The corporate cancer

Scene from movie “Too big to fail” of meeting of financial regulators closed door meetings with top bank managers during the financial crisis of 2008. Photo credit HBO

The modern economy is dominated by the corporate form of firm governance (Avi-Yonah, 2005 ; Lozano, 2011). A corporation is a legal entity entitled with rights similar to a person which is bound by a fiduciary responsibility to act in the interests of its shareholders. Its limited scope is to generate a financial return for its shareholders. Shareholders are protected by limited liability and their voting share is proportional to their ownership stake. Its behavior is like a cancerous growth in that it is a repeating cellular unit that tends towards growth, but too much of that growth in certain conditions becomes harmful to its host — the global economy. The corporation due to norms, laws and incentive dynamics has a tendency through competitive selective pressure to exchange negative externalities for financial profit between the shareholders that control the firm and the stakeholders at the interfaces of the firm.

This article makes the case for a strategic emphasis of the role of shareholder corporate institution on the transition to a more equitable, sustainable economy. The article presents a hypothesis that the modern corporation is like a cancerous growth that may be benign or even symbiotic at small scales, but can switch to a malignant growth that starts to undermine its host — the economy.

Strategic case to focus on the corporation

The case for a path to a more equitable, sustainable economy by reforming the shareholder corporate governance institution is :

  1. Larger resource pool, lower barrier to entry due to non-adversarial position to the state
  2. Lower access barriers multiple points-of-entry
  3. Economies of scale in learning effort
  4. Getting closer to the root cause with pre-distributive vs post-distributive solution

Larger available resource pool by lowering the barrier to entry

By focusing on firm governance, the movement aims are not directly positioned as adversarial to the state and in the most optimistic case could be complimentary. This could be an important consideration in a political environment where either the state has broad public support or otherwise is an effective authoritarian regime of reinforcing a culture of fear. Either case could be relevant for Singapore where open opposition to the state is both institutionally restricted and culturally taboo. A lower barrier to entry widens the pool of potential resources to mobilize for the transformation effort. It is not certain however whether this model is more or less confrontational given that the multinational corporation’s central positioning in Singapore’s economic blueprint traces to the initial design of the basic government institutions and is reaffirmation in contemporary political rhetoric (Teck Wong Soon, 1993 ; Chan Chun Sing, 2020).

Lower access barriers multiple points-of-entry

Compared to the number of autonomous academic or media entities in a country or a city, there are thousands of firms of different sizes as potential opportunities to learn and refine the practice of how to reform the governance as an outside entity through trial-and-error. The diversity of distribution of sizes and types of firms creates an opportunity that if unsuccessful for one campaign, there are many alternative opportunities for repeated attempts.

Economies of scale in learning effort

There may not be much additional information to characterize the difference of the lessons learned for how to organize a firm for a scale of 50 employees compared to one of 10,000 employees. Once the tactics for how to reform a target have been piloted and proven on a small scale they may be reused and adapted at larger scale with minimal marginal additional expense of learning effort. Through repeated experience and establishing some gains on a small scale, these gains can be capitalized to consolidated such as cooperative of cooperatives and eventually compete with the dominant actors in the economy.

Getting closer to the root cause with pre-distributive vs post-distributive solution

The concept of the welfare state leaves dynamics of how firms interface with their communities at a local level largely untouched and instead intervenes after-the-fact to correct for imbalances through taxes and transfers. Reforming at the firm level is a preventative approach that applies the corrections closer to where the decisions are made. The welfare state model may be less stable if it is vulnerable to single-point-of-failure such as if at some point the public trust in the welfare state model drops below critical levels. While an ecology of pre-distributive firms may result in non-standard outcomes, it could also provide some resilience to variations in performance between firms. Ideally the two systems could interact with and reinforce one another.

shareholder corporation stakeholder interfaces

The modern corporation is characterised by :

  1. Legally enforced fiduciary principal-agent relationship of shareholders and the firm
  2. Limited liability of the shareholders
  3. Limited disclosure obligation
  4. Voting rights proportional to the ownership stake %
  5. Legal treatment and definition of rights and priviledges of the firm as though it is a person
  6. The firm is an entity which creates a financial return on shareholder capital by owning assets, — contacting labor and other services to providing a service to a customer market
  7. Alienable ownership rights — owning a share is dependent on an existing shareholder giving up (selling) their ownership stake

The legal entity of the corporation has evolved over time and traces its origins to Rome and later England and the United States (Avi-Yonah, 2005). The transition to a for-profit entity was only at the end of the 18th century and the extensions to be publicly traded and later multinational have only been recently in the 19th and 20th century respectively (Avi-Yonah, 2005). The differentiated features of the corporate governance of limited liability and rights and entitlements as though it is a person enabled it to grow and dominate control of most of the productive resources in the global economy even though it lacks the human characteristics of conscience or altruism. These features are also responsible for its malignant effects on its surroundings.

The political ideology of free markets which goes by several names — “market fundamentalism” or “neoliberalism” by it’s opponents extends the model of the corporation and primacy of the rights of shareholders broadly into the domestic economy and to international trade. The ideology as expressed by the Heritage Foundation in their “Economic Freedom Index” advocates for open, tax free borders for immigration and trade, low or zero taxes on capital gains, independent central bank with low interest rate target, mature and deregulated capital and credit markets, low corporate income taxes, privatization of public services, limited government regulation of businesses, and decentralized wage negotiation (Miller, 2020). The cooperative economy strategy is based on the corporate cancer hypothesis, which asserts that the main malignant characteristics of the economy can be traced to the design of the corporate governance institutional framework and substituting an alternative would be sufficient to reform to a more equitable and sustainable economy.

Corporate cancer hypothesis

  1. Most of the undesirable characteristics of the current economic system which can be improved can be attributed to the corporate governance institutional framework.
  2. Switching to an economy where alternatives to the corporation are the dominant form of production of goods & services is sufficient to resolve the deficiencies of the current system

The hypothesis is based on the following points and is similar to the concept of the documentary film “the corporation” which argued that corporations are analogous to sociopaths if they were actual people (Bakan, Achbar, 2003).

  1. Managers are restricted in scope to appropriate a financial return to the shareholders
  2. Selective pressure to exchange spill-over costs to stakeholders in exchange for a profit to shareholders
  3. Limited application to business models of products that are excludable — private goods, clubs
  4. Hierarchical organizational structure conform top-down execution of instructions and protective defences
  5. Sociological dynamics of conformity within firm, diffusion of responsibility for decisions which disadvantage stakeholder over shareholders
  6. Complimentary to human development during rapid industrialization and urbanization

Fiduciary constraints of managers

Henry Ford. Image credit Bettmann

The concept of stakeholders is the complete group of entities and people who either contribute to or are affected by the operation of the firm and include government, the community, environmental resources, employees, customers, suppliers and shareholders. Competitors are not usually considered part of the stakeholders. Managers do not have the discretion to act on ethics beyond what the state requires or in the interest of a wider stakeholder group, nor are they free to provide other forms of benefits to shareholders other than that which can be monetized as a financial return (Mitchel, 1995). Much of the literature on corporate governance has focused on the perspective of the managers and how the incentives from the shareholders select for short-term focus on quarterly earnings and limited room to accommodate stakeholder interests where they are neutral or conflicting with shareholder returns (Mitchel, 1995). This restriction to shareholder profit is not only reinforced through norms, the finance ecosystem but also enshrined into law in countries such as the US. In 1919 in the case Dodge vs Ford Motor Co., the US Supreme Court ruled against Henry Ford, the C.E.O. who wanted to raise wages on behalf of the interest of employees and this was considered against his fiduciary duty to appropriate a financial return to shareholders (Harvard Law, 1919)

Externalized costs

At the stakeholder interface a corporation is more likely to externalize costs where such opportunities arise than the other way around. There are numerous case studies of externalizing costs which range from under-paying employees to overt illegal activities such as Enron (Lozano, 2011). It is taken as a given from the implicit assumption of the new stakeholder capitalism literature (Lozano, 2011) that the problem of cost externalization is not only theoretical but real and the cost of the negative externalities generally exceed the benefits of positive ones. The aim here is not to provide evidence of the extent to which such externalization occurs, but instead to explain why and link it to the design of the institution and to propose an alternative.

The predisposition for the corporation to monetize externalities from its shareholder interfaces in exchange for shareholder return is an emergent phenomenon from combination of external factors of opportunity, competitive pressure in the financial ecosystem and internal factors of the ability to suppress dissent, enforce conformity and diffuse responsibility. The firm operates in a competitive marketplace environment that provides a rewards feedback for externalizing costs. Any firm which is able to consistently produce a private return to shareholders by converting it from an externalized cost to its stakeholders would be rewarded not only with more financial resources to grow the business but also attracting more financing flows from the capital markets. Only when such behavior is penalized at the stakeholder interface could the reward be offset and there is no guarantee that this would happen for every opportunity that arises. The second reason why it is more likely than not that corporations would externalize costs is because of the sociological controls within the organization hierarchy to dissent on behalf of stakeholders against shareholder interests.

Excludable goods

Types of goods. Definition source Core Economics

Private goods are the most conducive to appropriate a shareholder return since they are excludable, and where they are physical they most likely are also rival. On the other hand commons (non-excludable, rival) and especially public goods by comparison are more difficult or impossible to completely exclude and appropriate a financial return back to shareholders. Provision of such goods by a corporation would be limited to voluntary charity and thus limited by the norms and laws of what the managers of a corporation are authorized to do.

Hierarchical organizational structure

The regular occurrence of hierarchies in corporations is attributed both to the selective pressure to economize costs — transaction, information costs, to standardize quality control (Williamson, 1981), and that organizational hierarchies are an ubiquitous social phenomenon not unique to corporations (Leavitt, 2003). The restricted terms of service to those which can be appropriated as financial return back to shareholders may favor hierarchical organizational. Hierarchical organizational structures are adapted to defend, enforce appropriation boundaries between the entity and the external interfaces and consistently execute top-down instructions (Leavitt, 2003 ; Brafman, 2006).

Market power and diffusion of responsibility

Two coupled dilemma games inter-agency between the firm and its interfaces and among firm employees

A consequence of the combination of inherent social dynamics arising from human psychology with the shareholder corporate governance creates a propensity to externalize risks and costs. This propensity in general is more likely when the risks are not easily observable, diffuse and dispersed among many different individuals or to the environment where it cannot be easily traced back to one particular firm. This arises from a combination of dynamics both internal to the firm and how the firm interacts within the larger economic system. Using the framework of game theory, the situation of the firm and its interfaces is one type of game where the firm can choose to either cooperate, compete, or dominate (when it is an option). Another type of game occurs internally to the organization among the different functional groups — the shareholders to the corporate board, the board to the managers, and within the line organization down to the individual employees in their teams. This internal game often takes the form of another form of the prisoner’s dilemma known as the bystander effect, where individuals within the firm have varying levels of awareness of a risk either to the firm or to some external agent and they chose to not intervene, even though it would be in the best collective interest for them to do so. The separation of owners and managers in the shareholder governance model in particular contributes directly to the diffusion of risk by creating an information barrier at an otherwise critical interface for risk management and governance (Means, 1983 ; Gordon, 2002).

Market power

Market power is the asymmetric advantage of a few agents in the market to unilaterally set prices or other terms of agreement. An example of an asymmetric game is the “ultimatum game” where one of the players has an advantage at setting the payoff outcomes. In such games the player with the advantage has no self-interest incentive to offer terms favorable or fair to the other player. While there is a diverse mix of payoff configurations between firms and their interfaces some of which are symmetric and others asymmetric, the overall effect of shareholder corporation as a system produces a net systemic asymmetric configuration between the entire corporate system and the interfaces with labor and the environment. Instead of the terms of trade, prices being determined in a “fair” means via the “invisible hand” of many decentralized small agents, it is determined by the “visible” choice of a few managers from powerful firms (Means, 1983). The separation of owners and managers in the shareholder corporation model has contributed to greater concentration of market power (Means, 1983). In 1930 75% of business wealth was owned by corporations, half of that wealth was controlled by 200 companies (Means, 1983). Whether this market power is effectively balanced by the state is an open question and would be dependent on different local circumstances, although it raises the question whether a policy of smaller government would fall below the minimum size necessary to be an effective check.

Bystander effect

Another variant of the prisoner’s dilemma is the bystander effect, whereby a group is faced with the opportunity to intervene to help some third party who is in danger. It is another type of collective action situation where each individual’s self-interest is at odds with the socially optimal outcome preferred by everyone which is that at least one person intervenes. The degree to which the individual consciously experiences cognitive dissonance from this conflict may vary from person to person (Fischer, 2011). In general the odds are that no-one intervenes, however certain conditions make intervention more likely. The bystander effect has been studied both theoretically and tested in controlled experimental situations and the summary of the literature identifies a few factors which predict the likelihood that an intervention will occur (Fischer, 2011). The general phenomenon that prevents action is known as diffusion of responsibility, and this increases with the group size. The other factors which predict intervention are the internal cost-benefit analysis of the individuals and information barriers for the individual’s ability to assess the urgency of the situation, the available intervention options and their effectiveness (Fischer, 2011). The first step, activation can determine whether any of the later cognitive steps occur and is sensitive to situational factors on how the individual experiences an emotional sense of urgency (Fischer, 2011).

Corporate governance and risk — case examples from financial risk — Enron and safety risks — BP Deepwater Horizon

The bystander effect could help to explain a number of situations within a corporation where diffusion of responsibility enables systemic risks to perpetuate unresolved. The risks which have been studied are cases where the risks ultimately fall back on shareholders. So it is reasonable to assume that the same systemic vulnerabilities would apply to those risks which could be externalized to stakeholders in a way that is beneficial to the shareholders. Such risks may or may not ultimately return back as a long term risk to the shareholders, and may or may not be detected at all within the organization. Two cases of a diffusion of responsibility and failure to manage risk to shareholders are the financial disclosure risks for the case of US energy company Enron in 2001, and B.P. offshore rig disaster Deepwater Horizon in the US Gulf Coast in 2010 (Reader, 2014, Gordon, 2002). Enron collapsed rapidly into bankruptcy primarily because of poor financial disclosure and financial risk management. The event was not due to any single individual, but rather an emergent, systemic outcome of diffusion of responsibility and varying degrees of performance failures ranging from generic poor risk mismanagement to suppression of information by several actors including the managers, employees and third party accountancy agencies (Gordon, 2002). The case of Enron illustrates an example of how the separation of ownership and management for the corporate institutional framework undermines the effectiveness of supervision of the managers by the shareholders. Due to a number of institutional design features, the managers behavior matches the incentives to do whatever they can to increase the stock price in a near run 1–5 year horizon (Gordon, 2002 ; Mitchell, 1995).

Their short term stock price biased behavior may subvert other priorities and risks either consciously or subconsciously and these biases diffuse down through the rest of the organization. The story of the BP offshore oil rig Deepwater Horizon was a case study of how the sociological dynamics of poor risk management trace from management through the organization ultimately leading to an accident that led to 11 fatalities and a large scale environmental disaster oil spill (Reader, 2014). In this example the consequence was both an externalized cost to the environment, the economy of the Gulf coast fishing industry, the workers who died and also a realized material loss for the shareholders (Reader, 2014). Historically, process safety risk management has neglected the role of management on accidents and limited root cause investigations to treat accidents either as “inevitable” at some probability or emphasized the responsibility at the lower levels of the organization or limitation of the technology (Reader, 2014). The study has evolved over time to trace back human factor failures to the systemic and organizational factors back to the managers (Reader, 2014). In the analysis of BP, the safety culture was found to have a bias to prioritize production ahead of safety risks, that leadership tended to construct narratives which presented the company in a positive image in a way that neglected consideration of skepticism or imagination of scenarios of decision failures (Reader, 2014). Another criticism of the safety culture was the over-emphasis on individual line workers behavior “slips, trips and falls” and an under appreciation for systemic and process safety risks which falls under the scope of engineers and managers (Reader, 2014). The safety culture shapes key design decisions by engineers that can shift priorities to production, profits or risks which are likely to materialize in the short run at the expense of longer term risks (Reader, 2014). The risk culture continues to diffuse to the operating teams. Group social dynamics based on incentives and cues picked up from the rest of the organization and management can influence situational awareness — how risks are perceived, detected and acted on in ways that can undermine the effectiveness of traditional administrative and engineering safety controls (Reader, 2014).

Paradoxically, the systematic dominance of corporations with their environment can persist as a tragedy of the commons in a state of sociological homeostasis. Even while the members that make-up the organization including the shareholders in the best case if they had perfect information (which they often do not) on reflection would prefer a more conservative approach to risks, due to the design of the institution and sociological dynamics of diffusion of responsibility, conformity, there is not sufficient conditions for any individual to detect and intervene to alter the tragic systemic pattern.

Industrialization and urbanization

Subjective well-being vs GDP per capita Source Inglehart, 2008

The corporation model may be complementary to material needs during the industrialization phase of development and in the most optimistic interpretation may generate net positive externalities, such as the private development of railways in the 19th century US, for example (Avi-Yonah, 2005). Beyond a certain threshold, the material needs and market opportunities for the corporate model may become saturated. At some inflection point, the corporate model may have exhausted the economic opportunities where provision of private goods are instrumental to social advancement as a whole, and instead starts to become counter-productive in the continued purposeless search for business model opportunities that meet the arbitrary constraints of private goods, but undermine social goals by externalizing costs to the rest of society in ways that are not easily identified or resolved by the public. Instead, at this phase of development as material needs saturate and are surpassed by social, psychological dimensions of well-being in the service economy, the demand for public goods and services begins to outpace the demand of private goods.

One of the arguments in defense of market fundamentalism is the empirical evidence of strong correlation between economies which score high on measures of prevalence of the ideology — such as the Economic Freedom Index (Miller, 2020). The statistical evidence suggests that generally there is a nexus of correlated variables related to urbanization, market fundamentalism and improvements in material needs — nutrition, shelter, clean water, basic health services. This relationship is particularly evident for those economies in the industrialization phase of development from low income, agricultural into service economy . (Hickem, 2020 shifting role of the state). While the relationship between market fundamentalism, growth of corporations is linear in advanced economies with incomes and material measures of “standard of living”, the statistical relationship of material and income measures of achievement with health, psychological dimensions of well-being becomes nonlinear, diminishing marginal returns after the basic needs are satisfied as illustrated in the graph of subjective well-being (SWB) and income (Inglehart, 2008). The statistical evidence for market fundamentalism and well-being is weaker for advanced economies, and even suggests that the collateral consequences of socioeconomic inequality may lead to worse outcomes of well-being for material needs of those on the margins of society and for non-material dimensions of well-being for the rest of society (Hickem, 2020 shifting role of the state).

Some dynamics which could contribute to the diminishing marginal returns effects of the shareholder corporation model on well-being in advanced economies are :

  1. Winner-takes-all effect of capital and income concentration and inequality in the shareholder corporation model (Piketty, 2013)
  2. Sociological, psychological costs for everyone in society in an environment with high socioeconomic inequality (Piketty, 2017)
  3. Emergence of materialistic values and the corresponding subversion of altruistic, cooperative attitudes and social dimensions of well-being (Bauer, 2012)
  4. Urbanization and economic development is positively associated with structural changes in the economic from primary (agriculture, mining) to industrial (manufacturing) and then to services (OECD, 2000)
  5. Role of human capital investments as a public good (IMF, 2014 ; Barro, 1990)

One possible explanation for the apparent diminishing marginal returns of income with well-being is that the goods and services associated with supplying material needs are more closely associated with the physical nature of easily excludable, private goods — food, water, shelter whereas those services that are more closely related to social, psychological well-being are by their nature closer to non-excludable goods (commons, public) — information, intellectual ideas, intangibles, social interaction and human contact. These later types of goods are more closely associated with the service economy and the challenge of appropriation of such goods for a profitable business model in the shareholder corporation framework is identified as an open challenge (OECD, 2000). The corporation model may be more well-adapted to provision of material needs which are more often private, excludable goods which are more cost-effective and practical for appropriation of rents to shareholders, but they are not ideal for the provision of the social, psychological dimensions of well-being — healthcare, education, social, community inclusion and personal expression as these are more closely associated with public goods and services.

The emergent phenomenon of urban materialistic consumption motivates a more pessimistic interpretation of the role of corporations in advanced urban economies. Here materialistic consumption is the phenomenon of consumption of goods and services using discretionary income which consume material resources, are physical in nature and classified as a private good (excludable, rival) and do not contribute substantially to well-being or “needs”, but satisfy intangible “wants” such as status or intangible hedonic goals. Given that the corporation model by it’s design searches for opportunities to grow, when the market has saturated the opportunities to provide material needs, there is a perverse incentive by the corporation and those who benefit by the economic model to grow and perpetuate materialistic markets which provide goods which on the one hand are maternal, excludable in nature and thus can fit into a corporate business model, but are at best neutral and at worst undermine psychological and social well-being for society. This can be considered as a systemic externalization of costs to society as a whole and another more clear externalization of the costs of materialism are the environmental footprint of the raw material extraction, waste generation, pollution and energy consumption. The idea of increasing demand for public goods is not new and related to the idea of Wagner’s law — of the general tendency for the size of government to increase as a society advances (IMF, 2014). The conventional interpretation is a macroeconomic solution for the state provision of public goods (IMF, 2014). So if the shareholder corporation is malignant to the goals for the equitable, sustainable economy, two questions remain. If there are alternative firm governance models to the corporate model which are more ideally adapted to provision of public goods, this could be a microeconomic solution alternative to the welfare state proposal.

Could there be alternative governance institution designs that promote a decision making based on trust-cooperation at the firm level?

Are there models which are capable to overcome the collective action failure for provision of public goods without the need of the state?


Avi-Yonah, 2005 The Cyclical Transformations of the Corporate Form: A Historical Perspective on Corporate Social Responsibility

Bakan, Achbar, 2003 The corporation

Barro, 1991 Economic growth in a cross-section of countries

Bauer, 2012 Cuing consumerism: Situational materialism undermines personal and social well-being

Brafman, 2006 The Starfish and the Spider

Chan Chun Sing, Minister for Trade and Industry 2020 Response to Parliamentary Question on Singapore’s economic strategy

Fischer, 2011 Bystander effect : A Meta-Analytic Review on Bystander Intervention in Dangerous and Non-Dangerous Emergencies

Gordon, 2002 What Enron Means for the Management and Control of the Modern Business Corporation: Some Initial Reflections

Harvard Law Archives, 1919 Dodge vs Ford Motor Co

Hickem, Singapore Green New Deal, 2020 Freedom for who? Shifting role of the state

Inglehart, 2008 Development, freedom and rising happiness : a global perspective (1981–2007)

International Monetary Fund (IMF), 2014 Public Expenditure Reform Making Difficult Choices

Leavitt, Harvard Business Review 2003 Why hierarchies thrive

Lozano, 2011 Addressing Stakeholders and Better Contributing to Sustainability through Game Theory

Means, 1983 Corporate power in the marketplace

Miller, Heritage Foundation, 2020 Economic Freedom Index

Mitchell, 1995 Cooperation and Constraint in the Modern Corporation: An Inquiry into the Causes of Corporate Immorality

OECD, 2000 the service economy

Pickett, 2017 The enemy between us : the psychological and social cost of inequality

Piketty, 2013 Capital in the 21st century

Reader, 2014 The Deepwater Horizon explosion: non-technical skills, safety culture, and system complexity

Teck-Wong Soon World Bank, 1993 The lessons of East Asia : Singapore public policy and economic development



Applied research, engineering, and projects for solutions to sustainable cities. SG Green New Deal

Get the Medium app

A button that says 'Download on the App Store', and if clicked it will lead you to the iOS App store
A button that says 'Get it on, Google Play', and if clicked it will lead you to the Google Play store
Taylor Hickem

Applied research, engineering, and projects for solutions to sustainable cities. SG Green New Deal