Do Corporations Have a Social Responsibility Beyond Stockholder Value? BECKER
Do corporations have any responsibilities beyond trying to maximize stockholder value, adhering to contracts, implicit as well as explicit, and obeying the laws of the different countries where they operate? My answer is "no", although maximizing value, meeting contracts, and obeying laws help achieve many of the goals by those claiming corporations should be "socially responsible" by taking care of the environment, considering the effects of their behavior on other stakeholders, and contributing to good causes. Still, laws and contracts, and individual use of their own resources, rather than corporate behavior, should be the way to implement various social goals.
References to the behavior of corporations really mean the behavior of top management who are in essence employed by stockholders through their representatives-boards of directors. In most cases, it is rather obvious that management should try to increase stockholder value through their pricing policies, the products they offer, where they locate plants, and so forth. CEO's who fail to do this are subject to termination either through takeovers or by being fired. In fact, the tenure of corporate heads seems to have become shorter over time.
In many other situations, apparent conflicts between maximizing stockholder value and social goals disappear on closer examination. A corporation may give money to local charities, play up its contributions to the environment, and do other things that appear to reduce shareholder value because that sufficiently improves the government regulations that affect their profitability. Or a company may give to various public causes, like Ben and Jerry‚Äôs ice cream company did in the past, because this attracts customers who want to support these causes partly by buying the products of companies that make contribute to these causes.
Treatment of employees that on the surface appear to reduce profitability often are in fact consistent with the criteria of maximizing stockholder value while respecting laws and contract. For example, a company may raise the value to shareholders by keeping on older workers beyond the age where their productivity is sufficiently high to justify their earnings because that attracts younger workers at lower wages since they expect too that they will not be let go when they get older. Or employees may invest in their on the job training because of an explicit contract or implicit agreement with their employers that their earnings will rise with their tenure as their productivity rises because of their investments. It would be inconsistent with my criteria if a company did not raise wages appropriately of some employees when their tenure and productivity increased because the company realized that these employees did not have good opportunities at other companies. This behavior would violate my recommendation that a company maximize stockholder value, subject to obeying all laws and contracts, implicit as well as explicit.
To take an example of what I do not believe companies should do, a global company operating in a poor country should not pay higher wages for either adult or child labor, adjusted for the quality of the labor, than is the prevailing standard in the labor market of this country, as long as higher wages would lower the profits of the company. I am assuming the wages they pay do not violate any laws or contracts of the countries where they operate, and that they are not subject to such bad publicity that their profits actually would increase if they paid more. I should add that pressure to pay much higher wages in labor markets of developing nations reduces the number employed there by international companies, and would tend to worsen, not improve, the plight of the poor populations of these countries.
Even in cases where this does not contribute to profitability, top management may want to use company resources to promote environmental ends that are not required by law, give to local symphonies, promote fair trade coffee or other fair trade products, and engage in other acts that increase the managers' utility, prestige and standing in their communities. In a competitive market for managers, management would have to take sufficiently lower earnings, bonuses, and options to in effect pay for the company assets and profits they use to boost their own welfare and community standing. So in such a competitive management market, management essentially engages in "socially responsible" behavior out of their own earnings. This would not lower stockholder value, and is consistent with my criteria.
If the management is entrenched, they might be able to give away resources to environmental and other groups without lowering their own earnings, but by lowering instead dividends and other payments to stockholders. Even this, however, would not affect stockholder returns if instead management could have taken higher earnings, bonuses, or stock options for themselves. Depending on what they would have done with their higher earnings, the use of company profits for particular social causes may or may not lead to better overall outcomes. But surely an important goal of any reform in corporate management is to reduce the entrenchment of management, and inject more competition into the market for CEO's and other top corporate leaders.
Whatever the degree of competition in the market for top management, the market for stock ownership is highly competitive. Those stockholders that want companies to use potential profits for environmental or other social causes might be willing to buy the stocks of companies that do this, even if that means lower monetary rate of return on their investments. If there are enough of these stockholders, then companies that engage in these practices would be maximizing stockholder values, and their behavior would be consistent with the criteria for corporate behavior that I advocate.
But such socially conscious stockholders are a small fraction of all owners of stocks, especially of large institutional funds and investors. These funds would avoid companies that are "socially responsible" until prices of the stock of these companies fell sufficiently to give the same risk-adjusted monetary rate of return provided by companies that do not engage in social behavior. This implies that new companies that are expected to contribute to various social goals beyond making profits, and respecting laws and contracts, will have lower IPO prices if they issue stock than they otherwise would have. In that case, the founders of socially-minded companies will bear the cost of their social responsibility. That is appropriate and is not objectionable. I am bothered only when managers, founders, or others in control of corporations that behave in a "socially responsible" manner try to pass the cost of behaving in this way on to others rather than bearing the costs themselves.