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BBS is a not-for-profit membership organization that seeks to create a more Just and sustainable global economy by working with the business community. The author extends his thanks to Marjorie Kelly for invaluable comments on an earlier draft, and to Anna Feller for editorial assistance. Is It Time to Rewrite the Social Contract? Allen L. White Society is indeed a contract… Between those who are living, those who are dead, and those who are to be born.
Edmund Burke (1792) In the midst of BP Billion’s assessment of the consequences of its massive and dramatically successful effort to reverse malaria in the region surrounding its aluminum smelter in Macaque, the general manager of the smelter commented, “you can imagine, it was huge disaster. We could not deal with that level of absenteeism, and we 1 would have had more fatalities. If we didn’t treat malaria we could not operate. ” Not long ago, such an intervention on the part of a private firm in a traditionally governmental function like public health was a rarity.
Today, interventions are increasingly commonplace, both in instances where a business case is evident (as in Macaque) and in instances where the economics are less than compelling but the moral high ground is unambiguous. Examples of corporate activities that impinge upon public goods abound: pharmaceutical companies providing affordable HIVE/AIDS drugs to battle the pandemic worldwide; beverage companies controversially extracting potable water sources in India; multinationals assuming control over public water supplies in Bolivia; and prevarication of mass transit in the UK and roadways in India.
Amid the broad spectrum of public goods -? public health, public education, public lands -? the emergence of the corporation as an investor, advisor and partner has moved from the exceptional to the expected. By all indications, this trend will accelerate in the coming decades as societal expectations of business stretch the traditional boundaries of companies from purely profit-driven entities to organizations with an obligation to operate with an enduring commitment to the public interest. For some, the movement of the corporation into the domain of public goods is laudable.
Government capability, integrity and resources are in short supply in many developing countries. Companies for which a stable, predictable operating environment is indispensable to business success find aligning the demand and supply of public goods to 1 La Francine, S. 2006. Business Joins African effort to cut malaria. New York Times, June 29. Business for Social Responsibility I Is It Time to Rewrite the Social Contract? Be an imperative for creating conditions for business prosperity. The burgeoning umber of business-government-civil society partnerships attests to this reality.
For others, the growing presence of the corporation in public goods provision signals a disturbing continuation of a trend that began some 25 years ago as the prevarication of public services began to take root as a basic element of the Washington Consensus, the dominant international development paradigm of the last several decades. The retreat of government and the increasing presence of corporations stir concerns over accountability and democratic control over public goods that many believe should remain in the domain of government.
In a similar vein at the national level, the rise of Reagan- Thatcher market “fundamentalism” embraced prevarication as the pathway to higher efficiency, less waste and lower taxes in the provision of traditionally public goods. These differences defy easy reconciliation because the rules of the business-government- civil society engagement -? which is integral to the social contract -? are being rewritten not through some formal, centralized mechanism, but as a result of the pressures of shifting societal expectations about business’ role in society.
It is a process fraught with contradictions and uncertainties. At the same time, demands on business to deploy its unparalleled managerial and technological capabilities to provide public goods provoke unease among many concerned with outsourcing of traditional public functions to the private sector. In some instances, this unease is shared by business leaders themselves who are concerned that 2 expectations of business may be spiraling toward unsustainable levels.
Praise for relief activities by companies in the wake of Hurricane Strain and other natural disasters abound while criticism for terminating or reducing workers’ health care overage and pension funding intensifies. Admiration for producing life-saving drugs is widespread while their enforceability offends many on moral and ethical grounds. Ambiguity is the inevitable consequence of the emergence of global businesses as the most influential and asset-rich social institutions of the early 21st century. Rethinking the societal-business contract is a work in progress that is likely to remain unsettled for years to come.
Yet amidst these turbulent times, we can learn from the past and shape a future in which the reciprocity of public and private interests are reformulated in a way that SST tests 21 century societal needs and expectations. Two centuries before the emergence of the 19th century modern, Joint stock, limited liability corporation, the idea of a social contract took root as the linchpin of relationships between individuals and between individuals and government. The great philosophers of the 17th and 18th centuries -? Thomas Hobbes, John Locke and Jean Flowered, M. ND B. K. Goosing. October 2006. Business leadership in society. Boston 3 Jacques Rousseau -? put forward the earliest concepts of the rights and responsibilities of the state to its citizens and citizens to each other. This early hinging was the precursor to modern concepts of democracy and the democratic state, wherein ultimate power resides with citizens who willingly delegate certain authority to the state so that individuals may fruitfully participate in a social arrangement that enhances the shared prospects among all participants in a defined community.
While assumptions and emphases vary, the basics of the social contract are straightforward. Its essence has not fundamentally changed for many centuries despite the enormous shift from the agrarian societies in which the early philosophers lived to the complex industrial societies that dominate the anthropometry global economy. To depart from a situation of undefined rights and endless conflict over control of common assets such as land and water, citizens assent to honor the rights of others in return for assurances that their own rights will be protected.
Those who violate the rights of others -? for example, by stealing, contaminating or trespassing -? are penalized. While the scope of rights is constantly expanding, the principle of protecting individual rights through individuals willingly granting authority to the state remains a foundational element to the social contract. Over centuries, rights protected through mechanisms of the state have steadily expanded. Consider the right to vote, the right to freely associate in the workplace, the right to freedom of speech and the right to own property, the latter of which originated thousands of years ago.
These rights and many more have been placed in the hands of the individual and overseen by a sovereign state that serves as custodian and adjudicator. Embedded in the social contract, the state, by virtue of authority granted by the citizenry, mediates among individuals and between individuals and society. The state’s role remains legitimate only as long as citizens Greer to let it continue. When the social contract frays or fails, either peaceful democratic change or forced change through civil (and sometimes violent) action results.
While property rights provided individuals with the resources to create wealth for their own enrichment and to drive productivity improvements, the commons -? public land, water and air -? represented communal assets to ensure the community’s long-term survival and prosperity. Thomas Paine in the late 18th century observed that “natural property… Which comes to us from the Creator of the universe must not be appropriated by private interests. That is, assignment of too many property rights to individuals may endanger the very assets that are the foundation for wealth creation.
A society that permits endless incursions into the commons for the benefit of the privileged is not a society destined to build deep democratic roots. These early notions of a social contract initiated the codification of rights and early formulation of the social contract was property-centric, within it there is something deeper; namely, the contours of what today we call democratic processes: the rule of law, due process and, more broadly, the pillars of modern nation states.
Debates around rights and a social contract were not limited to the commons but rather drifted into the domain of worker-employer relations, portending the emergence in the the early 19 century of the corporation as a third party to the social contract in addition to government and the citizenry. 3 Speaking from the perspective of a largely agrarian society, Jefferson stressed the need for workers to reap the benefits of their labor; and Pain’s vision of “every man a proprietor” is precursor to the notion that individuals have a natural right to reap the benefits of not Just societal capital, but reporter capital as well.
That is, those who create wealth in a corporate setting are rightful claimants to its benefits. In contrast, concentration of wealth in the hands of those who already possess it creates, in Dam’s Smith’s terms, “… An absurd tax upon the rest of their fellow-citizens. ” The rights of citizens in society and in the workplace specifically to receive a Just portion of wealth they help create is a universal norm in modern nations, but the expression of this contract varies widely over time and place. Centuries later, for example, the Japanese social contract is not identical to the
French social contract, and the French social contact is distinct from the American social contract. The U. S. Bill of Rights and Constitution provide the framework within which rights of and obligations to citizens and the state are articulated for the U. S. As a sovereign nation. At the same time, citizen- corporate relations were left to the legislation process and to Judicial decisions spanning more than two centuries. The proposed (and now stalled) European Constitution offers an alternative framework to the American model.
Diversity notwithstanding, each nation has defined the monuments of a social contract through its unique culture and political 4 devices. In short, approaches to social contracts across countries vary, but their core underpinnings do not. Democratic societies function based on the assent of the governed who, in turn, reserve the right to terminate a government or a governmental decision if sufficient numbers feel aggrieved or violated. When either of these conditions arises and the outlets for change are non-existent or blocked, the stage is set for reconstitution of the social contract through conflict.
History is rife with such circumstances, from the the American Revolution in the late 18 century to the anti-apartheid movement in South Africa two centuries later. These cases and dozens of others may be viewed through the lens of the social contract: an aggrieved citizenry demands an overhaul of the government-citizen arrangements built not on assent but on imposition of illegitimate exercise of state power. Kelly, M. 2002. The divine right of capital. San Francisco: Barrett-Koehler. 109-113.
We have yet to see such social dialogue, deliberation and debate when it comes to citizen-corporation and state-corporation relations. This is true despite the emergence of the corporation as a player that arguably wields as much influence in the lives of people as the very governments that grant corporations the license to operate. 5 Enter the Corporation Corporations were by and large absent from the earlier formulation of the social contract. The emergence of the corporation as societal actor on a par with government or the citizenry began in earnest only in the early 19th century.
The earliest state-chartered corporations such as the British East India Company and the Dutch East India Company, for all their influence, power and resources, were unique monopoly enterprises with a royal mandate as much political in nature (to expand the empire) as commercial (to enrich the royalty and investors). 5 the By the early 19 century, the economic landscape began to change dramatically, and with it the rules of the social contract shifted. 6 Prior to that time, corporations were of modest scale and formed as partnerships between small groups of investors who remained active in the day-to-day operations of the company.
This partnership model was adequate as long as partners could meet capital needs. Alongside these partnership enterprises were public chartered enterprises that were, for all intents ND purposes, state enterprises, chartered for time-limited periods for specific public purposes such as building a road or canal. Upon completion of an enterprise’s mandate, the charter would be terminated and the enterprise dissolved. As companies scaled up their operations, capital needs expanded and government control turned from dominant to subordinate and from active to passive.
Nineteenth century entrepreneurs, enriched and emboldened by rapid expansion of their enterprises, began a century of evolution that shifted their relationship from one of servant of government to one of rival of government. While corporations were formally dependent on the state for the license to operate via the charter process (at the state level in the U. S. And at the national level in virtually all other countries), the ascendancy of the corporation effectively emerged as a challenge to citizen sovereignty.
Unlike the governments over which citizens exercise the authority to install or dismiss, no such accountability defined the citizen-corporation relationship. Entity with many of the protections and privileges of “natural persons” including due process, habeas corpus and, within certain limits, freedom of speech and freedom to engage in the political process through certain political contributions. As the scale of corporations grew, their readiness to exercise political influence to reconstitute their position and form increased in parallel.
Because capital was scarce in the 19 century but was critical to a rapidly expanding industrial economy, companies aimed to extend privileges to capital providers to ensure a steady flow of investments in new and growing enterprises. Robins, N. 2006. The corporation that changed the world: How the East India Company shaped the modern multinational. London: Pluto Press. 6 White, A. L. 2006. Transforming the corporation. Great Transition Initiative Paper Series No. 5. Http://www. Activities. Org/documents/Pitfalls/corporations. PDF (accessed April 1 1, 2007).
This time period laid the foundation for what would evolve over many years into the uncontested preeminence of capital in defining the corporation’s obligations to society. The principal obligation of corporate directors to shareholders (the capital providers), the requirement of boards to accept the highest bidder in the event of competition among multiple offers to acquire a firm, and the duties of pension fund trustees to maximize returns to pension beneficiaries are but some of the anthropometry fiduciary principles that have roots in the 19th century ascent of capital interests.
The 20th century tinkered with but did not fundamentally alter these relationships as the citizen-corporation social contract gradually took shape. Shareholder primacy was occasionally softened in the early sass but was never seriously challenged, much less dismembered. Anti-trust legislation of the early sass reigned in some of the most egregious forms of monopolistic behavior. The sass witnessed the first serious efforts to tame volatility and speculation in securities markets through the creation of the U.
S. Securities and Exchange Commission to oversee capital markets and mandatory, audited disclosures of companies’ financial performances. For the first time, workplace standards on the rights of labor were established by law. These actions served not to undermine, but rather preserve the fundamentals of the capitalist economy by providing greater certainty, transparency and confidence to the investment community.
Even basic protections for labor, which might seem to be a step towards diluting the supremacy of capital interests, actually served capital interests by providing a predictable process through which management-labor The second half of the 20 century saw further change that modulated but still retained the dominance of capital in defining corporate-societal relations. Beginning in the sass, the U. S. Environmental movement spawned a series of regulations that for the first time established limits on pollution caused by companies’ activities in relation to air, water and land.
This incipient movement implicitly recognized the environment as a legitimate stakeholder in defining corporate rights and obligations to society. Companies were mandated to operate within certain limits of their use of the ecological commons. Capping the use of resources to protect public health and the environment was a breakthrough idea in the evolution of business-society relations. Compliance with these new rules meant allocation of a fraction of the firm’s economic resources away from earnings and dividends, thereby reducing shareholder returns.
The process of setting pollution standards immediately became highly contested territory, where business interests would engage both government and newly emergent environmental advocates in dueling testimony over how to define a “safe” level of air, water and land pollution. Incremental changes in regulation occasioned changes in compliance costs. Elaborate cost-benefit methodologies emerged to guide regulatory agencies as heated debates arose over imponderables such as the value of a human life or illness relative to the cost of its prevention through technological improvements in 7 processes and products.
While these debates held consequences for human and ecological well being, their existence signaled at least a temporary weakening in the grip of shareholder primacy as the paramount principle in defining the boundaries in the social contract between business and society. The closing two decades of the 20th century tempered the shifts spurred by the environmental movement. It was a period in which new political forces, led by U. S.
President Reagan and I-J Prime Minister Thatcher, challenged the drift toward activist government by espousing lower taxes, trade liberalizing and prevarication of heretofore public goods and services as the underpinnings of an ideology that would once again realign the social contract. Unbridled market capitalism, it was argued, was the only viable economic system in an age of globalization; the less government, he better to enable markets to deliver innovation, efficiency and wealth. The fraying of Soviet static in the eyes of the Reagan-Thatcher champions was a vivid example of a failed system.
They argued that the know-how of private enterprise, not the bureaucracy of big government, should be applied to traditional government and quasi-government functions such as public transport, education, health services and energy services to reduce inefficiency and inject competition in areas that once were This economic mindset was not limited to Anglo-Americans: it also defined the merging Washington Consensus of liberalized trade, fiscal austerity and prevarication that has dominated the ideology of the World Bank, International Monetary Fund and other multilateral institutions during the last two decades.
Without using the terminology of the social contract, the Reagan-Thatcher alliance and its offspring heralded a period of belief that business could function best absent government control, as business was essentially the only capable provider of goods and services as well as the most powerful engine for sustaining economic growth.
Amidst this ideological landscape the role of government receded, the role of civil society became one of watchdog to place constraints on business behavior, and the scale, reach and influence of global business surged to unprecedented levels on the back of international trade agreements and increasingly borderless capital and technology markets. Only during the last decade has the grip of the Washington Consensus begun to soften due to a confluence of several challenges to the prevailing social contract. Interestingly, shifts have in part originated in the business community itself.
The rise in expectations around the societal obligations of corporations exposed fissures in the business community. For some, prevarication of government functions in water systems, energy and education has opened vast new commercial opportunities, particularly in emerging economies. Much of the business model underpinning the “bottom of the pyramid” concept -? serving untapped markets among the world’s poor -? is premised on the view that governments in developing countries lack the resources or competency to provide many basic goods and services to their populations.
For the 60,000 multinational corporations that already represent about one quarter of global 8 economic output, these markets are ripe for exploitation and include activities such s financing micro-enterprises, restoring damaged natural resources and partnering with local entrepreneurs in developing appropriate health and energy technologies. 7 While the optimists depict infinite opportunities in prevarication, the skeptics worry about the continuing offloading of governmental responsibilities onto the commercial sector.
What should be the division of responsibilities for reversing climate change, or for managing the HIVE/AIDS pandemic and other global health issues such as malaria and tuberculosis? The answers to these questions defy simple either/or responses. Responsibilities ore often than not are shared, not exclusive. While the scale, influence and resources of global companies makes them ready targets for solving public goods shortfalls, many in the business community look askance at the intensifying pressures to outsource critical problems to the private sector that arguably should remain in the public sector sphere.
These anxieties were expressed as early as the 2002 World Summit on Sustainable Development in Johannesburg. They continue to business-society relations. Enter Civil Society Amid the shifting and contested frontier between business and government obligations, civil society is making its presence felt at unprecedented levels, particularly since the midair’s. Civil society organizations (Coos), of course, are not a new phenomenon; for centuries, citizens and workers have organized themselves into guilds, associations and trade unions to advance a common purpose.
What is new are the number and impact of Coos that have reached the point of formal recognition by multilateral organizations and national governments as legitimate stakeholders in international and national decision-making bodies. Coos have also inched their way into the corporate domain, establishing a foothold in the provenance of corporations through mechanisms such as community advisory panels and ad hoc consultative groups and partnerships on issues such as labor standards and climate change.
A plausible future is one in which civil society moves closer to the core of corporate governance by, for example, securing 8 positions as corporate directors or assuming more powerful roles of oversight. Now in the early years of the 21st century, the sophistication, complexity and reach of Coos continue on an upward trajectory. Dramatic changes have occurred not only in Coos’ influence, but also in their diversity and modus operand’. Parallax, C. K. 2005. The fortune at the bottom of the pyramid. Upper Saddle, New Jersey: Wharton School Publishing.
Hart, S. 2005. Capitalism at the crossroads. Upper Saddle, New Jersey: Wharton School Publishing. 8 White, A. L. 2006. The stakeholder fiduciary: CAR, governance and the future of boards. San Francisco: Business for Social Responsibility. Http://www. BBS. Org/ Sorceresses/index. CFML (accessed April 1 1, 2007). 9 Until the sass, a large segment of transnational Coos fell into the category of humanitarian organizations, such as CARE and Sofas, as well as that of environmental advocacy and scientific organizations, such as CNN, WFM and Greenback.
As globalization has accelerated, an explosion of new organizations has evolved in response to urgent problems that globalization itself has caused, accelerated or exposed, including lack of accountability of transnational corporations; government corruption in oil and mineral-rich nations; health pandemics such as HIVE/AIDS and malaria; labor practices of transnational companies in contract factories in poor and emerging economies; residual land mines in former conflict zones; biodiversity loss in critical regions; and incorporation of sustainable