Changing the Rules of the Game: A Solution to the BP Problem

Wall Street caused the BP disaster. Short-termism is the problem. The Benefit Corporation is a solution.

The Old Rules

For public companies, decisions are driven by the quarterly earnings call. Meet the numbers, keep your job. Beat the numbers, collect your bonus. The rules of this game are stunningly simple. And they are backed by the force of law.

U.S. corporate law states that the legal obligation of the directors and officers of a company is to serve the interests of shareholders. Period. Full stop. This is true even when serving the interests of shareholders comes at the expense of its workers, community, or the environment. This is why we have a race to the bottom for the lowest wages or most lax environmental standards. This is why safety corners are cut willfully, egregiously, and repetitively; this is how mountains of BBB loans become AAA at a scale too big to fail bringing the economy to its knees. If a Board Chair or CEO makes a decision that doesn't maximize the short term financial interests of shareholders, he risks being sued. Before that ever happens, he's more likely to just lose his job.

The pressure to deliver short term profits is intense and reaches through every level of the company, cascading down from the Board room to the executive suites to the line managers. Everyone is measured by one yardstick and thus everyone sees every decision through one lens--will this make more money faster.

The New Rules

We can't change outcomes until we change the rules of the game. Fortunately, Maryland Governor Martin O'Malley and Vermont Governor Jim Douglas have done exactly that. Both signed into law this spring legislation creating a new class of corporations accountable to serve society as well as shareholders. It's called a Benefit Corporation.

Directors and officers of Benefit Corporations are required by law to consider the impact of their decisions not only on shareholders, but also on their workforce, community, and the environment. This gives them the legal protection to tell those disembodied voices on the quarterly earnings calls that there are limits to what sacrifices will be made at the alter of more-money-now. The Benefit Corporation relieves the pressures of short-termism that drive bad decisions that affect the rest of us.

A Different Outcome

If BP were a Benefit Corporation, it's unlikely the Gulf disaster would have happened. Here's why:

Empowered with new rights, some group of BP shareholders would likely have asked if directors and officers considered the environmental impact of hundreds of decisions during the last decade when BP racked up more than 750 safety violations (97%! of all violations cited during that time by regulators). With a long pattern of behavior yielding such negative outlier results, BP's attorneys would likely advise BP's directors and officers that they were creating significant exposure for themselves to a shareholder lawsuit against them personally for breaching their fiduciary duties. Given this threat, BP directors and officers would likely have taken safety concerns more seriously, warning signs wouldn't have been so callously ignored, and a $500,000 safety device wouldn't have looked so expensive amidst record profits in the tens of billions.

We can't put this spill back in the pipe, but we can prevent future spills, and future bailouts, by removing the root cause of myopic decision-making. If BP wants to begin to rebuild public trust, a great first step would be to make their U.S. subsidiary a Benefit Corporation and to commit it to the level of transparency and accountability that might avoid a disaster like this in the future.

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1 Comments

  • Peter Davis

    I think this story is incredibly naive. The fact that publicly traded corporations are focused on maximizing their stock price has almost nothing to do with shareholders. It has everything to do with the positions the insiders are holding in their own stocks, most of which have been bought at far lower prices due to the options they're granted by the corporate boards, which allow them to purchase a large number of shares at low prices and then sell them whenever they want. It is in the financial interests of the corporate insiders to do whatever they can to goose the share prices so they can cash out.

    The issue isn't whether there's a soft mandate for corporate execs to consider the outward benefits of what they're doing. The issue is far simpler: cash. Cash is and has always been king. Believe me, most corporate boards and executives could give a crap about the shareholders. Most of the shareholders have almost no idea what goes in either the companies themselves or the stock market at large.

    Do you really think that corporate officers are sidestepping regulations and jumping through loopholes to please the shareholders? C'mon, if you do, I've got a boatload of swamp land to sell you.

    Within some circles in our society, there is a lot of talk about business for social benefit, and all of it is justified and well targeted. But it is naive to think that, when faced with the choice between wads of cash and doing social good, that corporate officers are going to do social good. Some well, but many will not. The lure of the money is just too great. And it always has been. The history of humanity is one of a fight over treasure, certainly within the echelons of political and business power circles. That will only change when people change. Much as I'd like corporations to act better, to actually run their businesses with the goal of doing business and not goosing their stock price and to genuinely get their shit together, I also didn't just fall off the back of a turnip truck.

    The root of the problem of their myopic decision making ain't about accountability and transparency, because god knows that corporate and political America have become experts in looking and saying their accountable and transparent while lying through their teeth (see: the big banks, Congress, the Federal Reserve and the President, etc.). No, the issue is one of human nature and of the nature of greed.

    In my opinion, the only way to address that issue is NOT to make accountability optional. It is to enforce the laws on the books which require corporations to honestly report their finances. The reason companies like BP can get away with so much crap is that they break rules and cook their books and are NEVER held accountable. Just three days before the blowout, the Mineral Management Services of our very own U.S. government approved the blowout preventer that went on the well, even though it was known to be defective. My point: the entire system is busted.

    Changing the mandate of a corporation will not solve the problem, especially given the fact that many publicly traded corporations openly flout their legal obligations by actively screwing their shareholders.