some extent a continuation of past changes on a vastly altered scale. In part they represent shifts that are more political and social than economic. In total, they demand a new corporate strategy geared to broader objectives than profit and to more specific objectives than whatever production can turn a profit. Profit is not excluded as a goal, but it is no longer exclusive.

Such a changed strategy cannot be pursued effectively without altering the corporate structure. To pretend that social purpose can simply be grafted onto the existing corporate organization is an illusion and an evasion. However, to revise the present corporate structure will not be easy: today's corporate form matured in the permissive atmosphere of the last century, when the principle of corporate privatism replaced the guiding principle of public service. Introducing social purpose depends not only on modifying the internal corporate structure but on reordering working relationships among corporations, other interest groups, and government.

Copyright © 1982 by the Trustees of Columbia University in the City of New York