The Multinational Monitor



When Corporations
Rule the World

An Interview with David Korten

David Korten is founder and president of The People-Centered Development Forum, a global alliance dedicated to the creation of just, inclusive and sustainable societies through voluntary citizen action. A former faculty member at the Harvard Business School, he served for more than a decade as a Ford Foundation project specialist in Manila and worked for nearly a decade with the U.S. Agency for International Development -- before breaking with the official foreign aid system. He is author of the recently published When Corporations Rule the World, as well as numerous other books.

Multinational Monitor: What do you mean when you write, "Corporate institutions have emerged as the dominant governance institutions on the planet?"

David Korten: In fact, the dominant governance system is the financial system, rather than the corporations themselves. The corporations are accountable to the globalized system of finance, which has transformed itself in very important and deeply troubling ways, and is now quite accurately described as a global gambling casino. This transformation grows out of a combination of the linking of all the world's financial markets into a single computerized system, and the fact that there have been major shifts in the way investment is done, particularly as mutual funds, pensions funds and trust funds have become much more dominant investment vehicles.

Today, when most people invest, very few buy shares in a company; instead, they buy shares in these funds, which are run by fund managers who are evaluated on the basis of very, very short-term results. The obvious example is the mutual funds whose results are published on a daily basis. It increasingly turns out that what we have referred to as investment is really a process of speculating, or betting, on very short-term price movements.

In a globalized system, where corporations are able to free themselves to a large extent from local regulation and any sense of community membership, they are increasingly accountable only to that global financial system. Managers are evaluated on the basis of their very short-term contributions to increases in share prices. That of course greatly constrains their perspective.

Over the last three years, the S&P 500 largest corporations have been increasing their profits by an average of 20 percent a year -- and that begins to define the norm. It puts enormous pressure on corporate management to go for the short term. You do that by gobbling up more and more of the available market share, and passing more and more of your costs on to the community -- by technological change to eliminate jobs, downgrade jobs, move jobs abroad to lower wage countries, by cutting corners on environmental regulations and by increasing the number of direct government subsidies through special tax breaks and handouts.

MM: What does it mean to say that corporations are able to "hold public policy hostage?"

Korten: There are two pieces to that. First, as you erase national economic borders, and integrate national economies into a global economy in which companies are free to move their money and goods without restraint, the real competition is far less among firms -- which are managing competition among themselves with mergers and acquisitions and strategic alliances. The real competition is among people and communities for a declining pool of jobs, and they compete by offering the lowest wages, the poorest working conditions and the least environmental restraint.

The other side of it is that corporations are putting enormous amounts of their money into buying politicians and rewriting legislation to serve their particular interests, to weaken environmental regulations, to weaken unions, to avoid any increases in minimum wages and to push through the trade agreements, which are really corporate bills of rights.

MM: Do individual corporations have the ability to be different, to act more responsibly??

Korten: I think this goes to the heart of the problem. Unless a corporation is working in a particular niche situation, and is privately owned by a terribly socially conscious family or manager, it is virtually impossible to manage a corporation in a socially responsible way. Either it will be driven out of the market by competitors, who are pursuing less responsible policies, or it will be bought by a corporate raider who sees the short-term profit in taking those actions. Or, as fund managers themselves become more active in the management affairs of corporations, the managers are likely to be replaced by shareholder action driven by fund managers.

MM: Does that mean it is irrelevant whether or not a particular corporate executive is socially minded?

Korten: The critical thing that comes out here is that, while business leaders have very little choice but to respond to the imperatives of the financial markets when playing within the system, they do not necessarily have to align with legislative agendas which are deeply contrary to the public interest in the pursuit of short-term corporate profits. Business people who are concerned about issues of social responsibility and the long-term viability of society can play a much larger role in insisting that their business colleagues not move us to the least possible regulation. They can do this by supporting appropriate legislation that will create a level playing field, but at a much higher level than now exists, meaning that all corporations will have to a adhere to a higher level of social responsibility.

MM: What are the strategic implications for citizen activists of the contention that corporate executives are themselves constrained in important ways?

Korten: Because of the systemic nature of the problem, the people who are engaged in campaigns against specific corporate wrongdoing in the end fight a losing battle. You can force some constraint through consumer boycotts or even embarrassment against a specific corporation on specific issues, but you are really fighting against the system, because the overall rewards to the corporation favor engaging in what should be considered corporate crime. We have to set our sights on changing the larger rules of the game.

My sense is the basic direction in which we have to move is toward more localized economies, and breaking up massive concentrations of corporate power.

MM: Why do you so strongly emphasize localism?

Korten: There are two large ways of describing it. One has to do with power and whether it is connected to a human interest or whether it is connected to a system of institutions that serve only the interests of the already economically powerful. If, as Adam Smith essentially recognized, you are dealing with a market system in which power is defined by money and control of productive assets, then the system is only likely to be equitable and tied to a larger public interest to the extent that ownership and power is very broadly distributed, rooted in people and basically by implication also rooted in community and a framework of community values.

When you get into a globalized economy, all of that stuff becomes detached. Ownership becomes delinked from community or workers. As the concentration of economic power grows greater and greater, the power to decide on resource allocation is concentrated in fewer and fewer hands that have special and unattached interests.

This leads back to the idea that, if you believe in democracy, you can't separate economic democracy and political democracy because of the extent to which political democracy gets bought out if you have enormous disparities in economic power. We therefore have to be very conscious of the conditions that sustain some degree of economic democracy. That comes back to equitable distribution and rooting economic power in sufficiently small units so that people can understand what is happening and can set local rules that are consistent with their values and circumstances.

Another way of posing this whole thing is to say that part of the reality of our modern world is that our lives are divided between two parallel realities. One is the world that is virtually defined by money and the institutions of money. The other is the living world, which is both a world of nature and people -- the systems that sustain life.

The living world functions by a very different rhythm, a very different set of imperatives than the money world. For example, we have created money systems that have a growth imperative. This stems from the structuring of a money system that pays interest, thereby requiring economic expansion to pay the continuous rent on money, and from the dynamics of technological change and increasing productivity, which mean the economy must grow for any semblance of full employment to be maintained. In the living world, however, unrestrained growth is a sign of dysfunction; if individual organisms or species grow beyond their normal cycle, that is a dysfunction.

The more that the money world becomes globalized, the more the links between the living world and the money world become tenuous, and the more the money system predominates. To the extent that we bring the power and control back to the local level, so that the money system is embedded and controlled by people who are living normal lives, whose view of reality is not shaped entirely by the numbers they see on their computer screens as they trade shares, stock options and derivatives, you get a much greater likelihood that the decisions that we make in society will be consistent with living-world values.

MM: Robert Reich, now U.S. secretary of labor, has argued that the nationality of a company is irrelevant from a public policy standpoint. What is your assessment of that claim?

Korten: At one level, he is absolutely right. The very term transnational means beyond nationality. Coca Cola, for example, recently announced it is reorganizing itself as a truly global company, in which North America is simply one division responsible for roughly a sixth of the corporation's business. These kinds of corporations clearly have very little sense of national identity or national interest. They couldn't care less about whether we have full employment in the United States, whether our education system works, whether our external payments are in balance or any of those sorts of things. At least it makes no more difference to them in the United States than it does in any other country. From that standpoint, if you are a community trying to negotiate with a corporation, the nationality is probably somewhat irrelevant, although I do believe the Japanese firms have some slightly greater sense of loyalty to Japan, although perhaps that is declining also.

Reich's argument is that this is a fait accompli. His answer is that we should educate everybody in the United States, so we can control all the symbol manipulator jobs in the world and outcompete everyone else and run the show.

In my view, that is naive -- there is no way in the world we are going to capture all those jobs, nor that everyone who happens to be a U.S. citizen even necessarily has the potential to acquire the skills to be part of that class. It is also myopic, because it is part of a pattern of pitting the interests of one small group of people against the interests of all the rest. It is hard to see how that could ever make for a stable and peaceful, let alone just, world.

That is why we have to go beyond these kinds of solutions that take the status quo of a globalized economy dominated by transnational capital detached from human accountability as a fait accompli. We have to recognize that the globalized system was created through conscious choices and decisions. People had access to political power and used that access to change the rules in ways that served their particular interest, contrary to the larger public interest. If globalization is not a historical inevitably, but a matter of choice, then it is in our means to make different choices.

But that means that those choices are going to have to be made by a different group of people. This again brings us back to the importance of political reform, and the reclaiming of citizen sovereignty in democracy, getting big money out of politics and starting to design rules that work for people, including rules that localize markets, and localize economic power.

It is obviously not an easy agenda, and it is even hard to imagine in the present political climate. But we are in a situation where the system is rapidly self destructing, and the disillusionment with the political system is at an all-time high.

I do believe that awareness is building of the reasons why the system is malfunctioning. We need to advance that awareness building, and we also need to create awareness that there really are alternatives. We need to begin building credible alternative agendas that move us toward a very different political alignment, that combine the conservative values of community, individual responsibility and family with the liberal values of compassion, equity and international cooperation.

MM: Do you think it is fair to characterize localism as a form of protectionism?

Korten: If protectionism is about giving preference to local employers who play by local rules, create local jobs, pay local taxes, function as members of the local community, then I don't have any problem with being a protectionist.

The anomaly here is that being a local protectionist is in many respects a far more internationally friendly posture than being an international competitor, in which you are trying to drive your rivals out of business and into destitution -- that to me is the most internationally unfriendly posture.

All of this ties back to the issue of the real nature of the environmental problem, and the reality of environmental limits. Much of the impetus behind so-called free trade is to open up international borders in order to assure a small group of people free access to the world's remaining resources.

Part of moving toward more localized economies is to start asking questions of how can we maintain a decent, humane standard of living based on reliance on our own resources. This requires recognizing the traditional dynamic of colonialism, which was about getting a small group of people in the colonizing countries access to a large pool of wealth to support lifestyles that could not be supported purely on local resources. Globalization, and the ascension of corporate power, is an extension of that colonial process.

If you take gross figures of roughly 20 percent of the world's population consuming roughly 80 percent of the earth's resources, and you combine that with the realization that we are now in many instances using the output of our natural systems at rates greater than can be sustained, you begin to see the real implications of our situation -- there is no conceivable way that all of the world can be brought up to the levels of consumption of the high-consuming 20 percent. The earth's systems would simply collapse.

So we are really talking about issues of distribution and equity. And the more localized your economy, the more you are aware of the need for living within your local environmental means. In contrast, maintaining a global economy allows us to be far less aware of whose resources we are dependent on.

MM: What are some of your prescriptions to return politics to public, rather than corporate, control?

Korten: The agendas I have laid out in When Corporations Rule the World are only intended to be illustrative of types of changes. They are a collection of a lot of ideas that I believe point in appropriate directions. But I think there is a lot of room for debate as to specifics. In some instances, we may conclude that different policies from those I have suggested would in fact lead more effectively to the results we want.

An important starting point is to reclaim our political spaces from the corporations and other big money interests that control them as a step toward reclaiming our economic spaces. This will require far more than incremental or marginal changes. We should prohibit political advertising on television, substituting instead a public interest obligation on the electronic media to give political candidates access to the public airways through debates, roundtables and interviews. And we will need to eliminate the concentration of media ownership to assure a diversity of political voices.

We will need to place strict limits on individual campaign contributions and on campaign spending altogether. Corporations should be prohibited from making any sort of political contribution, including charitable contributions; relatedly, corporations should be stripped of their fictitious human or civil rights, which in the United States ensures that they receive many of the same rights as real people. We should also explore ways to facilitate citizen action to withdraw the charters of corporations that demonstrate disregard for the law or fail to serve the public good.

MM: Your call for a ban on corporate charitable contributions runs counter to the advocacy work of many proponents of corporate social responsibility. What underlies that proposal?

Korten: Part of the rationale for the tax exemption of charitable contributions is that they are an expression of individual values, and individuals choose to make those contributions that reflect those values. It is a kind of democratic way to make allocations to the public purposes that different people desire. Those are appropriate actions for real people, but not for artificial creations like corporations.

In fact, when corporations make charitable contributions, increasingly they are very conscious of making contributions that directly serve the corporate agenda. A lot of what they charge off to charitable contributions are contributions to front organizations that are specifically set up to pursue corporate political agendas.

Corporations are created by public charter to serve a public purpose. It is their role to obey the laws that citizens create, not make those laws. Therefore, any action, any use of corporate resources to in any way influence the political process, should be absolutely forbidden. Political rights belong to people. And charitable contributions are, to some extent, a means of political expression.

It is simply not within the appropriate prerogative of corporations to make those kinds of charitable judgments. Those are judgments that belong to the person. So you pass through to real people -- workers and shareholders -- the income from which corporations would otherwise be making political contributions, charitable contributions and so forth, so that these individual workers and owners can make those decisions.

At the same time, we have to take other steps to redistribute income and asset ownership, so that you are democratizing that process as well.

MM: How do you propose redistributing income and wealth?

Korten: Appropriate measures to promote equality and security may include: a guaranteed income sufficient to meet basic subsistence needs; highly progressive income and consumption taxes on levels of income and consumption beyond those required to comfortably meet basic needs; taxation of inheritance and trust income at the same rate as other income, to avoid the perpetuation of a permanent privileged class; and a reduced workweek to allocate paid employment equitably.

Public policies that favor economic equality and security are essential if we are to live sustainably. Inequality makes it possible for those with economic power to pass the costs of unsustainable consumption on to the economically weak and encourages extravagant consumption by the few. Economic insecurity creates a significant incentive for individuals to accumulate wealth beyond their real need.

MM: More generally, how do you propose reorienting economic policy to promote local economic control?

Korten: We need to consider means to limit financial speculation, which promotes short-term decision making. Some possible means to dampen investors eagerness to engage in high-turnover, speculative trading include a .5 percent financial transactions tax on the purchase and sale of financial instruments and a graduated surtax on short-term capital gains.

A 100 percent reserve requirement on demand deposits would reduce the ability of the financial system to create money by pyramiding loans. Government, not private banks, should create money. Meanwhile, a reform of this type should be coupled with an explicit government preference for community banks; one way to promote this aim would be for the government to guarantee only deposits placed in unitary community banks that channel the majority of their funds back to the community.

A critical element of an agenda to promote localism is rigorous enforcement and expansion of anti-trust laws to break up corporate concentrations. Mergers should only be allowed where it is shown that they will advance long-term public -- not just short-term investor -- interests. When sales or mergers are permitted, or a corporation plans to close a factory, the affected workers and community should have a legal right of first option to buy out the assets on preferential terms. Intellectual property rules which serve to protect information monopolies should be changed; intellectual property rights should be granted only for the minimum period of time necessary to allow those who invest in research to recover their costs and a reasonable profit. Also, to reduce corporate bloat and waste of public resources, welfare reform should give top priority to reducing corporate subsidies.

We also need to reconsider corporate taxation policy. First, corporate tax law should be revised to shift taxes from things that benefit society, such as employment -- employer contributions to social security, health care and worker's compensation -- in favor of taxing activities that contribute to social and environmental dysfunction -- such as resource extraction, packaging, pollution, energy use, imports, corporate lobbying and advertising. Second, I favor an elimination of corporate income taxes in conjunction with the introduction of a requirement that corporations pay out their profits each year to shareholders, who would pay taxes on the dividends at their established marginal rate. These corporations would then have no incentive to shift profits around the world to the jurisdiction with the lowest tax rate.

To emphasize that this agenda is illustrative only, let me say that I was recently in a discussion about how to set up a system of incentives that would encourage corporations themselves to voluntarily break themselves up. One of the suggestions, which I think is plausible, was to maintain a corporate income tax, but make it highly progressive, so a corporation earning very big profits would have most of those profits taxed away, creating an incentive to break itself up into much smaller pieces with separate ownership. The point is we need to think about these issues in terms of a whole system, in terms of packages of policy interventions that create a very different dynamic.

Finally, I believe that forms of advertising that encourage consumption rather than simply inform prospective consumers of the availability and specifications of products should be banned. This would eliminate an important market advantage of large corporations and remove an important underpinning of the consumer culture.

MM: What sort of reforms do you propose at the international level?

Korten: Here, the agenda is far reaching, but easily stated. The international debts of low-income countries should be eliminated. The World Bank should be closed. An international financial transactions tax should be placed on all spot transactions in foreign exchange, as a means to dampen speculative currency movements. The World Trade Organization and International Monetary Fund should both be shut down, with responsibilities for international economic management -- understood as the need to maintain a balanced and equitable system of economic relationships among nations that supports substantial environmental and economic self-reliance, and restricts the prerogatives of transnational corporations -- transferred to the United Nations. We also need to devise a system to monitor cross-border environmental flows as a step to limiting the ability of a country to pass the environmental burdens of its consumption to another.

Altogether, this is as full an agenda as it is incomplete. We will need to engage in truly critical thinking and vigorous debate to develop citizen agendas for national and international reforms adequate to the task of building just and sustainable societies for the new millennium. n

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