Capitalism isn’t broken, corporate incentives are

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Corporate officers are charged with a fiduciary duty of loyalty to their corporation and its shareholders. To fulfill this duty, officers must place business interests above societal wants and needs. So it comes as no surprise that this duty has been used as an excuse to justify all sorts of questionable, myopic and downright sketchy actions.

What’s in the interest of a business almost always isn’t in the interest of society at large and, in particular, vulnerable communities that have insufficient capital and insufficient means to influence corporate decision-making. The mismatched interests between businesses and society are coming to a fore in the tech sector. Case in point is Facebook’s apparent prioritization of ad revenue over society’s interest in spotting and eliminating misinformation.

As Facebook slowly comes to its senses and changes its policies, the company has claimed it acts to mitigate the platform’s negative impact on elections and discourse in general. However, that is largely just a front for the truth: Tech giants such as Facebook will prioritize profit so long as it’s their actual legal responsibility to do so. That’s precisely why we have to change the rules of the game and make people, not profit, the focus of corporate activity.

The good news is that some corporations are forcing their tech colleagues to recalculate what’s actually best for their bottom line. As company after company pulls ads from Facebook, Mark Zuckerberg and his fellow officers have been compelled to fulfill their fiduciary duty by changing their behavior in a manner that serves society’s interests. Importantly, though, this duty was not triggered by a concern for people, but rather simply for profit.

Long before the current public health and economic crisis, the common approach to organizing startups and corporations created great investment opportunities that simultaneously morally and financially bankrupt society. For example, Vale, a Brazilian mining company, allegedly ignored warnings that could have prevented a dam collapse that killed hundreds of people. A different set of incentives (and regulations) could have spurred the company to take more preventative and proactive steps to shore up the dam and heed the warnings of mine operators. Instead, the company and its lobbyist succeed in preventing regulation that would have imposed more stringent (and expensive) maintenance.

Business folks such as Eric Ries saw how a focus on short-term gains permitted companies to ignore their negative long-term impacts on society. He started the Long-Term Stock Exchange, or LTSE, which, when it opens, will list companies that “agree to adopt and publish a series of policies that are consistent with long-term-focused principles.” The policies are designed to provide investors with “insight into how the company operates its business for the long term.”

The LTSE is important because it’ll change the very DNA of corporations — making consideration for the long term a part of every decision. It follows that companies on the LTSE will be encouraged and obligated to think less about next quarter and more about the next decade, in terms of not just their profits but also society at large.

Others, such as the good people at Patagonia, opted to become B Corps — “businesses that meet the highest standards of verified social and environmental performance, public transparency, and legal accountability to balance profit and purpose.” In doing so, these corporations fundamentally altered the duties of their officers.

The officers pledged, among other things, to be the change they seek in the world, to conduct all business as if people and place matter and to aspire to work in a way that harms none and benefits all. Consequently, these officers are no longer just beholden to the bottom line, but also to communities around the world and the earth itself.

Silicon Valley’s startup culture has perpetuated a traditional approach to corporate formation that values return on investment and other financially oriented metrics above all else. Unicorn after unicorn has been motivated to change its product, mission and personnel to do whatever it takes to convince someone that it’ll become a great financial addition to their portfolio.

But the tech heartland also has the chance to become the birthplace of a new approach to starting and running a business. What if angel investors pledged only to invest in B Corps? What if the firms along Sand Hill Road closed their doors to companies that didn’t join the LTSE? What if incubators only welcomed startups that pledge to make diversity, equity and inclusion training a mandatory part of their corporate culture?

If Silicon Valley remains the epicenter of startups, it can lead the way in updating an outdated approach to corporate governance. Kudos to all the companies that are forcing Facebook to change what’s good for its bottom line. But let’s go a step further and actually redefine what we mean by the bottom line: doing business that does good for the community, the planet and future generations.

This new bottom line will compel corporations to do more than create corporate social responsibility programs by creating a duty to actively weigh and report on how decisions are impacting a broader range of stakeholders over a longer time horizon.

Kevin Frazier is a student at the UC Berkeley School of Law and the founder of No One Left Offline.