America is built on simple yet revolutionary principles; fundamentally, self-governance is an inalienable right and governments should serve the interests of the people. These are essential characteristics of a healthy and functioning democracy. But America has stumbled upon a formidable roadblock to the realization of our founding fathers' dream, as Lincoln said, of a country that is "of the people, by the people, and for the people" . Clearly, the gap between our democratic ideals and our current reality is due to many factors; one of the biggest is that mammoth corporations, huge in size, wealth and power, are drowning out the voices and interests of everyday American citizens. The following is a broad overview of the ways in which corporate dominance is stifling democracy, stunting our communities and devastating the environment.

THE CORPORATE INFLUENCE ON GOVERNMENT
A huge component of increasing corporate control, power and irresponsibility is the grip that corporations have over our government. The most obvious way that corporations influence government officials and policy is through campaign donations and lobbying. In the 2000 election cycle alone, businesses gave $1.2 billion to congressional campaigns , lining the pockets of both the Democrats and Republicans. Unless you are rich, it is nearly impossible to run a viable congressional campaign without corporate financial backing, since their donations make up about 75% of the money that candidates receive . In the most recent election, the candidate who raised the most money won 94% of the time .

Once elected, an army of roughly 20,000 corporate lobbyists provides constant reminders of just whose money elected whom . The combination of corporate political donations and pressure from lobbyists is an excellent investment for the corporate world. It helps them frame the issues and keep critical interests out of the halls of government. Sometimes the payoff is direct. In 2000, corporations received $125 billion in tax-breaks and subsidies , a return of about 100 to 1 on their investment. In addition to draining taxpayer dollars to support corporate welfare, the government also heavily subsidizes the research and development side of many industries, particularly the pharmaceutical, technology and military hardware/weapons industries, spending billions of government dollars and then giving away the findings for virtually nothing to corporations, who proceed to make a profit .

The ties between corporations and governments run so deep that a revolving door has appeared between the two sectors. Many of President Bush's appointees, for example, are ex-corporate executives now in government positions where their role is to regulate the industries they were once a part of. For example, 41 officials in the Bush administration have close ties to the oil industry . These kinds of connections clearly make it difficult for objective evaluation and regulation of industry, or for the interests of ordinary citizens to receive equivalent consideration.

THE RISE OF MULTINATIONALS
In the past several decades, corporations have been given free reign to enter markets around the world with little regulation and with the license to demand priority treatment. With the emergence of the World Trade Organization (WTO) in 1995, and the transformation of the World Bank and International Monetary Fund into corporate-driven institutions, there now exists an institutional framework by which corporations are legally dominating markets around the world, dictating economic policies of developing nations, and strong-arming their way to resource and wealth extraction . Although we usually think of these transnational institutions as determining the economic policies of indebted nations in Asia, Africa and Latin America, it's also true that international trade agreements such as NAFTA pose considerable threats to the U.S. system of democracy.

One example of how international trade agreements give corporations more rights than citizens is Chapter 11 of NAFTA, the chapter that defines investors' rights. Chapter 11 grants corporations of each nation (the U.S., Mexico and Canada) the power to sue the other two nations and overturn laws that might be construed as interfering with the corporation's profits. If a company believes that a NAFTA government has violated these new investor rights and protections, it can initiate a binding dispute resolution process for monetary damages before a trade tribunal - a process which is closed to public participation, observation and input. Individuals, on the other hand, have no legal status in NAFTA. Human and labor rights, environmental protections, and democratic accountability were consciously excluded. As Jeff Faux of the Economic Policy Institute puts it, "NAFTA thus represents the most extreme example of the so-called neoliberal model, in which supranational rules liberate the private corporate investor from the constraint of democratic public values."

The recent mass wave of corporate mergers has resulted in extreme consolidation of wealth for a very small number of corporations. In fact, 51 of the world's 100 largest economies are corporations, while only 49 are countries . The result is that unaccountable corporations and corporate dominated institutions like the IMF, World Bank and WTO have more power and influence than many countries' governments .

WHAT DRIVES THE SYSTEM?
Hardwired into the corporate machinery is a drive to maximize shareholder value. Translated into practice, this economic imperative means that corporations do whatever it takes to maximize their gains while externalizing all possible costs onto workers, communities, consumers and the planet.

CEOs are in fact legally bound to make as much money as possible for their shareholders. The problem with this kind of system design is not the notion of profit in itself, but rather that the real costs of business ventures and corporate activity are not taken into account. Consequently, communities, workers and the environment are left to pick up the tab for corporate irresponsibility. Any economic model that solely relies on profit and growth to gauge success is fundamentally unsustainable and flawed because it neglects critical components of a healthy society: the well being of communities, workers, and the environment. A huge component of this problem is that there are very few avenues available for the voices and concerns of employees, communities or other stakeholders to be heard and heeded as they are excluded from the corporate decision-making process.

The logical result of the single-minded profit-based approach is an array of both legal and illegal bad corporate behavior. For example, in the name of profit corporations legally can, and often do, re-incorporate in an off-shore tax haven without moving any of their operations. While still benefiting from government services and contracts these corporate tax traitors can save tens of millions in annual tax returns. Officials from the U.S. Treasury Department estimate that between $70 and $155 billion disappears into the "Bermuda Triangle" of off-shore tax havens each year . By utilizing tax havens and other tax loopholes corporations are paying less than their fair share, only 1.3 percent of the nation's Gross Domestic Product, the lowest percentage in two decades . At the same time, many of these same companies are receiving untold billions in corporate welfare subsidies. Additionally, because of weak whistleblower protection laws, corporate disclosure regulations and public right-to-know laws, it is often difficult for the public to learn when corporations are breaking the law.

While much corporate irresponsibility, abuse and tax-avoidance is legal, we recently witnessed a wave of corporate crime that was fueled, in part, by the drive to maximize profits. But corporate crime is not a new phenomenon. While the FBI doesn't keep statistics on corporate crime, one university professor found that in 1997 there were twice as many workplace deaths as murders . White-collar corporate crime - consumer fraud, deceptive advertising, tax cheating, and insurance, Medicare, and securities fraud - cost society between $200 - $500 billion each year . Compare this to the cost of burglary and robbery costs, which the FBI estimates is about $3.8 billion a year .

The punishments for white-collar crime are also significantly less than for street crime, generally on the order of months instead of years. Corporate crime, like violating environmental, workplace safety or labor laws, regularly goes un-prosecuted and often results in nothing more than a minor fine that the corporation can write off as the cost of doing business. The big Wall Street banks that were charged with stock-research abuses in 2002, for instance, are claiming that more than $1 billion of their $1.5 billion global settlement is tax-deductible.

Frank Easterbrook and Daniel Fischel, two leaders of the Chicago School of Law and Economics, summed up the profit-at-any-cost school of thought 20 years ago: "Managers not only may but should violate the rules when it is profitable to do so. "

THE CORPORATE CRIME WAVE -- A SYSTEM OUT OF CONTROL
The explosion of corporate scandals in 2001 and 2002 should not surprise anyone. The drive to maximize profits at all costs (externalized costs, that is) reached manic proportions during the recent stock market bubble. And when the bubble burst, it sent many companies into a devastating tailspin that hit employees and shareholders the hardest. A total of 186 public companies with $368 billion in debt filed for bankruptcy protection in 2002, shattering the record for a second straight year . With nearly half of all U.S. households owning stock , the corporate restatements of earnings and huge losses of stock value (both for criminal corporations and across the market), hurt millions of ordinary citizens.

The corporate scandals of 2002 were caused by a number of factors that can be viewed as the failure of both internal and external accountability. Observers, such as The Conference Board , that describe the cause as a failure of internal accountability point to a breakdown in corporate governance. Corporate governance is the accountability of management to shareholders and directors. (See the Corporate Governance fact sheet in the appendix) Shareholders (mostly passive investors) are technically the owners of publicly traded companies, but since they are such a diffuse group, they exert little control. Instead, they "elect" a board of directors to look out for their interest, which is almost always narrowly defined as making money. However, these directors are generally handpicked by management and wind up serving the interests of management more than the interests of shareholders.

An illustration of the resulting unaccountability of management is the ridiculous pay packages that top executives have received in recent years . Nor is this lack of accountability unique to companies involved in financial fraud. On average, CEO pay is astronomical, and still rising. In 2001 the average CEO earned 411 times what the average worker earned . Incentive packages for CEOs often include millions in stock options that can motivate executives to pursue short-term profit at any cost, even if that involves laying off employees or artificially inflating share price through accounting fraud.

Even where directors are more independent, they still only represent a small slice of people affected by a company's actions. If workers, communities, consumers and other stakeholders were given a participatory voice in corporate governance, corporations would probably become responsive to more than just profit-driven investors, and more closely resemble their roots as public-minded entities. But shuffling the players on the board is not enough. We are still left with the failure of corporations to be accountable to the broader citizenry. (The analysis of the Enron scandal provided by its own board through the so-called "Powers Report" - which depicted a company defrauded by a few greedy executives - ignores the damage that Enron did to California consumers, the environment, etc.)

Much of the debate after the recent scandals focused upon the failure of the system's traditional watchdogs - including accountants, stock analysts and the media. The dismantlement of New Deal-era protections and the aggressive deregulatory agenda of the last 30 years led to massive conflicts of interest between and among the accounting and banking sectors. The doctrine of deregulation only left corporations alone to bend and break the law, while these so-called watchdogs aided and abetted the fraud. Their indifference was fueled by "tort reform" laws that gutted the liability of aiders and abetters of fraud, such as the Private Securities Litigation Reform Act of 1995 .

But while a few laws were passed regarding accounting reform and analyst ties to banks that underwrite the businesses they are supposed to provide objective stock analysis, the general faith in deregulated markets continues. Although many "experts" were touting the benefits that deregulating the electricity markets would bring to places like California, we now know the results: gouging of customers (including poor homeowners and small businesses), blackouts, and fraud and manipulation of trading by Enron and other companies. Nevertheless, efforts to gut the Public Utility Holding Company Act (PUHCA) continue unabated .

The larger lessons seem to have gone unnoticed. The most prominent companies involved in the corporate scandals came from industrial sectors -- energy, banking and telecommunications -- that were quickly transformed in recent years by new laws that lowered existing barriers to the companies' rapid expansion and involvement across business sectors. For example, after the Telecommunications Act of 1996, the telecom industry (buoyed by overinflated expectations about the new high-tech economy) spent nearly half a trillion dollars building a monumental high-tech network with extensive overcapacity that caused it to grow its debt from $9 billion to $306 billion by the year 2000 . Telecom investors alone lost nearly $2 trillion, while half a million workers lost their jobs, and dozens of debt-laden companies went bankrupt, including WorldCom, the biggest bankruptcy in history .

We also saw the repeal of the New Deal-era Glass-Steagall Act, which established the strict separation between investment banking, insurance, and underwriting businesses. As a result of lobbying efforts led by Citigroup, in 1999 the Act was fully repealed after several years of gradual dismantlement. As a result, investment analysts rated stocks that their own banks were underwriting, giving them strong recommendations, while privately deriding them as junk.

BIG PICTURE: LEGAL WRONGDOING
Of course the most horrific truth about the recent corporate scandals is that much of the devastation was the result of perfectly legal actions. The fact that millions of employees, pensioners, and investors lost their life's savings while executives knowingly cashed out without going go to jail indicates a much larger and more fundamental problem. Corporations have become so powerful, and have so many rights, that many of the worst abuses of corporations and top executives are often considered to be legal. And even when the bad behavior is illegal, the enforcement of the law is undermined every step of the way, and the penalties are minor -- considered merely the cost of doing business. For example, it is easier and cheaper in many cases for a company to pay a fine for dumping toxic waste into the sewer than it is for the company to dispose of it properly. The problem therefore is not just that they break the law, but that they write the laws, influence the people and entities that enforce the laws, and use their illegitimate claims to constitutional rights to block any serious attempt at holding them accountable.

HOW DID THIS HAPPEN?
While the enormous power and influence of today's corporations results in a complex web of negative impacts, corporations as large, private institutions are historically speaking a fairly recent creation. When corporations were first formed in Europe during the 17th century as a way to finance large projects, they were closely watched and regulated by governments. In early America, there were few corporations; corporate charters (the license to do business) stipulated that the corporations act for specific purposes, such as public works projects. The charter could be revoked if the company exceeded that defined purpose. Charters were also issued for a discrete period of time and corporations could not make political contributions or own stock in other companies.

After the American Revolution (which happened in part because of the unjust activities of the East India Company) our founding fathers worked to develop a government that balanced power between separate branches of government to avoid the consolidation of too much power. Corporations were not mentioned once in the Constitution or Bill of Rights. They were thus not recognized as having the same legitimate claims to fundamental rights that we, the people, have.

Nevertheless, during the first half of the 19th century, corporations slowly gained increasing amounts of economic and political power. At the same time that corporations grew into giant trusts, they quickly acquired considerable legal rights, privileges and immunities. For example, in 1819 the Supreme Court ruled in its landmark Dartmouth College decision that all corporate charters were protected by the United States Constitution clause prohibiting a state "from impairing the obligations of contracts." Under that ruling, after granting a corporate charter, a legislature could no longer repeal or revise it, thus limiting the state's ability to regulate the corporation.

During industrialization, a new mega-wealthy class of railroad barons, steel magnates and financiers began to influence policy and push for fewer restrictions on corporations. Charters grew longer and less restrictive. States began to include limited liability in their laws, which allowed corporate owners and managers to avoid responsibility for the harms and losses caused by the corporation. Charter revocation became less frequent, and government functions shifted from keeping a close watch on corporations to encouraging their growth.

Corporations continued expanding their power through the courts and the state and federal legislatures, all of which were increasingly packed with sympathizers. As a byproduct of an 1886 case, Santa Clara v. Southern Pacific Railroad, corporations gained access to the legal standing of "persons" and as a result can use constitutional rights installed for citizens to challenge attempts to limit their power. The importance of this corporate status of personhood cannot be overstated: it means corporations have the same rights as real people including constitutional rights to free speech, protection from search and seizures, and freedom from discrimination. While the Supreme Court never ruled or heard arguments in the case as to whether corporations qualified as "persons", Santa Clara has effectively given corporations the legal standing of people .

At the end of the 19th century a "race to the bottom" ensued in which states relaxed their chartering laws and regulations to attract corporations . In 1896 New Jersey passed legislation permitting unlimited size and market share, removing time limits on corporate charters, reducing shareholder powers, and allowing all kinds of mergers, acquisitions, and purchases. Delaware followed suit in 1899, passing its "General Incorporation Law" which weakened regulations even further. Today, nearly 60% of all Fortune 500 companies are incorporated in Delaware. By the beginning of the 1900s, the corporation had been transformed from a quasi-public organization limited in size to a gigantic unlimited private organization with limited responsibility and limited accountability.

As corporations became the dominant institutions of society, presidents like Teddy Roosevelt and Woodrow Wilson turned to a regulatory system and applied anti-trust laws to keep corporations from getting too big. This was followed by a string of pro-business presidents during the 1920's who stopped cracking down on corporate power.

As corporations continued to grow in size a new problem emerged - the owners (now an increasingly diffuse network of individual investors) no longer controlled the corporation. Ownership and management became increasingly separate, which resulted in disinterest from owners and a lack of accountability and consequences for management. Though in theory stockholders owned a company, they were now too numerous to exercise any control over management. Executives essentially ran companies as they see fit. That separation of ownership and control, wrote Adolf Berle and Gardiner Means in their groundbreaking study, "destroys the very foundation on which the economic order of the past three centuries has rested."

The Great Depression restored government as the dominant economic institution, strengthening the regulatory framework in response to some of the corporate excesses that led to the stock market crash of 1929. Government regulation remained in place for a few decades, though corporations continued to play an ever more central role in society, particularly as consumer goods became dominant in the 1950s. The theory of free market idealism developed throughout the 1970s, and continues to dominate today's discourse .

Beginning in the 1980s, the majority of New Deal protections were eroded during the business-friendly and free market-focused Reagan administration. That administration kicked off two decades of aggressive deregulation, eliminated key public controls on corporations and cut taxes on corporations and the wealthy. This set the stage for the market consolidation and conflicts of interests behind many of the recent scandals as well as the continued growth of the corporation into the unchecked behemoths that run much of our world today.

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Last Updated February 2003