Susan Watson: Corporate citizens and recognising the value of workers

Sleepyhead factory workers at the Ōtāhuhu manufacturing facility. File photo / Brett Phibbs

Opinion

COMMENT

Mitt Romney is best known as the Republican nominee who lost out to Barack Obama in 2012 - and also as the person who said corporations are people too. By calling corporations people, Romney was nailing his colours to the mast of robust American capitalism, and showing awareness of the debate in the US Supreme Court in the Citizens United case in 2010.

Corporations are a pillar of capitalism and a great invention of the modern world, an assertion which might seem inflated were it not supported by the fact that the technologies and systems that power the modern world are forms of value that are locked in and protected by the corporate form. The debate in Citizens United echoed longstanding discussions across the world on the legal nature of the modern corporation or company by asking: Are corporations people, are they comprised of people, or are they separate from people?

The answer is linked to the reasons why corporations are the vehicle of choice for business.

Bed-maker and home of iconic Kiwi brand Sleepyhead, The Comfort Group, has confirmed plans for a manufacturing hub and community in Ohinewai, North Waikato. Photo / Supplied

Romney was correct to say corporations are people. But they are not human beings or natural persons. Corporations are legal persons; the characteristic which has enabled them to transact in the world since the 16th century. And although contested, I would also argue corporations do not contain people and it is that legal separation of the corporate entity from people which has allowed it to capture, protect, and generate value in the long term, far past the lifespan of human beings. In short, the separation is the reason for the success of the form. Value captured in the corporate form and the rise of the Western world are inexorably linked, whether it is the activities of the East India Company laying the foundations of empire in the 18th century, the railroad and oil corporations of the 19th century linking continents, or the tech behemoths of our age linking the world.

Through capturing value, corporations generate wealth. Who should benefit from that wealth? The tenets of capitalism are being questioned including the assumption that shareholders have sole claim on the value generated by the corporation. Shareholders provide the financial capital which seeds the corporation. The corporation as a legal person then seeks out and captures other forms of value by transacting with other legal persons (human and non-human). In less abstract terms, that means the corporation trades. The corporation also employs people who have a close relationship with the corporation which extends past the transactional. Employees contribute to the reputation of the corporation for example; a form of value captured by the corporation which becomes part of its brand.

So does this mean employees have a claim to the forms of value generated by the corporation?

Forms of value which might be provided to employees extend beyond the financial. As an example, Sleepyhead's plans to build houses for its workers echo the model villages established by the Quaker companies in the 19th century. Those companies were family-owned, meaning their boards could look beyond the short-term pressure by shareholders to generate maximum profits and return to the long-term interests of the company itself.

Notably, many of these Quaker companies survive today when other companies have ultimately failed. Cadbury, with its model village at Bournville, is the best known example but also Rowntrees (New Earswick) and Lever Brothers, which established Port Sunlight, and is now the multinational Unilever. As some of these companies, most notably Cadbury, pass out of the control of family shareholders and boards who were motivated by the interests of the company in the long term, much of the long-term perspective seems to be sacrificed at the altar of short-term profitability for the benefit of existing shareholders.

Susan Watson. Photo / Supplied

Can short-term profit maximisation continue in mankind's great creation? The corporation may be an artificial person that is not a human being and is not comprised of human beings but the corporation is controlled by human beings; its board of directors. If boards understand their role is to act in the interests of companies in the long term, not current shareholders in the short term, the corporation will survive. A long-term perspective is good business.

The workers at Sleepyhead will remain loyal to Sleepyhead because they own houses in a town where Sleepyhead is the major employer. They may also remain loyal because the provision of housing by Sleepyhead is recognition by Sleepyhead that the workers provide forms of value which are crucial to the long-term survival of Sleepyhead. Tangible evidence Sleepyhead values its workers.

It is good corporate governance which boards of other companies should wake up and take notice of.

• Susan Watson is a Professor of Law and currently Deputy Dean of the University of Auckland Business School