Global Policy Forum

By Robert C. Hinkley

Some dismiss Enron's bilking of California's electricity customers as just another bad deed by a company that could not tell right from wrong. Others say that the system of deregulation was at fault. Neither tells the full story. Part of the problem is the way corporations are designed.

A big company like Enron making money at the expense of the public interest is nothing unusual. It happens all the time.Two ways they take advantage of the public interest are price gouging and externalizing costs. Enron engaged in the former. The latter is more common.

Cost externalization occurs anytime a company makes money while damaging the environment or another element of the public interest (e.g., human rights, public health and safety, the dignity of employees or the welfare of our communities). Examples of cost externalization include tobacco companies killing hundreds of thousands of people every year and auto manufacturers and electric utilities polluting our air. In each case, a corporation creates a cost that, under existing law, must be borne by the public.

The reason corporations are prone to violate the public interest is that corporate law dedicates the corporation solely to the pursuit of its own interest -- making money. Nothing in corporate law balances this dedication with respect for the public interest.

Historically, we have tried to offset this imbalance with business regulation.Environmental, workplace safety, anti-trust and other laws have all been enacted to stem corporate abuse of the public interest. Unfortunately, these laws only limit ''where'' and ''how much'' abuse will be permitted. They do nothing to correct the underlying imbalance in corporate law.

Corporations make this situation worse by lobbying our elected representatives to make business regulation less burdensome. Probably the most infuriating thing about Enron's rip-off in California is that it might not have been illegal.

Allowing corporations to profit at the expense of the public interest makes no sense. Corporations would not exist if state laws did not permit them to operate. They owe their existence as much to the public as they do to their shareholders (to whom, by the way, the same laws grant limited liability).

Corporations should have obligations to the public as well as to shareholders.Americans are generally uncomfortable with government imposing obligations on them to protect the public interest, but there are important differences between people and corporations.

The first difference is that corporations are institutions, not people. They have no conscience, morals or sense of right and wrong. They have no sense of living in a community. They have none of the human traits and characteristics that restrain us in ways that laws cannot and that make living in a community possible.

Although corporations act only through people, these people are forced to play roles that in some ways make them more like machines than human beings. Every employee is aware that his or her job is only to help the company make money. Protecting the public interest is not part of the job description. Suggesting that it is can be career-threatening and often gets dismissed as idealistic or naive. In this environment, people regularly do things to damage the public interest that they would not do outside the corporation.

Another difference is that a large corporation's ability to damage the public interest is many times greater than that of an individual acting alone.Corporate action is often the action of thousands of employees working together backed by millions (sometimes billions) of dollars of capital. This can result in more damage to the environment or another element of the public interest in one afternoon than an individual can inflict in a lifetime.This difference alone is reason enough to impose duties on corporations that we do not impose on individuals.

The only thing unusual about Enron's abuse of the public interest in California is its hubris. Corporate abuse of the public interest is a common occurrence. Its source is a design flaw in the corporate system.

The best lesson we could learn from Enron would be to change corporate law so that the pursuit of profit no longer comes at the expense of the public interest.

Robert C. Hinkley is a corporate securities lawyer in Brooklin, Maine. His e-mail address is This e-mail address is being protected from spambots. You need JavaScript enabled to view it

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