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By Rosabeth Moss Kanter
Middle-class economic anxiety has led to a renewed interest in corporate responsibility to the work force. Pointing to models of employee-friendly companies, from Malden Mills to Hewlett- Packard, advocates argue that the "good corporation" should be established as a new institutional form with legal and tax benefits: the "R-corporation" or the "A-corporation" (for "allied with working families"). The "good corporation," however, is not a singular entity that can be established by legislative mandate. The proposals are flawed because they neglect principles of effective change.
The proposals are blunt instruments rather than precision tools. By trying to define the ideal attributes of the "good corporation," the proposals lump together many things that might make more sense treated separately. Creating a package of requirements for corporate behaviors could make it hard to add more to the bundle or to unbundle the elements later, as new discoveries are made about sources of high wages and security. And if debates start about all the things that various groups might want as a part of their definition of the "good corporation," watch the whole proposal go nowhere.
To change behavior it must be easy to take a first step in the right direction. When social actors people as well as companies are required to do too much all at once, they may find the costs of the transition beyond their means and the leap too difficult to make - and so they do nothing. It is very difficult for institutions to transform fully, and it takes many years. Creating two categories of corporations might reward the really good guys that are already behaving the right way (and did not need government incentives to do so) but fail to change the behavior of the bad (or less good) guys.
There are simpler and more direct ways to increase socially responsible behavior. For example: Encourage large companies to move toward a 50-to-1 compensation ratio between the highest-paid and lowest-paid employee by eliminating the tax deductibility of payroll expenditures for salaries above the chosen multiplier. Develop individual training and education savings accounts and give employers tax credits for contributing to them. Make individual pensions and health insurance benefits "portable" when employees change jobs. Add a tax preference for gain-sharing programs to offset the “loss" to shareholders when productivity gains are shared with workers.
A targeted approach consisting of separate initiatives would permit different companies the flexibility to do things appropriate for their industry, size and situation. It would permit experimentation - the development of alternative models of the “good corporation."
An incremental or step-by-step approach might seem less satisfying to those advocates hoping to solve the whole problem with one bold stroke, but flexibility is a virtue in the case. Recall the Clinton health reform package: too big, too comprehensive, too different, and thus too politically vulnerable.
A second set of concerns revolves around the use of incentives themselves. The law of R-corporation or A-corporation proposals could create perverse incentives. An incentive for "good corporations" that lowers their cost of doing business adds to the relative cost for the "bad corporations' that compete with them. This extra cost for the bad guys could then produce the very behavior it was designed to prevent. The bad guys limit employment or flee off- shore.
Financial incentives are only one tool for motivating socially responsible behavior, and they tend to encourage extrinsic motivation (do it because it provides a tax break) rather than intrinsic motivation (do it because it motivates the work force, produces higher performance, creates good will in the marketplace and community, or is the right thing to do based on societal and individual values). Social psychologists have found that intrinsic motivation produces longer-lasting behavior change - true commitment. Extrinsic motivation often produces compliance with the rules, followed by attempts to get around them and a shift of behavior if rules change.
The proposals could have another set of unintended consequences: undermining new business start-ups, one of the major sources of job creation in America. Small entrepreneurial companies cannot afford some of the financial investments in human capital that the R-corporation proposals desire, yet they can also be good employers that invest in their work force in other ways: stock options, challenging work that builds skills, and the potential for higher earnings and better jobs as the company grows. If start-up companies could not qualify for R-corporation status, they could face a cost disadvantage against established competitors, with a potentially dampening effect on job creation.
A final principle of system change is that it is important to identify and work on the real problem. The R-corporation proposal tends to assume an ideal of employment stability and pays little attention to the increasing reality of employment transitions. All jobs are less secure today, whether in "good" or "bad" corporations. Few believe that lifetime employment, civil-service-like, will come back. Even if the bond between employer and employee is strengthened, there will still be change, as some fields or skills become obsolete while new ones rise. Yet the R-corporation proposals would not address a major source of economic insecurity and anxiety. Solutions are required to both the problem of wage stagnation and insecurity within a company and good job-creation-and-finding mechanisms outside a particular employment relation.
The R-corporation proposal is employer oriented but not individual/family oriented. It provides benefits only for those who are employees, as long as the employment relationship continues. But why continue a possibly outmoded system in which most social support comes through employers? Why increase the dependence of people on the decisions of employers? A better approach might be to provide people with tools for their own survival and prosperity, such as individual education accounts that can be used for lifelong learning.
Proposals for changes in corporations should be evaluated in terms of the likelihood that they will produce results for the work force and society, rather than simply change corporate behavior. Change requires output, not input, standards and measures. Incentives for training, for example, tend to reward activities rather than results; the percentage of payroll spent on training is an input measure. The training might be lousy, jobs might be non-existent, and therefore the input might simply create a "training establishment" or bureaucracy. Consider one of the criticisms of welfare programs: that they support a bureaucracy instead of alleviating poverty.
Creating a separate legal and tax status for the "good corporation" has too many flaws. But this is not to say there is nothing government can do to achieve the desired ends.
Companies could balance the interests of all of their stakeholders if they had access to “patient capital" - investors who are willing to look beyond the current quarter and wait for long-term investments to pay off. Government could encourage a longer-term orientation through long-term capital gains tax reduction and taxes on short-term turnover of investments.
And by closing corporate tax loopholes in the interests of fairness, the government could raise revenues to pay for national investments in education. A highly educated work force is one of America's primary economic assets. Moreover, a work force armed with education is more secure in the face of economic transitions and can better bargain with employers to create conditions that produce the "good corporation."
Rosabeth Moss Kanter is a Harvard Business School professor and is author of World Class: Thriving Locally in the Global Economy, published by Simon & Schuster, Copyright 1996 by Rosabeth Moss Kanter. All rights reserved.
Copyright © 1996 Corporate Conduct Quarterly, Rutgers, the State University of New Jersey. All rights reserved.