Public Arguments: Seven Plus Seven — The Responsibilities of Business Corporations

Viewed in the long run of history, the business corporation is a fascinating institution. It is a social institution, independent of the state. Its legal existence is transgenerational; it goes on even when its progenitors die; and it may endure across many generations. Its members come to it voluntarily. They do not give it all the commitment and all the energies of life; it is not a “total institution.” They may well commit more of their time and energy to it, on a sustained basis, than to any other institution of their lives, except possibly their families.

The business corporation is also a “mediating structure,” that is, a social institution larger than the individuals who make it up, but smaller than the state. An institution both voluntary and private, it stands between the individual and the state, and is, perhaps, (after the family) the crucial institution of civil society.

Civil society is composed of all those associations, freely chosen or natural (such as the family), through which citizens practice self-government independently of the state. Through the institutions of civil society and its mediating structures, citizens pursue their own affairs, accomplish their social purposes, and enrich the texture of their common life. Civil society is a larger, more basic, and more vital component of social life and the common good than the state. The state is a servant of civil society. This is caught in Lincoln’s classic phrase: “government of the people, by the people, and for the people.”

The private business corporation is a necessary (but not sufficient) condition for the success of democracy. This insight is one of the crowning achievements of this nation’s founders, who inherited parts of it from Montesquieu. They saw quite clearly that democracy would be safer if built upon the commercial and industrial classes than if built upon the military, aristocratic, clerical, or landed classes, on which most regimes of prior history had been built. Our founders offered several reasons for this view, which here need not detain us.

Furthermore, the founders of this nation looked to commerce and manufacture as essential keys to economic prosperity. In Article 1, section 8 of the Constitution, they looked to the private business corporation for the advancement of the arts and practical sciences — they looked to invention and discovery — and saw in ideas a new form of property far more significant than land. Only in this one place in the body of the Constitution did they use the word “right,” to protect the “right” of authors and inventors to the fruit of their original ideas. In mind, they saw, lies the primary cause of the wealth of nations. To genius of mind they added, as Lincoln admiringly noted, the “fuel of interest.” To mind they gave incentives and, later, in the land grant college act, a basis of institutional support through the research of an entire array of state-funded universities.

 

Building Community

One of the most striking features of early American life, according to Tocqueville, was the delight Americans took in forming associations, in cooperation, and in teamwork. (It is little wonder that the only sports to attract universal acclaim in the early United States were team sports — baseball, football, and basketball.) A major preoccupation of the early centuries was building communities—entire cities where none before had existed. This entailed learning to work together under private auspices, while keeping the state both as weak and as strong as is consistent with self-government.

In this climate, the private business corporation became a prime model of public association, common motivation, mutual dedication, widespread optimism and the “can do” spirit. “The impossible takes a little longer,” is the sort of motto that members of enterprising institutions like to exchange. (Professors, with their professional interest in ambiguity, have always shown discomfort in the face of the rhetoric of business leaders; the latter like to get past ambiguity in order to act successfully. Typically, the temperaments of the professor and the businessman diverge — and the two tend toward genial enmity toward one another.)

Despite its obvious importance, until recently it has been difficult to find theological or religious writing on the business corporation that meets two conditions: that it is not positively hostile to business; and that it is not merely patronizing, but fair and sympathetic. Sections 32, 33 and 42 of Pope John Paul II’s magnificent encyclical of 1991, “The Hundredth Year,” meet these tests. They are, by far, the most religiously helpful passages that people involved in business are likely ever to have found. These passages are so apt that it is less useful to paraphrase them than to allow them to be heard directly:

… many goods cannot be adequately produced through the work of an isolated individual; they require the cooperation of many people in working toward a common goal. Organizing such a productive effort, planning its duration in time, making sure that it corresponds in a positive way to the demands which it must satisfy and taking the necessary risks — all this too is a source of wealth in today’s society. In this way the role of disciplined and creative human work and, as an essential part of that work, initiative and entrepreneurial ability becomes increasingly evident and decisive.

At this point, the Pope makes a startling claim. Speaking of the process of organizing the productive effort, the Pope writes: “This process … throws practical light on a truth about the person which Christianity has consistently affirmed,” and “should be viewed carefully and favorably.”

Please note these words. Pope John Paul II recommends that we study the business corporation in order to gain “practical light on a truth about the person.” We should study this example “carefully and favorably.” Indeed, the Pope himself immediately highlights some of the lessons for “the Christian truth about the person” that become evident in the life of the business corporation:

Indeed, besides the earth, man’s principal resource is man himself. His intelligence enables him to discover the earth’s productive potential and the many different ways in which human needs can be satisfied. It is his disciplined work in close collaboration with others that makes possible the creation of ever more extensive working communities which can be relied upon to transform man’s natural and human environments. Important virtues are involved in this process such as diligence, industriousness, prudence in undertaking reasonable risks, reliability and fidelity in interpersonal relationships as well as courage in carrying out decisions which are difficult and painful, but necessary both for the overall working of a business and in meeting possible setbacks.

Pope John Paul II also has a sound word on profit:

The church acknowledges the legitimate role of profit as an indication that a business is functioning well. When a firm makes a profit, this means that productive factors have been properly employed and corresponding human needs have been duly satisfied…. In fact, the purpose of a business firm is not simply to make a profit, but is to be found in its very existence as a community of persons who in various ways are endeavoring to satisfy their basic needs and who form a particular group at the service of the whole of society. Profit is a regulator of the life of a business, but it is not the only one; other human and moral factors must also be considered, which in the long term are at least equally important for the life of a business.

The private business corporation is, then, an extraordinary institution. It is a practical model for the Christian church to reflect on, “carefully and favorably.” “Carefully” — since, after all, “The first moral responsibility is to think clearly.” The corporation is not a church, not a state, not a welfare agency, not a family. A corporation is an economic association with specific and limited responsibilities. In this light, seven corporate responsibilities may be said to constitute its primary moral duty.

 

Seven Corporate Responsibilities

Some who work in the field of business ethics were trained first in ethics, with a liberal arts background, and tend to think of business corporations as morally naked, unless hung with baubles and jewels from ethics to disguise that nakedness. In other words, they do not see the ethical dimensions inherent in business activities. As a consequence, one detects a certain dualism in many discussions of business ethics: on the one side is business, and on the other side are all those other responsibilities that business needs to add on in order to be, or to appear to be, ethical. In an analogous way, parents sometimes try to impose on one of their children an ideal of behavior that seemed appropriate to their other children. Sometimes it is necessary to listen for a while to the distinctive being of a child, in order for the parents to detect a lifetime ideal rather different from any they have known before, and yet altogether proper to that child. It is wrong to impose on one child the ideals that worked very well for another.

Thus, it is of considerable importance to discern, first of all, the moral ideals inherent in business qua business. A business corporation is not a church; it is not a state; it is not a welfare agency; it is not (except rarely) a religious association; it is not a political association; it is not a “total institution” (Erving Goffman). It is an economic association, which in several ways serves the common good of the community simply by being what it is. Accordingly, among the corporate responsibilities of business that spring from its own nature are at least these seven:

1. To satisfy customers with goods and services of real value. This is not so easy as it seems. Some three out of five new businesses fail — perhaps because the conception their founders have concerning how to serve the customer is not sufficiently realistic, perhaps in the conception itself, perhaps in the execution. Like other acts of freedom, in the beginning launching a new business is an act of faith; one has to trust one’s instincts and one’s vision, and hope that these are well enough grounded to build success. In the end, the customers decide.

2. Make a reasonable return on the funds entrusted to the business corporation by its investors. It is more practical to think of this responsibility in the second place, rather than in the first, where some writers place it, because only if the first is satisfied will the second be met.

3. To create new wealth. This is no small responsibility, because if the business corporation does not meet it, who else in society will? Probably more than a third of American citizens who are employed receive their salaries from non-profit institutions. But non-profit institutions receive their funding from the benefactions of others, which in the end come from the new wealth created by the business corporations. It is also from this new wealth that the firm finds it possible to pay a return to investors, in addition to returning their principal. From this new wealth, provision must also be made for the future, including a fund to underwrite all those failed projects which are certain to happen along with some successes. If a company is not creating new wealth, it is spinning its wheels or going into debt or consuming its seed corn; such a process is self-destructive. On the other hand, the steady, incremental creation of new wealth is the road to what Adam Smith called “universal opulence,” the condition in which the real wages of workers keep growing over time until even the poor live at a level, with new technologies and other benefits, that even kings and dukes did not enjoy in 1776.

4. To create new jobs. It is better to teach a man how to fish than to give him a fish, and in the same way it is far better to provide all willing citizens with jobs rather than with government grants that keep them permanently dependent and in the condition of serfs. This is one of the great social responsibilities for whose accomplishment democracies look to business corporations, and in particular to new entrants into the field. The rate of small business formation is usually a very good index of the general health of society, and not only its economic health, but also its morale, hopefulness, and spirit of generosity toward others. When economic horizons close down, and when large masses of people are unemployed, divisive and self-destructive passions such as envy, leveling, and resentment multiply.

In South America, where there are nearly 110 million persons 15 years old and under, youngsters enter the labor force cohort by cohort with every year that passes, looking for employment, with little employment to be found. In the future, surely there will be fewer agricultural workers in Latin America, and perhaps even fewer working in large industrial factories. Unless there is a rapid expansion of the small business sector, in firms employing from two or three to one hundred workers, it is not easy to see how economic health will come to Latin America. The creation of jobs is a very high priority, but you cannot create employees without creating employers. Like other societies, Latin America will have to look to its small business sector for a realistic hope of liberating the poor.

5. To defeat envy through generating upward mobility and putting empirical ground under the conviction that hard work and talent are fairly rewarded. The founders of the American Republic recognized that most other republics in history had failed, and that the reason they failed was envy: the envy of one faction for another, one family for another, one clan for another, or of the poor toward the rich. If a republic is to have a long life, it must defeat envy. The best way to do this is to generate economic growth through as many diverse industries and economic initiatives as possible, so that every family has the realistic possibility of seeing its economic condition improve within the next three or four years. Poor families do not ask for paradise, but they do want to see tangible signs of improvement over time. When such horizons are open, people do not compare their condition with that of their neighbors; rather, they compare their own position today with where they hope to be in three or four years. In this way, they give no ground to envy. The realistic hope of a better future is essential to the poor, and this hope is made realistic only through the provision of universal chances for upward mobility such that, more or less, people see that hard work, good will, ingenuity, and talent pay off. When people lose their faith in this probability, they become cynical. For this reason, a dynamic economy is a necessary (although not sufficient) condition for the survival and success of democracy. If they do not see real improvement in their economic conditions, people in the formerly communist countries of Central Europe, for example, are not satisfied merely with the opportunity to vote every two years.

6. To promote invention, ingenuity, and in general, “progress in the arts and useful sciences” (Article 1, Section 8, The U.S. Constitution). The heart of capitalism is caput; the human mind, human invention, human enterprise. Pope John Paul II puts it well: “Indeed, besides the earth, man’s principal resource is man himself.” And again: “Today the decisive factor is increasingly man himself; that is, his knowledge, especially his scientific knowledge, his capacity for interrelated and compact organization, as well as his ability to perceive the needs of others, and to satisfy them.” The great dynamo of invention, discovery, and ingenuity is the business corporation. To repeat Abraham Lincoln’s formulation, the property in ideas made possible by the patent and copyright clause of the Constitution “adds the fuel of interest to the fire of genius.” The Constitution gives an incentive to discover new practical ideas, and to bring them to the realistic service of one’s neighbors. Perhaps no other practical device in history has so revolutionized the daily conditions of life and actually brought about a higher level of the common good than any people ever experienced before.

7. To diversify the interests of the Republic. One of the least observed functions of the business corporation is to concretize the economic loyalties of citizens, and to sort out their practical knowledge into diverse sectors of life. The interests of the road-builders is not that of the canal-builders nor of the builders of the railroads nor of the airline companies. The sheer dynamism of economic invention makes far less probable the coalescing of a simple majority which could act as a tyrant to minorities. The economic interests of some citizens are, in an important sense, at cross-purposes with the economic interests of others, and this is crucial to preventing the tyranny of a majority.

All seven of these economic responsibilities need to be met by a nation’s business corporations. All seven are crucial to the health of the state and, more important, to the health of civil society, the master social reality. But there are also other responsibilities, inherent not so much in business qua business as in the convictions of its practitioners.

 

Should the Christian Businessman Be Different?

Romano Guardini once wrote that you should be able to tell a Catholic even from the way he climbs a tree. For the cult of the Catholic Church is culture-forming. The liturgy is intended to inspire a distinctive style of life. Thus, while the business corporation has a set of inherent responsibilities, proper to itself, these do not exhaust the responsibilities of the Christian whose vocation calls him to the business world. Without intending to be exhaustive, and in a kind of shorthand, one might discern seven further sets of moral responsibilities proper to the business worker qua Christian. I have taken pains to state them in a way that shows their relevance to business, and makes them analogously compelling to those who are not Christian. Among these responsibilities are another seven:

1. To establish within the culture of the firm a sense of community and respect for the dignity of persons, including a respect for the standards, the discipline, the motivation, and the teamwork that brings out the best in people, and helps them gain a sense of high achievement and human fulfillment.

2. To protect the political soil of liberty. Since free business corporations are permitted to operate freely only in a minority of countries on this Earth, those involved in business must come to see how fragile their activities are — how they can be crushed by war, revolution, tyranny, and anarchy. Most people on Earth today, like most in history, have suffered from such devastations. Many individuals have hardly ever (or even never) experienced that peace, stability, and institutional environment that supports the daily activities and long-time hopes of business. Businesses do not grow in any soil at all; they depend on specific sorts of political environments. People in business, therefore, have a responsibility to be watchful over the fate of their political society, even as a matter of self-survival. It is no accident that they have had reason to learn to love liberty as ardently as any others in history, and indeed, have often been forerunners of free societies.

3. To exemplify respect for law. Business cannot survive without the rule of law. Long-term contracts depend for their fulfillment upon respect for law. Often in America we take the rule of law for granted, and hardly appreciate how fragile it may be. In any case, hardly any institution is so much at risk as the business corporation, and hardly any is so dependent on the reliability, speed, and efficiency of the daily operation of the rule of law. Thus it is doubly scandalous for people in business to break the law. It is wrong in itself, and it is also suicidal, since to the extent that the law falls into disrespect, the life of corporations is rendered insecure if not impossible.

4. To win the allegiance of the majority. Since the survival of business depends on the survival of free institutions, the responsibilities of people in business go well beyond their strictly economic responsibilities. A look at the top twenty percent of American society — i.e., its elite, defined in terms of income, education, and status (professionals, managers, the self-employed vs. employees) — shows that our elite is roughly divided into two parts. Call one part the “Old Elite,” whose income and status depend upon the expansion of the private sector, particularly the business sector. Describe as the “New Class” those who see their own income, power, and status as dependent upon the expansion of the state. These two rivals vie for the allegiance of a democratic majority. A society simultaneously democratic and capitalist benefits when these two perennial rivals are of roughly equal strength, so that the free political system and the free economic system are in healthy equilibrium. (Given the tendency of the state to amass power and even coercive force, however, a society is probably closer to healthy equilibrium when at least a slight majority favors economic liberty.)

5. To overcome the principle of envy. Benjamin Franklin and Thomas Jefferson ransacked the libraries of London and Paris, respectively, in an attempt to understand what brought about the down-fall of earlier republican experiments. Virtually all republics failed, often after only a few generations. Typically, the cause of failure was envy and the division it caused between rich and poor, family and family, dynasty and dynasty, or one section of the Republic and another. No vice is deeper and more destructive than envy, not even hatred. Hatred is visible, and everybody knows it is wrong. Envy is typically invisible, like a colorless gas, and normally it presents itself under a beautiful (but deceptive) name, such as “justice,” “fairness,” “equality,” or even “social justice.” All these are good names, and often envy for this reason hides behind their skirts. Envy is so pervasive among the human race that in the Ten Commandments, under the name “covetousness,” God forbade it seven times.

What people in business need to learn from this is that envy, once mobilized in society, can strangle the open society. They need to be on the alert to defeat envy. For this reason, they should avoid some things which are otherwise innocent in themselves. Conspicuous privilege, ostentation, and other forms of behavior, even when not necessarily wrong, typically provoke envy among others. Unusually large salaries or bonuses, even if justified by competition in a free and open market (since high talent of certain kinds is extremely rare), may offer demagogues fertile ground on which to scatter the seeds of envy. It is wise to take precautions against these eventualities.

6. To communicate often and fully with their investors, shareholders, pensioners, customers, and employees. A business firm represents ever-widening circles of people, and it is much to its advantage to keep all of them informed about its purposes, needs, risks, dangers, and opportunities. In a democratic society, the corporation needs the support of a great many, and it is of itself — especially over against the omnivorous administrative state of the late 20th century — exceedingly fragile.

7. To contribute to making the surrounding society, its own habitat, a better place. It is much to the advantage of the business firm that the republican experiment in self-government should succeed; and that also, therefore, there should be an active private sector as an alternative to the state. The business firm does well to become a leader in civil society, and to contribute to the good fortune of other mediating structures in the private sector, whether in areas such as education and the arts, healthful activities for youth, the environment, care for the elderly, new initiatives to meet the needs of the homeless and the poor, or other such activities. The business corporation cannot take primary responsibility for these things; it is not, in itself, a welfare organization. Nevertheless, it does well to strengthen the networks of civil society, and to strengthen those of its allies who provide an alternative to government. Government is not the enemy of business, nor of the citizens; on the other hand, it has been, historically, a fertile source of tyranny, corruption, the abuse of rights, and plain arrogance of power.

In sum, the business corporation is, in its essence, a moral institution of a distinctive type. It imposes some moral obligations that are inherent in its own ends, structure, and modes of operation. Other obligations fall upon it through the moral and religious commitments of its members. Thus, those who labor within the business corporation have many moral responsibilities and a richly various moral agenda, of which the fourteen responsibilities mentioned here are basic but not exhaustive.

Those academics (and journalists) who do not take the high moral responsibilities of business with due seriousness are making a serious mistake, on two different levels. First, they are guilty of intellectual blindness or, perhaps, professional prejudice. Second, since a capitalist economy (indeed, a healthy, thriving capitalist economy) is a necessary condition for the success of democracy — including the rule of law, the protection of the rights of minorities, resistance against the voracious power of the state, and a flourishing of civil society — this error is in the long run self-destructive.

A fuller version of these remarks was presented at the Conference on Corporate Social Responsibility in a Global Economy last April.

Michael Novak

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Michael Novak held for many years the George Frederick Jewett Chair in Religion and Public Policy at the American Enterprise Institute and is now a trustee and visiting professor at Ave Maria University. He is a philosopher, theologian, and author, as well as the 1994 recipient of the Templeton Prize for Progress in Religion. He has been an emissary to the United Nations Human Rights Commission and to the Conference on Security and Cooperation in Europe. He has written over twenty-seven books on the philosophy and theology of culture, especially the essential elements of a free society. He also founded Crisis Magazine with Ralph McInerny in 1982.

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