Corporations' efforts to maximize shareholder value also include political contributions to influence the tax and regulatory environment in which they operate. While usually legal, is the undue influence that corporations have socially responsible, when they can avoid taxes they would otherwise have to pay and generally bias the legal framework that governs their own operations?

No

That is, No to the entire post, not to your comment Frank.

I would like to suggest that the ethical responisbilities of corporations are, first of all, those that are incumbent upon individuals, and then any additional responsibilities, such as to maximise the value to their shareholders.

This is of import, because I believe, and I suspect that our esteemed bloggers would agree, that the whole moral and ethical responsibility incumbent upon people is not totally captured by the law. For example, while it is not illegal to promote the use of baby formula to mothers in the third world, using sophisticated marketing techniques that do not include false advertising, it is morally reprehensible when the promoters know that mother's milk is the best way to feed a baby, all else being equal, and that the water that is likely to be used to mix the formula is contaminated with disease, leading to the deaths and injury of babies as a result of promoting that product.

Just as I would expect an individual whose actions foreseeably resulted in the deaths of babies to be considered worthy of censure, so I would hold that corporations should also be censured to the maximum extent possible, even if that is only to subject them to moral opprobation.

While I am pretty much in agreement with Dr. Becker's analysis, I offer that if one thinks about stockholder utility, stockholders may prefer to investin companies that they see as responsible. If not, they can certainly invest thier money elsewhere. One might assume that investors would be bette off making their own charitable donations, outside of the company, however that is entirely up to the investor when he or she is selecting their portfolio. In any case, the budren or reponsibility does not lay on the corporation; however, not all charitable donations that are not profit-maximizing need be seen as bad.

As a critique of naive "stakeholder" approaches to CSR, this seems to me about right. I'm not seeing much in this post that differs from Milton Friedman's classic 1970 argument ("The Social Responsibility of Business is to Increase its Profits").

There are some interesting complications, however, that have arisen in the literature in the past 30-some years. First of all, there is the argument that whether or not corporations maximize profits is really a matter between their shareholders and managers. It's not up to outside observers to make pronouncements about what they believe companies should and should not do. It's an issue to be settled in the stockmarket, not the blogosphere. If someone can set up shop, vowing to pay above-market wages rather than maximizing dividends, and manages to find investors willing to buy their shares, then good for them. It's not as uncommon as one might think. Easterbrooke and Fischel, for example, like to use the example of newspapers as corporations that "have established structures that give their managers substantial freedom to produce news at the (potential) expense of profit." Yet we never seem to hear people complaining about newspapers...

Second, there are a number of different ways in which corporations can fail to maximize profit in the name of CSR. Giving away money is the most obvious (and the easiest to criticize). But what about more subtle cases? What about "gaming" the rules, i.e. exploiting what are clearly unintended features of a body of regulations (think Enron's "Silverpeak" manoever in California)? Or what about taking advantage of weak regulatory environments (or weak property right systems), in order to externalize costs? Exploiting market failures, e.g. adopting competitive strategies that would, in an ideal world, be illegal, but happen not to be for purely practical reasons? Kenneth Arrow wrote an excellent piece on this issue back in 1973 ("Social Responsibility and Economic Efficiency"). I'd be interested to know what you think of it.

in re wages.

your position to maintain 'industry standard wages' conflicts with Henry Ford & Costco. The 'shareholder value' calculus seems too mechanistic to me. Rather quality trumps quantity; integrity trumps ROE. i.e. given the uncertainty of future events, we might prefer companies that exhibit qualitative differences over the 'industry standard'.

I'm curious, do you have any empirical evidence for your assertion that "corporations should only engage in those actions they can directly justify based on shareholder value" (assuming I read you correctly)? I seem to remember that various studies have shown companies which focus on creating "customer" value (including by semi-paternalistic attitudes towards employees) actually outperform those that are financiall focused, e.g., "Built To Last." There does seem to be an empirical argument that "wisely doing the right thing for its own sake" is actually a better value creator than merely "maxizing forseeable profits." Would you disagree?

Apologies for the long post...

I may very well be missing something but Becker's reasoning seems to be: "Shareholders are the owners of corporations therefore the purpose of corporations is to do what shareholders want. What shareholders want is to maximize shareholder value therefore corporations should only be socially responsible when it maximizes shareholder value".

As to the first point on ownership, for the most part I see ownership as being justified by its economic effects rather than by any moral considerations. Ownership conveys certain powers or control or "rights" to the owner. Depending on what is being owned these "rights" may be very different. In fact, I would argue that they should be very different and they should only be granted by society to the extent that they are consistent with the kind of economy that society wants.

Now, what I want from an economic system is an economy where no one is desperately poor. That is, absolutely everyone has the basic necessities of life including access to education. Also, I want everyone to have the possibility of getting full time work that will pay enough for a middle class lifestyle and I want people who either work very hard or are uniquely talented to earn enough for an upper middle class lifestyle. I don't mind if there are also people who are rich but I don't mind if there aren't any people who are rich either.

In my view then, a corporation should only have the goal of doing what its shareholders want to the extent that it is consistent with the economic goals in the previous paragraph. In particular, if a corporation has a choice between decreasing the number of people who are desperately poor or increasing shareholder value, it is not at all clear to me that there is a fundamental reason why the corporation should always choose to increase shareholder value.

Even to the extent that it is assumed that the the only thing that matters in an economy is increasing total economic output, there is still the problem that the biggest thing that absolutely destroys an economy is concentration of too much economic and political power in the hands of a few individuals. A single-minded focus on increasing shareholder value runs a grave risk of such dangerous concentration of economic power and very few people would consider the resulting economic collapse to be increasing the total economic output or otherwise desirable in any way.

Getting back to Becker's reasoning, even to the extent that one accepts that corporations should always do what their shareholders want, the current system of share ownership makes it very difficult to determine what exactly shareholders want and it also makes it very difficult for shareholders to enforce what they want.

On the subject of what shareholders want, I see laws as limits rather than guides on acceptable behavior. Governments take the position that they really don't know what the point of life is or what people should do with their lives but that there is some behavior that interferes with other people's lives to such an extent that it must be limited.

Specifically, an individual should not base their life choices on doing the bare minimum that is legal. For example, in most circumstances it is legal not to give birthday presents to one's children but that doesn't mean that it is the right thing to do.

Similarly, not all shareholders are poor conservatives trying to get rich by any means possible. There are a lot of rich liberals who have more money than they know what to do with who care a great deal that corporations are socially responsible. That is not to say that they want the corporations to give the money invested in them directly to charity, however, they may very well prefer that the corporations adopt more stringent pollution guidelines than are required by law.

It should be noted that even from the point of view of economic efficiency it may be much more efficient for a corporation not to pollute in the first place rather than to expect private individuals to give to charities to alleviate the effects of the pollution later.

The thing is, corporations do not provide a practical mechanism for shareholders to require top management to comply with their desires on things like pollution. Maybe if there were strict term limits on top management and top management had to campaign to get elected on the basis of their policies on things like pollution then there would be some measure of shareholder control. The problem is, however, that unlike citizens in a political election, shareholders have no long term interests or responsibilities in the outcome of the election.

A shareholder could, for example, "vote" for a corporation to dramatically pollute some developing country. In the short term the corporation's profits would rise dramatically because of the cost cutting measures and the shareholder could sell their shares at a nice profit. Even if in the long term the corporation went bankrupt from lawsuits regarding the pollution, the shareholder would not have any reason to care (nor would they have any reason to care about the welfare of people in the developing country).

Essentially, the present system of corporate shareholder ownership creates a system where shareholders who care about the welfare of society and the welfare of the corporation have no practical and effective ways to influence corporate behavior and those shareholders who do not care are not held responsible even though they are supposedly ultimately in control of corporate behavior. In summery, the present system discourages and, in fact, prevents shareholders from having any affect on top management's decisions.

Let's take another example that gets back to the problem that too much concentration of economic power in the hands of a few individuals destroys an economy. Consider the problem of top management salaries: that the top management of corporations are paid way too much and given way too much economic power.

The usual argument by capitalist economists is entirely circular: "Capitalism guarantees that everyone is paid a fair wage. Everyone is paid a fair wage therefore capitalism works." It does, however, get to the heart of the problem. Except in cases of extreme mismanagement, no one really know whether top management is doing a good job or not. A corporation's performance could be the result of management decisions or it could be the result of external market forces.

If shareholders don't actually know whether the top management is doing a good job there is no way for them to collectively decide on what salaries the top management should receive or even whether they should be fired. Now, the usual argument is that if management is doing a bad job then the stock price will go down.

As discussed earlier, however, if a shareholder thinks a stock is going to go down, rather than trying to lower the salaries of top management or even fire top management they will just sell their stock. In fact, they might even try to make money through options trading. Furthermore, lower stock price doesn't matter to the management because they can just keep increasing the number of shares of stock in the bonuses that they give themselves in order to maintain the monetary value of their bonuses.

So why don't we have a better system? It's the classic prisoner's dilemma. Even though collectively shareholders and top management (and society) would benefit more in a system with long term accountability, individually shareholders and top management benefit more in a system without long term accountability. Why would someone voluntarily put themselves in a situation of accountability if no one else is?

It's like parking, collectively maximum benefit is achieved when people park in an organized manner. Unless the government steps in and requires that people park in an organized manner then people will not park in an organized manner. This is because people benefit more individually by not cooperating with the system of organization.

In fact, that is the basis of law generally, society benefits most when people are nice to each other but unless there is punishment for not being nice then people will not be nice to each other because not being nice is what benefits them the most individually.

Wes

Your advocacy of a role for corporations in social justice as well as wealth creation has a number of problems, most touched on by Becker and Posner.

First, charity above and beyond those required by law is unsustainable in competition. Other things equal and notwithstanding consumer and worker preferences for "good" behavior, a corporation that elects to exceed its legal obligations will not be competitive against firms that do not.

Second, the law already constrains the behavior of corporations. Law and economics gives reason to think that laws will converge to efficient solutions that prevent pollution occurring when it is cheaper than cleanup. Where inefficient pollution still occurs, the failure is ultimately in law rather than corporate conscience, because only legal constraints are sustainable under competition; good will is not. This is not a value judgment.

Third, if you expect corporations to target goals other than shareholder wealth you must say specifically what those goals should be. Importantly, you do not say how these goals should be defined, and reasonable people will disagree.

Fourth, corporations specialize and they are probably not efficient suppliers of social goods. Rather than expect corporations to improve social justice (however defined), better that they pay taxes for an elected government to distribute according to voter's wishes. That is the system in place now. The argument is then reduced to whether corporations should be paying more or less tax, and whether election rules are properly transmitting the constituency's social values into policy.

Fifth, a corporation will rarely face "a choice between decreasing the number of people who are desperately poor or increasing shareholder value". It could raise wages or increase jobs in spite of economic efficiency, but this is not sustainable under competition. Again, not a value judgement. In any case, the wealth created by corporations targeting shareholder value may still end up being used for charity e.g. Bill and Melinda Gates foundation.

The idea that "corporations do not provide a practical mechanism for shareholders to require top management to comply with their desires" is simply wrong, since shareholders or their agents write job descriptions and reserve the right to sack workers who do not comply. Of course, monitoring costs could be the source of the problem but you do not say this. Your views on the wages of management misunderstands what determines their wages and are in any case irrelevant.

In summary, Wes, you fail to recognise the real constraints corporations already operate under; your preferred outcomes for social justice can be achieved without the arbitrary, unsustainable and wasteful constraints you propose.

Of course they do! No man/woman or company is an island any longer. Take a look at any of the recent Fortune Most Admired issues. While social responsibility does not rate individually high with the most admired, compared to those less admired corporate responsibility has considerable weight in the over all determination of how much admired a company is.

Not the best measure you say? I can't disagree but if you got something better, please share.

I think corporations have moral responsibilities just like normal people. Do normal people have no moral responsibilities beyond maximizing our wealth, keeping contracts, and obeying the law? Of course not. Corporations are a device for acting collectively, and we don't lose our moral responsibilities just because we're acting collectively.

This corporations as people business is nonsense. I don't believe corporations have the same rights as individuals so I dont' know why I should believe they need to have the same responsibilities. The corporation is an economic innovation, nothing more and nothing less. Because if its inherent composite nature, efficient and just allocation of "social justice" becomes problematic. Those decisions, despite Posner's novel assertion to the contrary, are more efficiently placed in the hand's of individuals, where their preferences can be more precisely met. Moreover, lest we forget that corporations are primarily seeking to promote the corporate image rather than seeking an efficient and productive charity, to say nothing of the ends that charity serves harmonizing with the shareholders' values.

Matt,

Thanks for the response.

First, charity above and beyond those required by law is unsustainable in competition.

Well, people won't park their cars in an organized fashion unless it is required by the government but that doesn't mean that organized parking is a bad thing.

Where inefficient pollution still occurs, the failure is ultimately in law rather than corporate conscience,...

I agree that corporate behavior will not change without changes in the law or at least changes in interpretation of the law.

...because only legal constraints are sustainable under competition; good will is not.

Actually, most of my consumer choices are based on good will. For example, in choosing restaurants, the biggest factor is whether I like and trust the proprietors.

Third, if you expect corporations to target goals other than shareholder wealth you must say specifically what those goals should be.

Actually, I was quite specific about what my economic goals are (no one is desperately poor, access to jobs, etc.). I recognize, however, that a single economic system must be decided on for an entire country. The economic goals of each country should, therefore, be decided in some sort of democratic process in that country.

Fourth, corporations specialize and they are probably not efficient suppliers of social goods.

Actually, corporations provide jobs and pay wages which is pretty closely related to society's economic goals.

Rather than expect corporations to improve social justice (however defined), better that they pay taxes for an elected government to distribute according to voter's wishes

I don't necessarily see why one is better than the other. Corporations could even make the choice themselves: pay high taxes that will be redistributed to the desperately poor or structure themselves to provide jobs with decent wages to people who are desperately poor.

Fifth, a corporation will rarely face "a choice between decreasing the number of people who are desperately poor or increasing shareholder value".

Actually, a corporation can either pay a dividend to its shareholders or it can use the same money to pay middle class wages for it's lower tier workers. Except for corporations that are in bankruptcy, then, it is a choice that corporations face constantly.

It could raise wages or increase jobs in spite of economic efficiency, but this is not sustainable under competition.

It is if the government requires/rewards itor if stockholders are willing to accept lower profits in exchange for socially responsibility.

...shareholders or their agents write job descriptions and reserve the right to sack workers who do not comply.

I don't actually know any stockholders who have written job descriptions for workers at corporations they own stock in. If, however, "agents" means top management then I would agree that top management write their own job descriptions and more or less decide when to sack themselves.

Of course, monitoring costs could be the source of the problem but you do not say this.

Well, one of the big arguments in favor of ownership generally is that it promotes responsibility. The problem is that stockholders want to be owners when it comes to control but they want to be lenders when it comes to liability/responsibility. If stockholders were required to put all their assets into the stock of one corporation and hold onto that one stock for decades and if they could be thrown in jail if the corporation did anything illegal then stockholders would become a whole lot more responsible as corporation owners.

Your views on the wages of management misunderstands what determines their wages and are in any case irrelevant.

If I am correct that the wages of management are determined by what management wants to pay themselves rather than what stockholders want them to be payed or what they are actually worth (and there are good reasons for thinking this) then it is highly relevant because it shows that stockholders are not actually in control of corporations as is asserted by the idea that "stockholders are owners".

...your preferred outcomes for social justice can be achieved without the arbitrary, unsustainable and wasteful constraints you propose.

I wasn't aware that I actually proposed anything specific in my previous post. My preferred "outcomes for social justice" are obviously not being achieved under the present system (many people are desperately poor without access to jobs paying middle class wages). Since you assert that my preferred outcome can be achieved, what would you propose in order to achieve it?

As to what I would propose:

First, stockholders would have to choose between being owners or lenders.

People who chose to own stock in the capacity of owners would be personally liable for crimes and negligence of the company they owned. Furthermore, there would be limits on personal diversification and requirements that a stock be held for at least a decade. On the other hand, there would also be laws facilitating imposition of stockholder preferences on top management.

People who chose to own stock in the capacity of lenders would have no inherent right to control the corporation. The purpose of a corporation would be specified in its incorporating contract and in its lending contract. Stockholder liability would be limited to anything arising from the terms of the various contracts.

Second, in situations where a corporation's behavior was directly related to a goal that a society had (democratically) specified, then the government could reward/require the desired corporate behavior. For example, a society might want to prevent too much concentration of economic power. The government could then require that corporations limit the pay of all employees including top management to, say, five times the average salary at the corporation. As another example, the government could reduce taxes of corporations that provided payed apprenticeships teaching skilled jobs to people who were desperately poor.

I suspect that in a system where stockholders either had direct control and responsibility as true owners or had clear contracts specifying what their money was being used for as lenders, that stockholders would actually express a strong preference for socially responsible corporations. As with organized parking, however, I also suspect that there would be a need for the government to provide some level of guidance/encouragement.

The problem with the concept that obeying laws is one of the responsiblities of a corporation is that they get around that responsibility by buying politicians to re-write the laws.

Both Becker and Posner's writing on this issue seem hopelessly naive and out of touch with the current reality of the relations that corporations have with governments and individuals.

Wes

Thanks for your response. I think our disagreement can be isolated to:

1. Whether a firm can survive in the long run despite offering a lower rate of return to shareholders than less-charitable equivalents;

2. Whether government is a better a better provider of social justice than corporations; and

3. Whether management can be disciplined by shareholders.

In point 1, charitable firms will be forced out of business by non-charitable ones (notwithstanding consumer preference for charitable firms? products) because the charitable firm will not earn a competitive return. You correctly note that "if stockholders are willing to accept lower profits in exchange for socially responsibility" the charitable firm will survive. But the same outcome can be achieved, notwithstanding tax effects, by requiring a firm to maximize shareholder value and shareholders individually donating a share of dividends to charity. That is how the system currently works. It is not clear that collective charitable contributions will exceed the sum of individuals' contributions, particularly after the impact of imposing multiple objectives on firm performance filters through.

On point 2, you say that corporations might optimally be offered a trade-off: "pay high taxes that will be redistributed to the desperately poor or structure themselves to provide jobs with decent wages to people who are desperately poor". Which of these options is optimal turns on a) whether government agencies or corporations are superior deliverers of social policy, and b) whether it is better for governments to impose social objectives on firms in exchange for a tax break, or for government to pay firms to execute specific tasks (e.g. hire 1000 long term unemployed). In fact, such "corporate welfare" programs already exist, many of them very costly per job created. I do not think that companies expert in, say, sports shoes are qualified to make judgments on social justice issues. That, surely, is the role of governments.

On point 3, if I understand you correctly, your view is that shareholders are unable to prevent themselves being duped out of funds by management. How can this be correct? I accept, of course, that major aberrations have occurred. Generally, however, wages and performance are reasonably transparent to owners. What prevents a board disciplining or sacking overpaid, underperforming managers? What prevents shareholders from voting to sack an under-performing board? What are the good reasons you say exist for believing such things? It would in some cases be clearly inequitable to make shareholders liable for management misbehavior e.g. WorldCom.

It does not follow that reining in managers would leave room for corporate charity. If all firms started paying their managers only what they are worth, the firms that elect to be charitable still go out of business in the long run by delivering inferior returns to shareholders.

You ask how to achieve preferred outcomes. My answer is this. Corporations are innovation machines: they are exceedingly good producing ideas and solving the many problems of innovation, encompassing R&D and commercialization. These innovations materially improve well-being. Corporations should be permitted to get on with business, subject to the familiar constraints (environmental, health and safety rules, etc.). A share of the wealth created is taxed, and tax raised is diverted by specialized government agencies to addressing social objectives. This re-distribution process is regulated (imperfectly) by democracy. This is the system already in place. Corporations fund in part the delivery of social objectives, but they do not actually do the delivering (other than in the pursuit of shareholder wealth).

The problem with your suggested solutions is that they are either already in place (e.g. controls on economic power) or are horribly arbitrary and damage incentives for wealth creation. Such damage makes no sense when social objectives can be achieved more transparently through tax and spend.

Dr. Becker’s example involving wages paid to foreign workers illustrates how something that seems “bad” or unfair is actually socially responsible if one takes the time to think it through. Raising the wages of foreign workers may also create an “intellectual drain” within a nation’s job market. The wages that U.S. laborers earn are fairly close to what white collar professionals earn in developing countries. If U.S. companies decided to pay foreign workers wages that were close to the wages these companies paid to their U.S. workers, that could create an incentive for people in those nations to become factory workers instead of pursuing careers in medicine, engineering, or similar fields. Don’t get me wrong -- there is no shame in being a factory worker. Also, most people who enter into a profession do so not for the money but because of a deep interest in the particular field. Still, money is a powerful motivator. In this instance, raising wages may actually be socially irresponsible.

Palooka,

You say, "This corporations as people business is nonsense." But imagine someone who thinks that he has certain moral obligations, and sets up a corporation to do help fulfill them--a church, or an educational institution, or something like the Boy Scouts. The corporate-form organization can have the same sorts of obligations that individual people do--to teach the Bible accurately, for instance, or to provide a liberal education, or to help kids understand the outdoors. The fact that a corporate form is used doesn't eliminate moral responsibilities.

Matt Burgess

"1. Whether a firm can survive in the long run despite offering a lower rate of return to shareholders than less-charitable equivalents"

We're going to see shortly, between Costco & Walmart. Please review the NYTimes article about how Wall Street Analysts think Costco is paying too much in wages to its employees. I think they're both competitive, but Costco clearly refutes the notion that they can't pay more in wages & be competitive.
The integrity of management is more inportant to my investment decisions than mere profit margin; the sustainable moat around a business is more important than next quarter's numbers. This reductionism of all management decisions to marginal costs is a short way to the poor house.

"Costco's average pay, for example, is $17 an hour, 42 percent higher than its fiercest rival, Sam's Club. And Costco's health plan makes those at many other retailers look Scroogish. One analyst, Bill Dreher of Deutsche Bank, complained last year that at Costco "it's better to be an employee or a customer than a shareholder." "

"Mr. Sinegal begs to differ. He rejects Wall Street's assumption that to succeed in discount retailing, companies must pay poorly and skimp on benefits, or must ratchet up prices to meet Wall Street's profit demands."

http://www.nytimes.com/2005/07/17/business/yourmoney/17costco.html?ex=1122523200&en=3019213891544e73&ei=5070&incamp=article_popular_3

Chris Green,

My point was not that large instititutions cannot serve charity. Indeed, you provide some examples where they do. And there are many more. My point is that for profit corporations are not intended to adminster themselves as charities. It is a secondary function, an after thought, and something which is (usually) counterproductive to the actual purpose--making profit. Though shareholders can sell their interests if they are particularly offended by a company's charitable dealings, they are more or less coerced into supporting charity they would otherwise not support. There is something fundamentally wrong with that. Moreover, I think corporate charity is likely to be inefficient (focused on building image rather than finding efficient, useful charities) and be a poor match for the interests of the shareholders (either they would not donate to any charity, or they would prefer others). I accept this sort of coercion in government, but I see no reason to extend it to the board room. People are free to donate to whatever charity they want, why must management preempt and rob those individuals of that choice?

There is no reason to support this sort of activity unless you think the choice is not better exercised by the individual. I can imagine many support this corporate charity business because they think if the dollars were dispersed to shareholders that only a portion of those funds would end up in the coffers of charities. Yet this is precisely the sort of coercion which strikes me as unacceptable. In this sense, management is blantantly violating their fiduciary duty.

The idea of "implied consent" is not without merit, but why isn't a system of explicit consent, where people give directly to charities, not preferrable? The answer is it is most certainly preferrable, unless you think people can't be trusted with those decisions.

Jim

Thanks for your response. Becker pointed out that higher wages and better conditions can be consistent with profit maximization if there is a pay-off. For Costco, the payoff from paying more may be lower turnover, better ability to attract qualified staff, and benefits to reputation. If Costco management has correctly judged this payoff, its owners will prosper; if it has not then it will either have to adjust its practices or eventually go out of business. What you see as charity may be a rational business decision.

The question of whether investors can and do invest in firms that seek to (or appear to) maximize something other shareholder value is different from whether all corporations should be expected to follow suit.

That profits can be increased and costs reduced by raising wages, famously recognized by Henry Ford, is important.

Matt,

I think our disagreement can be isolated to:

That is a good analysis. Of course, the overall question here is whether corporations should be socially responsible.

1. Whether a firm can survive in the long run despite offering a lower rate of return to shareholders than less-charitable equivalents;

It is not clear that a corporation's survival is strictly about competition based on efficiency. Here are two examples:

Consider a family that moves to a small Midwestern town and starts an ethnic restaurant. Suppose that it is the only ethnic restaurant of its type in the town and that over time the family that owns the restaurant becomes liked and respected in the community. Suppose further that the restaurant develops a policy of once a week providing the food (for free) for the evening meal offered by the local homeless shelter. It seems very unlikely that this charity will be what determines whether or not the restaurant survives.

At the other end of the spectrum, consider Microsoft. Suppose that Microsoft donates a million dollars for a new homeless shelter in the Seattle area. A purely competition based analysis would suggest that this would cause Microsoft to go out of business because it was no longer be competitive with other computer software companies. Then again, a purely competition based analysis would suggest that Microsoft would not be able to compete with free software like Linux and Open Office either.

2. Whether government is a better a better provider of social justice than corporations; and

Society, facilitated by a democratic government, rather than corporations should be making the decisions about what level of "social justice" is appropriate. On the other hand, I see no fundamental reason why society can not require corporations to provide "social justice" in situations where the corporations are the most efficient providers (limits on pollution being an obvious example).

3. Whether management can be disciplined by shareholders.

The whole stock thing is something of a scam:
Well! Hello there little person! I'm the CEO of MegaCorp!
Uh, hi. I'm just an average person.
Great! You look like you are saving for retirement!
Uh, sort of.
Have I got a deal for you! How would you like to own a major corporation?
Uh, I don't know. I don't think I could afford it.
Oh no silly! Not the whole corporation! Just "shares" of the corporation!
I see. What does it mean to own "shares"?
It means you get a fancy certificate saying that you own "shares"!
How much does that cost?
You can buy as many "shares" as you want! I recommend spending your entire life savings!
I see. Can I ever get my money back?
Ha ha ha! Not from us! In the old days we used to pay regular dividends and the value of the "shares" was based on the total expected dividends. But now the only way to get your money back is to sell your "shares" to some other poor fool with the same kind of talk I'm giving you. You might even make a profit!
I do like profit! But don't I get anything from you besides a fancy certificate?
You also get to vote on top management and their compensation! After all, you are the owner of the company!
So I get to choose who the top management is and how much they get paid? Wow!
Ha ha ha! Oh no! The top management actually makes those decision. But you get to vote for their decisions
Or I could vote against their decisions?
Of course!
And what effect would that have?
Ha ha ha! Absolutely none! Top management owns way more shares than you could ever dream about and you can bet they're going to vote for themselves. Besides, everyone always votes for top management's recommendations. It's tradition and, after all, what other choice is there? I mean, seriously, who's going to vote to not have a board of directors?
So, fundamentally, why would anyone want to own "shares"?
Well it makes them feel good, of course! It's like jewelry - except that men can own it too without having people think they're gay. And, unlike jewelry, no one thinks it's excessive to spend one's entire life savings on it.
Will owning "shares" make me look sophisticated at parties?
Of course! People will love you!
Now you're talking! Can I pay by credit card?

"Do Corporations Have a Social Responsibility Beyond Stockholder Value?"

I say no. They have a responsibility to follow the law however.

Social responsibility? What exactly is "socially responsible". What one person considers responsible another could consider irresponsible.

Let's not burder our corporations with anymore B.S. It's up to the citizens and their government to make up the laws that will keep corporations socially responsible.

I think this analysis is badly oversimplified. People have ethical responsibilities that go beyond legal requirements.

To take a concrete example, suppose there are no laws against water pollution in an area, an underdeveloped country perhaps, where some company operates a plant. Hence it can, perfectly legally, dump its wastes into the river for free. Should the plant manager do this? What if he is aware that the wastes are hazardous, and may affect the health of people who rely on the river for drinking water, or on its fish for food? Do we just shrug and say the manager's has no right to spend shareholders' money to filter the wastes, or dispose of them some other way?

What if there are laws and the company uses its clout - legally - to get them eliminated? Is that OK?

More broadly, many places do not have well-developed legal systems and political systems that give voice to the population. To simply say, "what we're doing is legal, so it's fine, and we are just meeting our obligations to our shareholders" is a major cop-out. I think it's wrong.

Let me further take issue with the statement that

"socially conscious stockholders are a small fraction of all owners of stocks, especially of large institutional funds and investors."

How do we know the preferences of shareholders in these matters? Large institutional investors are themselves agents for shareholders, rather than being the actual owners of the shares. Do they know their clients' preferences?

My main point here is that simple analyses like that in the post may help illuminate issues, but they sure don't settle them. The super-libertarian approach to the world works fine in the academic buildings at the U. of Chicago. I'm not sure it works so well in other places.

Palooka,

You say, "My point is that for profit corporations are not intended to adminster themselves as charities. It is a secondary function, an after thought, and something which is (usually) counterproductive to the actual purpose--making profit."

I agree that if a corporation explicitly seeks investments on the false pretense that it only cares about profits, that would be wrong. But you seem to beg the question of whether corporations should be aimed only at making money. Just as normal people don't only have the responsibility to make money when they act individually, they may also have the responsibility when they set up corporations to make sure those corporations also care about other things besides profits.

Wes,

You are correct, of course, that when shareholders will tolerate sub-competitive returns charity is possible. Equivalently, shareholders could expect competitive returns and donate a portion of dividends (or paper value of shares) to charity.

The question, however, is whether companies should be expected or compelled to be charitable in spite of their owners' wishes, and we seem to be running out of reasons for why they should. What you have proposed for getting corporations to be socially responsible is either already in place or arbitrarily burdens companies with tasks we agree, I think, government is better suited for. Governments can and do pay corporations to deliver social services, but it does not follow that all corporations should follow suit, particularly in view of the mixed success of these programs.

Your story is most entertaining, however the performance of stock is measurable and can be compared to other investments. Company stocks have over time outperformed cooperative investment returns in at least some industries, so I question whether your theory has general validity. Even if you are right that management swindles shareholders when ownership and control is separated, you must explain why forms of organization that do not separate control and ownership, and presumably avoid management swindles you say exist and offer superior returns, have not proliferated in their place. The evidence, I think, is against you.

"But you seem to beg the question of whether corporations should be aimed only at making money."

Corporations are using shareholders' money when they give to charity. The question becomes why the responsibility (if it can be considered a responsibility to give to charity) should be placed with management rather than with shareholders. There are only two suitable answers. One, that management will more efficiently and productively use those funds because they are more informed, and that a large percent of shareholders are happy with this arrangment (Posner's suggestion). The second reason, which I find unacceptable, is that one believes shareholders should be forced to spend more than they would on their own. This argument pressuposes that management has a right to extract profit from shareholders to further what management feels promotes "social justice" or "social responsibility." I don't see how that squares with management's fudiciary duty. In fact, I think it's a pretty clear violation of it.

If instead of charity management decides to increase dividends or invest further into the business, the shareholder will see either income increase or the value of their stock increase, both of which can be used at the stockholder's discretion to donate to the charity's which harmonize with their values. Unless you think those decisions do not belong to the individual, and that shareholders should be coerced through a sort of tax to give, then this sort of arrangment is clearly preferrable.

I would also like to address the concept of "implied consent." Though many investors are undoubtedly happy with management which gives to and supports charitable causes, I would venture to say a large majority of stockholders would prefer to make those decisions directly. This can no more be viewed as "implied consent" than if management was engaged in other violations of their fiduciary duty. Just because individuals continue to buy a stock does not mean they support the specific action. Management is using their position, then, to extract a premium from stockholders, which of course violates their fiduciary duty just as if managment recklessly spent company money on personal expenses (Tyco, for example). Many investors most certainly knew of Kozlowski's extravagance (though perhaps not his criminal extravagance), but that is not to say they impliedly consented to it. All an investor is saying when they purchase a stock is that they think, on balance, it's a good investment, a value. Management, however, always has the ethical duty to eliminate violations of their fiduciary duty, even if their stock price is soaring.

I would like to point out that I do not believe the ethical responsibilities of corporations end with obeying the law. I only mean to attack the premise that for profit corporations should double as philanthropic ones.

Palooka,

I don't disagree with much here. I would construe the fiduciary duty, though, as the duty to act in the interest of the stockholders; this may include acting responsibly in a variety of ways, as well as not wasting their money.

Also, it might not always be the case that fulfilling philanthropic or other moral responsibilities is always best accomplished when separated from profit-making aims. As Posner points out, there might be synergies there.

you must explain why forms of organization that do not separate control and ownership, and presumably avoid management swindles you say exist and offer superior returns, have not proliferated in their place.

That's pretty easy. The advantages of the corporate form outweigh this particular disadvantage. Enabling investors to hold very small ownership positions with limited liability makes it much easier to raise capital, both because the investor's risk is reduced and because the existence of many shareholders simplifies the trading of stock, thus increasing the investor's liquidity.

Your question presumes the possibility of a generally superior form of business organization. What do you think it is?

Company stocks have over time outperformed cooperative investment returns in at least some industries, so I question whether your theory has general validity.

Imagine a type of long-term lottery where lottery tickets are sold by the government at the beginning of the year, traded by the public on an open market over the course of the year, and possibly chosen as the winning ticket in a series of government controlled drawings culminating at the end of the year.

In terms of money flow between the government and the public, money would go from the public to the government in the initial sale and it would go from the government to the public in the drawing at the end of the year. The interesting thing, however, is that even if the net flow of money was from the public to the government (ie. the government made a profit), one would still see demand / positive prices for lottery tickets on the open market over the course of the year.

Getting back to corporations and the stock market, the lottery example makes it clear that as long as there is even just the expectation that dividends will be paid in the future, then there will be demand / positive prices for stock even if the overall system results in a net flow of money from the public to corporations.

In fact, in societies where people are accumulating savings (ie. not in major recessions), stock prices would be likely to rise over time due to increasing demand even if expectations of dividend payment remained unchanged. This means that it is possible to claim "positive performance" for the stock market even in situations where there is actually a net flow of money from the public to corporations.

In reality stock prices reflect a number of factors. Some corporations do pay real dividends but prices are also elevated by the lottery / gambling effect and, of course, sentimental considerations (eg. being able to say "I own Microsoft.") are very important in the real world.

Even if you are right that management swindles shareholders when ownership and control is separated, you must explain why forms of organization that do not separate control and ownership, and presumably avoid management swindles you say exist and offer superior returns, have not proliferated in their place.

People who really own and control successful corporations do actually give themselves all the profits / value and become fabulously wealthy as a result. As to why stockholders are not given these fabulous returns, the short answer is that they are lenders who have to compete with interest rates set by the government. Although the money a corporation gets from stockholders has the advantage of not needing to be repaid on a fixed time schedule, at most that would be worth a few extra percentage points above the rate a corporation could get on something like a bank loan or a corporate bond.

For all real intents and purposes, stockholders are lenders - except without the right to require repayment of their loans.

"That's pretty easy. The advantages of the corporate form outweigh this particular disadvantage."

That's my point. There is competition between ways to organize production. That investors choose corporations over rival forms of business organization tells you shareholders are getting a good deal.

"Your question presumes the possibility of a generally superior form of business organization. What do you think it is?"

I had co-operatives, and franchised owner-operators in mind.

"I don't disagree with much here. I would construe the fiduciary duty, though, as the duty to act in the interest of the stockholders; this may include acting responsibly in a variety of ways, as well as not wasting their money."

Yes, that is a good definition. But what is in the "interest" in stockholders is pretty much an unanswerable question with regards to "social responsibility." Profit, on the other hand, is a little simpler. Again, when decisions can be made by the stockholders themselves, why not do it? Maximize shareholder value, something every shareholder desires, and let the shareholder decide how to best promote "social responsibility."

Posner's suggestion that corporations are more suited to finding the best charities would partly justify "social responsibility" among corporations, but I simply do not think it is correct, for a number of reasons. It is, however more palatable than the rationale I have discussed, which is a coercive one.

Matt,

Sorry. I misunderstood what you were getting at. However, if I may raise another issue, I don't think it's accurate to discuss corporate social responsibility strictly in terms of charitable activities. That's obviously the easiest one for "Beckerites" to deal with. "If you think the company should donate more to the Red Cross then donate some of your dividend yourself."

I think the bigger question has to do with things the shareholders cannot do themselves. Consider my example of pollution, posted at 6:09 yesterday. This sort of thing has to be decided at the corporate level. And I think to say that the manager who makes the decision is required to consider only the shareholders' financial interests is wrong.

BTW, it is not the case that a firm that incurs expenses in order to conduct its business in a socially responsible fashion will necessarily fail. It will earn lower profits than otherwise, and the value of its equity will fall as a result, but that does not mean it cannot survive.

One interesting question (to me, anyway) is how often attempts to be socially responsible on the part of some corporation, perhaps in response to social or shareholder pressure, actually do some harm. My least favorite example of this was the story of Nike being convinced by bad publicity to stop employing teenaged girls in sweatshop conditions in Thailand. Nobody seemed to publically wonder what other jobs were available for poor teenaged girls in Thailand....

Sometimes, pursuit of profit makes you do worse things than you might otherwise have done, but sometimes, it makes you do better things. Would a socially conscious company in 1920 employ blacks to do "white mens' work?" How about a company run by ruthless capitalists?

--John

"However, if I may raise another issue, I don't think it's accurate to discuss corporate social responsibility strictly in terms of charitable activities. That's obviously the easiest one for "Beckerites" to deal with. "If you think the company should donate more to the Red Cross then donate some of your dividend yourself."

True enough. I find myself much less opposed to corporate "social responsibility" when it comes to business activities, like reducing pollution beyond legal requirements or providing a work place which is safer than legally required (as opposed to activities as I think of beyond the scope of what they should concern themselves with, e.g. philanthropic causes). But it's important for a company to maintain its reputation, and conducting business in an ethical (and not merely legal) way helps do that. It's also wise to error on the side of ethical rather than only legal lines because that helps reduce (at least usually) the probability of lawsuits.

Sad news about the death of Jack Hirshleifer.

http://levine.sscnet.ucla.edu/General/hirshleifer.htm

Bernard,

Corporations exceed minimum legal requirements in many areas, consistent with being "socially responsible" as seems to be understood here, because this raises shareholder value. However, the debate concerns whether corporations should go further and reduce shareholder value in the name of being responsible. I am using "charitable" to isolate only management activity that destroys shareholder value in pursuit social objectives. A decision not to pollute a river when it would be unprofitable to do so is not charity under this definition.

Your water example is instructive. Whether it is legal to pollute water or not is not the end of the matter; it may still be in shareholders' interests for the firm not to pollute the water. Pollution may cause the introduction of costly regulation; the firm's reputation among customers or employees may suffer costly harm; the firm may annoy a neighbor who can retaliate, etc. Thus the manager's decision to pollute is wider than you appear to believe.

The question then is whether the firm should pollute when, after all these things are considered, it is still in it's shareholders interests to do so. My answer is, "it should" for three reasons. First, the pollution may be efficient i.e. net social benefit exceeds cost. Second, environmental standards among countries vary; they are lower in poor countries. As Becker notes with respect to wages, the Third World is generally not helped by slapping First World constraints on companies operating there. Third, if the pollution is in fact not efficient, it is incumbent on the local government to set or enforce laws to correct this. Relying instead on company goodwill merely penalizes and possibly excludes responsible companies and rewards polluters.

Shareholders who disagree are free to pull their money out and invest elsewhere, or vote to replace their board.

It is worth mentioning, I think, that local and foreign direct investment is overwhelmingly concentrated in countries with strong laws and enforcement.

"...it is not the case that a firm that incurs expenses in order to conduct its business in a socially responsible fashion will necessarily fail"

A firm that is unable to earn a competitive return has no long term prospect of survival unless it can attract investors willing to accept lower returns. For-profit investors will not invest in a firm they can achieve higher returns elsewhere. Charity, as defined here, will be lost in noise provided it is small enough, of course, but the basic point that charity is not sustainable under competition stands.

Matt is mostly right when he says that "The question then is whether the firm should pollute when, after all these things are considered, it is still in it's shareholders interests to do so." That's half of it. The full question is whether the firm should pollute when 1) it's in shareholder interests AND 2) it is actually socially irresponsible. (Whether social irresponsibility is ever in anyone's interest is an interesting question for another day, for now, let's assume it somehow can be.) So Matt's first two responses (net social benefit despite harms & meddling hurts the third world more than it helps), which both suggest how polluting might actually be the socially responsible thing to do after all, are as off point as his critics who suggest that social responsibility can be the path to financial success. Attempts on both sides to fight the hypothetical are charmingly irrelevant. But perhaps forgiveable, as Becker made the same mistake decrying abritrary wage increases in developing nations. Funny, Becker's basically saying that such wage increases would be socially irresponsible. Is that altogether consistent?

Since the hypos are getting so muddy, here's some more to play with: Should a corporation engage in slavery, murder, genocide, or even, dare I say, violations of widely recognized intellectual property rights if it furthers shareholder interests and happens not to be against the law?

A strict reading of Becker's original rule suggests they should. Thoughts?

Several posters note that companies are obliged to obey the law. Let's be honest and admit that in today's America if the company doesn't like a law they just get it changed if they can figure a way around it.

Costco does have much better employee retention than Wal-Mart or Sam's Club. The experienced employees that they have also put in more hours than many Wal Mart employees. What kind of advantage does that give them? Well, for one I'm probably going to go join Costco and if I can get what I need from them with better service the Sam's Club membership will probably go bye-bye.

Thomas,

Much of the disagreement in these debates turns on unanswerable questions of what "social responsibility" means and how much of it is right, which I think is the gist of your first post. It is simply unworkable as a yardstick for anything.

Re: your second post, even if a company could convince it's employees to enage in such behavior and it's suppliers and consumers to still deal with it, the company must still operate consistent with it's owners' values, whatever they are. A goal of value maximization obviously need not be to the exclusion of everything else. You have misunderstood Becker's point.

Yes, they have no obligation to do this,
but I think we should advocate that those corps should take this kind of responsibility.

--- a chinese reader

Matt -

On Post 1) Definitions can be tricky, agreed. So I'm happy to stay away from the more devious semantic particulars. But if your examples of Social Responsibility incur great social harms, and if your descriptions of Social Irresponsibility offer grand benefits, I suspect something's gone so grossly wrong and it needs addressing. (Consider Pollution leading to greater efficiency; Arbitrary Wage Increases leading to intellectual drains - is it right to call the former socially irresponsible, or the latter socially responsible?)

On Post 2) Misinterpretation is the hallmark of my career. To avoid misreading, let's look to Becker's exact formulation:

"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?" (emphasis mine)

You offer an obligation to "operate consistent with it's owners' values, whatever they are," which may not be very substantive, as owners can have any values they choose. And if it is substantive, it seems like a departure from Becker.

So even with your extra-Becker caveat (which I'm still not sure counts), I'll put the question more directly: If owners value slavery as a-ok and laws chance to permit it and it's not contrary to stockholder interest, what part of Becker's original formulation allows us to criticize them? Genocide? (Recall American plantation owners, or IBM's somewhat disputed role in the Holocaust if you think these examples are too implausible.)

Nice post.

As someone said, "Costco" - but I think Costco proves your point, not challenges it.

You echo thoughts I'd had in law school - that the long-term maximization of SH value is not through rapacious cost-cutting and downsizing and reckless competition alone, but by true selfishness (Rand, as properly understood):

there is nothing more competitive and selfish than getting what you want, even if you must give others what they want in the process.

This is the pinnacle understanding of negotiation, and perhaps of politics and economics as well.

For example, Henry Ford tried to ensure that his own workers could afford his cars. The Dodge folks insisted that this did not maximize SH value. I say, which shareholders?

If employees are shareholders, improving their lot obviously implies conflicts-and-cooperation of interests. If employees are the public face and one of the main focuses of the company, then the positives flow quite obviously: word of mouth, free advertising, higher work ethic, public approval, less burden on the government's safety net.

If employees are cogs or tools or depreciating assets, on the other hand, you get GM, or worse, United, or worst of all, Unisys (promises made to former employees are vitiated by later professional managers unfamiliar with culture, custom, implicit and explicit contract, and with no ties to the retirees).

The question then is whether the firm should pollute when, after all these things are considered, it is still in it's shareholders interests to do so. My answer is, "it should" for three reasons.

First, the pollution may be efficient i.e. net social benefit exceeds cost.

First, there's no way to know this. Second, the utility argument just doesn't work when all the benefits flow to the shareholders, and all the costs to the local residents. It also ignores the notion of marginal utilities. Even if you could show a net social benefit on a pure financial basis, that doesn't make it efficient. Most important, your position does not seem to rest on this at all. You do not claim, "It's OK if it's legal and efficient." You claim "It's OK if it's legal."

Second, environmental standards among countries vary; they are lower in poor countries. As Becker notes with respect to wages, the Third World is generally not helped by slapping First World constraints on companies operating there.

Irrelevant. The point is that people are harmed. My hypothesis is clear that there is no regulation, and does not address the question of why this is so.

Third, if the pollution is in fact not efficient, it is incumbent on the local government to set or enforce laws to correct this. Relying instead on company goodwill merely penalizes and possibly excludes responsible companies and rewards polluters.

Again, irrelevant. This utterly disregards the issue. Who knows why the government does not make sensible rules. Perhaps it is corrupt, or ill-informed. So what. The question is what the company should do in the absence of such laws. You cannot justify unethical behavior by arguing that there should be stricter rules against it. Unethical is unethical.

The essence of your case, I think, is that making money for the company trumps all other considerations for the manager of a firm, so long as no lawbreaking is involved. I think Thomas' post about slavery etc. characterizes the ultimate consequences of this position well.

Shareholders who disagree are free to pull their money out and invest elsewhere, or vote to replace their board.

If they are aware of the practices they are free to invest elsewhere. Does that make it OK for the others? Just because lots of shareholders don't object to the practice does not make it ethical. And as you surely know it is virtually impossible for shareholders to vote out the board, so perhaps we can leave that option as a purely theoretical notion, with zero practical value.

A firm that is unable to earn a competitive return has no long term prospect of survival unless it can attract investors willing to accept lower returns. For-profit investors will not invest in a firm they can achieve higher returns elsewhere. Charity, as defined here, will be lost in noise provided it is small enough, of course, but the basic point that charity is not sustainable under competition stands.

Yes. It must attract investors willing to accept lower returns. But not all investors in the firm must be willing to do so. To take a simple example: suppose I am the sole owner of a "socially responsible" firm, and hence make less profit than my competitors. This in itself does not mean my firm cannot survive indefinitely, just that I will earn less money than my competitors.

Now suppose I need to raise capital for some reason. First, I may find investors who share my values, so the problem is solved. But if I don't I can still survive by offering shares at a lower price than my competiton, hence providing investors with a competitive return. Clearly, this can't go on into infinity if I continually face this problem. But there is nothing that says I will. And it can go on for quite some time.

Thomas

"You offer an obligation to "operate consistent with it's owners' values, whatever they are," which may not be very substantive...if it is substantive, it seems like a departure from Becker."

I think it is substantive when talking about your example of genocide. I doubt many shareholders would be comfortable earning a return from mass murder. It is not a departure from Becker because he mentioned implicit contracts. Even if it is not explicit in their employment contract, shareholders will not endorse a manager who murders in pursuit of a profit when it violates their values. That is a substantive constraint on managers.

"If owners value slavery as a-ok and laws chance to permit it and it's not contrary to stockholder interest, what part of Becker's original formulation allows us to criticize them?"

Becker's formulation mentions implicit and explicit contracts. Firms have implicit and explicit contracts with government, consumers, suppliers and employees. Slavery, I would hope, is a breach of at least some of those contracts. Thus, even without legal restrictions, shareholders are constrained in the pursuit of their interests under Becker’s formulation.

shareholders will not endorse a manager who murders in pursuit of a profit when it violates their values. That is a substantive constraint on managers.

Fair enough. Does this apply only to murder, or to homicide in general? Suppose the manager's action results, predictably, in the death of some number of people. That is, suppose that the disposal of waste measurably shortens the life span of local residents. How does that fit with your previous arguments, again assuming no law is violated? If shareholders do not object, possibly because they do not understand the details, does that matter? Are managers allowd to kill in the pursuit of profits if shareholders don't object?

Bernard,

"Are managers allowd to kill in the pursuit of profits if shareholders don't object?"

Doesn't my earlier response cover this? A manager that breaches the values of his shareholders isn't going to be employed by them. And you are ignoring other constraints on company behavior.

There isn't a part of your 1:45pm response I agree with. Net social benefit of pollution can be measured. The benefits of polluting need not accrue only to shareholders. I certainly do not claim the only question is legality. For obvious reasons, developing countries are more willing to tolerate pollution in exchange for investment, and this is relevant to the ethics of polluting. In "making money" a company is subject to more constraints than buying low, selling high and following the law. And companies will face "this problem" (last para) for precisely as long as they are charitable and earn less than competitive returns.

Underpinning your response is a view that shareholders' ethics are wrong and somebody else's (yours?) are right. Please justify this.

Yomtov -
Profit is an anomaly. If you're operating with lower returns than the competition, be it through your commitment to SR or otherwise, you should be operating at a loss, and will eventually run out of money. If you're breaking even or making a profit, and the industry average is even better than you, then why aren't firms flooding this profitable industry, increasing costs associated with competition and reducing margins until they disappear?

Yes, it occasionally happens in practice. But that doesn't mean it's really sustainable.

Matt - greatest respect for fighting off several antagonists at once. But you seem well equipped for the task, so here's my next volley.

"I doubt many shareholders would be comfortable earning a return from mass murder."

I suspect history indicates otherwise, and predictably so. As you've so astutely noted: you can't simply rely on goodwill in open competition and hope for the best. (Consider IBM's role in the holocaust, ColTan mining, the trade of blood diamonds...).

But those examples all have complications, so let's just say you're right and it's crazy unlikely: in those few situations where stockholders, buyers and suppliers are complicit, can we sanction gross immorality by a company?

You claim that we can sanction our devilish firm's immorality, citing Becker's "implicit contracts" clause. I have two main concerns with this response.

1) If corps have "implicit contracts" with their stockholders to be basically moral, and if Social Responsibility is just an extension of basic morality, then haven't we just let SR in through the window of implied contracts? Surely Yomtov feels exactly as you do, that it's implicit in his contracts as a stockholder that the firm be basically moral. And basically moral for him includes Social Responsibility.

2) If your behavior is immoral, it doesn't matter what kind of stockholders you have. If you're being immoral, then you're wrong simply because you have a duty not to be immoral. It's not magically mitigated when the people who own your company (or anyone else you contract with) turn out to be real bastards as well.

Matt,

"Are managers allowd to kill in the pursuit of profits if shareholders don't object?"

Doesn't my earlier response cover this? A manager that breaches the values of his shareholders isn't going to be employed by them. And you are ignoring other constraints on company behavior.

I don't think your earlier response does cover this. The shareholders may well not object to the manager's behavior. Oh sure, they'd object if he pulled out a gun and started shooting, but if he dumps crap in the water that increases cancer incidence and damages food supplies, say, they may very well not object. Or they may very well be unaware of the action and its consequences.

Net social benefit of pollution can be measured.

Sometimes, to a reasonable approximation. But not always and certainly not easily, if at all, in underdeveloped areas. If it were as easy as you say, even in the US, why are there so many political and legal disputes about it?

I certainly do not claim the only question is legality.

No, you don't. You argued that one factor mitigating pollution is that sometimes it can be efficient. But earlier you did not state that as a requirement for you to consider it acceptable. So I was just trying to say that the question of social efficiency of pollution is not part of your basic argument.

There isn't a part of your 1:45pm response I agree with.

Do you really think shareholders can easily vote out board member when they dislike company policies?

Underpinning your response is a view that shareholders' ethics are wrong and somebody else's (yours?) are right. Please justify this.

No. Underpinning my argument is the view that acting in the financial interests, or even the broader interests, of the shareholders does not justify behavior that is plainly unethical or immoral on other grounds. This is what anonymous says in his point #2.

Anonymous,

I understand your point, but it is not clear to me whether you are talking about economic profits or accounting profits. Yes, the SR firm will earn less than the appropriate risk-adjusted return on its capital, hence will not make a "profit," using the word as I think you are using it when you call profit an anomaly. But that does not mean it does not earn an accounting profit, does not have positive cash flow, and cannot survive. I agree that it wouldn't be easy.

The question of what responsibility corporations owe the societies that permit their charters is not avoided by arguing that management should act only to increase shareholder value to the extent possible within the law.

If we follow Becker, the question is simply shifted onto the electorate. What benefits should we demand of corporations through laws and regulations in exchange for the privileges we extend them?

The rightists will say as little as possible in order to maximize efficiency and attract capital. But isn't it time we reevaluated profit and growth as ipso facto social goods?

What values might the people place above profit? We might value sustainability--clean air and water and renewable resources. We might value self-sufficiency and make corporations which do business abroad bear more of the cost of keeping the world safe for international trade. We might value fairness for corporate stakeholders and require workers' wages to be based on value-added (as shareholder and management wages are) and not merely on their replacement cost.

I agree with Becker that the way to make corporations responsible is through the law, but I question what laws and regulations Becker and Posner are ready to support.

Bernard

"Underpinning my argument is the view that acting in the financial interests, or even the broader interests, of the shareholders does not justify behavior that is plainly unethical or immoral on other grounds."

Earlier, you used the word "allowed" rather than "justify" and I think that caused confusion. I now see what you are getting at.

I agree with you. But I do not think your point is especially useful because, firstly, nobody including Becker and Posner are actually arguing the pursuit of profits justifies plainly unethical behavior, and secondly nobody can agree what unethical or even "plainly unethical" means. We can probably agree wanton murder qualifies, but what about paying $2/hour for labor or a decision to pollute a waterway? We can agree with your statement without being any closer to understanding it's implications.

Claiming that maximizing shareholder value is the appropriate objective is not the same as saying any unethical behavior in pursuit of that is justified. There is no contradiction in tying constraints to an objective. Those constraints will reflect the sensbilities of shareholders.

"But isn't it time we reevaluated profit and growth as ipso facto social goods?"

Not ipso facto, Brute.

Profit and growth are the sine qua non of social good.

Anonymous,

I think point 1), notwithstanding control issues, is true by definition. And, as I mentioned in my post back to Bernard, we can agree with point 2) without really saying anything of consequence. 2)'s implications turn on what you define is moral. Has a firm that acts in a way that is consistent with shareholders' and officers' morality but contrary to yours been immoral?

Matt,

Obviously, defining precisely what is ethical or unethical, at the border, is difficult, and there is plenty of room for reasonable people to disagree.

My understanding of Becker's position, which I understand you to endorse, is that it is the obligation of corporate management to maximize shareholders' wellbeing, constrained only by the law and contractual obligations, implicit or explicit.

I disagree with this. I think situations may arise in which maximizing shareholder wellbeing subject only to these constraints is immoral. I recognize that it is hard to produce a general rule, but the very fact that we can agree on extreme cases - homicide, for example - suggests that the "Becker rule," while a decent guideline, is not a firm principle.

Part of your argument is that it is hard to know when the Becker rule should be ignored. Yes it is. But I do not think that moral principles which cannot be simply stated do not exist. I am confident that there are cases where the rule should be ignored, and that there would be substantial agreement on many of them. If some are reasonably debatable, so be it. That's what our brains are for.

"For example, while it is not illegal to promote the use of baby formula to mothers in the third world, using sophisticated marketing techniques that do not include false advertising, it is morally reprehensible when the promoters know that mother's milk is the best way to feed a baby, all else being equal, and that the water that is likely to be used to mix the formula is contaminated with disease, leading to the deaths and injury of babies as a result of promoting that product."

Perhaps it's mean to point out flaws in logic, but then again, the point of this blog is to learn, so I'll try to be kind and gentle. This argument suffers from a causation problem. It's the contaminated water that would be responsible for causing sickness in infants, not formuala. While it is true that "but for" the formula mixed with water, some infants may be spared, but the underlying cause is still the water. Chances are that if the water is contaminated in a certain area, the standard of living there is not very high, which means that the adults probably experience some malnutrition. A malnourished mother would not produce good quality breast milk; the infants would probably be better off with pre-mixed formula.

As for the poster who asked whether it was morally responsible for a corporation to lobby against laws that would add to the cost of doing business but may benefit society as a whole. The question I have is who is the truly committing the wrong here: is it the corporation lobbying and throwing money at politicians or the politicians who accept the money and eventually vote against the law?

Paul Krugman's op-ed in today's NYT is on topic.

I think the guiding principle should be the fudiciary duty. A commenter pointed out, in response to me, that it is the interests (and not necessarily just the interest of maximizing shareholder value) of the stockholders which management must further. While I think it is usually prudent to construe these interests narrowly--the interest in maximizing shareholder value should usually take precedence--I do believe when there is near univeral agreement among shareholders on an issue of "social responsibility" it's appropriate to act accordingly. On issues which do not share near clear super majority support, I think it is best to construe shareholders interest narrowly. The reason I do not require a mere majority is that I do not believe corporations are suited to be sort of mini-democracies, where a majority can essentially tax the minority in support of the majority's views. That seems to me a scenario that we want to avoid.

99.99% of shareholders do not want to be part of a company which profits from slavery (even it is legal where it's practiced), so I think it's properly understood that being involved in those activities would be a violation of management's responsibilities, even if it increased profitability.

This rule should apply more to actions than omissions, however (for exmaple, I think charitable donations should be left to the individual). But the issue of "social responsibility" is much greater than just the issue of charitable donations, and I think where there is overwhelming shareholder disapprobation of a practice, management can and should refrain from engaging in that practice.

Further, I am not certain it is legal for an American company to engage in such practices, even if they're on foreign soil. And if it is legal, then it would certainly be possible to sanction those companies that do in engange in aboherent practices like slavery, even if offshore. That seems more sensible than using the extreme case of legalized offshore slavery as justification for the generally unjustifiable concept of corporate "social responsibility." Nevertheless, I concede that reducing shareholder value in order to act morally is sometimes consistent with management's fudiciary duty. But, as the saying goes, the exception proves the rule.

Prof. Becker, one aspect that you didn't touch on is the corporattion's ability to influence the law. For example, it would clearly be unethical for a gold mine to violate a law requiring its tailing pile to be expensively cleaned, whether or not the penalties are larger than the compliance costs. As you observe, there's a democratic process that could pull the penalties up appropriately.

However, the companies have a voice in the very democratic process that's supposed to restrict them. There are many reported examples of industry a) commissioning flawed scientific studies to cover up risks, b) lobbying against the passage of environmental laws, and c) lobbying against the enforcement of environmental laws. Those activities are entirely legal, so your description of corporate ethics does not proscribe them. I would say that heavy lobbying itself is unethical, as it prevents the ideal solution, the limit on externalities for the public good, from being reached.

I recognize that the question posed for criticism aims toward profundity, but I must unfortunately answer it in a quite quotidian way. Corporations are state-created legal entities that states may fashion into whatever shape they please. Corporations as a result have whatever obligations toward the wider community, the public interest, public health, or society-at-large that their states of incorporation demand of them. It is a very simple matter, then. Vote for a legislator who will enact legislation that obligates corporations to do xyz if you believe that corporations should do xyz.

This is lengthy. Humor me.

Poor children do not perform as well on standardized tests as do the children of the rich, which stunts their social mobility. Wait. Am I saying that poor kids are dumb?

It is not so difficult a gap to bridge. I think we all understand that money can be exchanged for goods, and that acquiring greater amounts of money, up to a certain point, grants us greater access to goods. If the good at issue is a tutor, and the tutor costs $500, someone with $500 can afford the tutor, whereas someone with $300 cannot. A tutor, clearly, can help one pass a test. One might reasonably call Princeton Review and Bar/Bri tutoring services.

Another way to think about how poverty impacts test scores is to consider how standard of living intersects with language. If all of my friends are rich and we yacht on the weekends, chances are we are all familiar with the word "keel". "Keel" is not a particularly difficult word, like, say, tenesmus. Because tenesmus is obscure and technical, a question requiring knowledge of this word is apt to flunk almost all test-takers. By contrast, a question employing the word "keel" will flunk only those test-takers unfamiliar with the word. Because all of my rich friends and I are familiar with the word, due entirely to our standard of living, the test has given an advantage to the rich.

So: while I agree that poverty does not cause stupidity, poverty does entail exclusion from certain social circles, which means the ignorance of certain parlance that middle-class exam-makers may employ in drafting a biased exam. It also increases the likelihood that one has been less adequately prepared, in comparison to richer students, for the exam.

One must also consider the causes of poverty. Poverty is often caused by divorce. A child in a single-parent family not only has a lower standard of living, but also has a decreased likelihood of being imparted secondhand knowledge. A family with a mother who is a doctor and a father who is a janitor offers a child a greater opportunity to receive competent help with his mathematics homework than a family consisting of only a father who is a janitor. Note that in the foregoing example even if the disappearing mother were the janitor, the father, as a single-parent doctor, would have greater responsibilty (indeed, the burdens of two parents), and thus less quality time to spend with the child. It is also that case that even in intact families, poor families are poor because their wage-earners have not attained advanced degrees. In general, a family comprised of two MIT microbiologists will offer an evironment more conducive to scholastic achievement than one comprised of a daylaborer and a hot dog vendor. While this is not true in every case, as poor families often transmit concrete values, such as a strong work ethic, to their children, it is undeniably the general rule.

Lest any reader suspect I am calling for any radical political regime, let me assuage your fears. All I suggest is the following: bias should be eliminated from exams, strong families and marriages should be encouraged and promoted by the state, quick and easy divorce should be discouraged by the state, and private tutoring courses should be compelled to admit some percentage of poorer students who cannot afford their exam preparation services, in exchange for a voucher.

Corporations should be compelled to provide these vouchers; to subsidize the intellectual accomplishment of the poor. Promote marriage and aid the poor: since when did the core of most of the world's major religions become a radical notion?

Death is always in the wings: every "cost" is a little death, every "benefit" is a spark of new or extended life. Wages are new blood; pollution will kill or shorten lives. No corporate endeavor can avoid doing both.

The concept that a corporation can add much death to society and also can add much life to society is extremely relevant. Forget philanthropy. Each enterprise has an overarching
responsibility to grow, enhance, and support life at the least cost to itself, to its workers and to the human race. Finding out how to do this is our responsibility, and our corporations' responsibility.

Mr. Becker is not wrong; however, I urge him, and Matt, and some others, to define
"profit" in the manner, and according to the spirit, of what insight led Ford to pay his workers enough to buy the cars they built, or Nike to offer Thai girls an alternative to forced prostitution: a clear picture of what it is to be human and to be empowered with new choices.

Economic growth is about empowerment; that someone could profit from manufacturing 'Xyklon B', or from excreting untreated waste downstream, or from slave labor,
nevertheless has very little real profit involved. Instead, we are speaking of a transfer
of costs, so that what results in a profit for one party is completely at the cost of someone else. In a real sense, there is no economic "profit" involved whatsoever; instead, the activity may be a zero-sum or negative-sum activity in total. To say that extracting a profit 100% as the result of costs incurred but
not paid is ibn a "profit" truly trivializes and marginalizes the value of real economic profit
to society.
The social costs of opium in 19th
Century China, cigarettes in 20th Century America, and so on, created enormous profits by transferring the costs of addiction from the
substance manufacturers and purveyors to the users and to families and Governments. It is not
at all an issue of whether these products killed people or not; it was that the time lags created the appearance of non-lethal relationships, allowing for the profits to be banked and used for charity and so on, long before anyone even began to try to count the real costs.

This does not make the British opium merchants and the American tobacco companies truly profitable corporate enterprises. They were schemes for the transfer of costs from the
suppliers to the consumers and to society at large.

So, my simple rule is, if the enterprise actually profits -- is a positive-sum
corporate undertaking -- then, real shareholder value is very, very likely to be created.

Death and life will always be supported by corporate activity. The only question is, what will the balance be ?

tm

MikeTheBear points out a putative logical flaw in Marcin's baby formula example when he writes: "This argument suffers from a causation problem. It's the contaminated water that would be responsible for causing sickness in infants, not formuala. A malnourished mother would not produce good quality breast milk; the infants would probably be better off with pre-mixed formula."

MikeTheBear's first assumption is false. In Marcin's example, it is not only the contaminated water that would be causing sickness, it is also the absence of colostrum in formula that causes sickness.

Morbidity and mortality rates are demonstrably lower for breast-fed infants compared with formula-fed infants even when the breast-feeding mothers are themselves malnourished. This is particularly true if the local water supply is contaminated. Except in the case that the mother will directly transmit a disease to her infant (e.g., HIV), it is better for an infant to be breast-fed by a malnourished mother who is drinking contaminated water than for that infant to drink formula prepared with the same contaminated water.

There is no logical flaw in Marcin's argument. A corporation would only under extremely rare circumstances be justified in promoting the use of formula instead of breastfeeding, even if it would be maximally profitable for the company to sell more formula.

Jeremy

I suppose I should commend you for introducing some technical terms to the discussion, but I won't because you have used them inappropriately.

Information asymmetries and market failure are red herrings. Board members almost always come with reputations and an interest to protect them. Board decisions are usually transparent on hiring and compensation decisions. The hiring decision is reversible. And investors can take their money elsewhere. Co-ordinated action is also a red herring: all shareholders whatever their size do not want to be ripped off; their private and co-ordinated incentives are aligned.

This alignment of interests is precisely why boards are so careful in who they hire and what they pay for a CEO. Far from looking after a CEOs interests ahead of their shareholders, boards have a record of being meticulous in determining CEO compensation. Boards frequently benchmark candidates using consultants, their explicit aim being to ensure they get value for their shareholders' money (or to say they made every effort to). Boards also fire CEOs, strongly indicating no special treatment on salary.

Your prisoner's dilemma is not a prisoner's dilemma. It also does not explain why wages continue spiraling beyond the CEO's value to the firm. I will ignore your vague psychological theories on the basis that a) shareholder's preferences are what they are and b) I think you just made that up.

It appears I have trodden on some religious feelings. You have no doubt that CEOs do not justify their wages and you have no plausible reasons to back it up. To be fair, your mission is not easy. You must demonstrate that millions of shareholders around the world own firms that overpay their CEOs but in all other respects add value. Rather than take the difficulty in justifying this as a sign the theory is wrong, you have joined the procession in proposing ever more outlandish explanations.

Let me bring the following facts to the anti-corporate altar. One, there is competition. If CEOs are being overpaid, then every shareholder on earth has an incentive to fix the problem. Once a mechanism is found, companies that do not adopt it cannot compete and eventually go out of business. Competition for funds ensures that. There is also competition from other forms of business organization e.g. cooperatives. Two, boards are replaced, there are takeovers, and CEOs are fired. So your theory that shareholders find it hard to discipline their agents looks a bit thin. Three, shareholders and their boards succeed. They manage to hire people to undertake complex activities like R&D, distribution, marketing and production and do so in a cost-effective manner. Yet according to you they are unable to cap the earnings of their highest profile employee. Four, suitably qualified CEOs are rare and valuable. This explains why boards go to the trouble and expense of a global search for their next leader. Five, CEO is a risky position and failure can literally end a career. Competition requires that risk be rewarded.

I can't help thinking the religious ferment that seems to underlie the view that CEOs are overpaid also underpins the view that corporations should be charitable. If you want to add one and one to get three, go ahead, but you do so at the expense of reason.

Apologies for the length.

A business is not a social service enterprise. The purpose of a business is to make money for its owners. The obvious constraint is the legal one. Make all the money you can, as long as you stay within the law.

If corporations pay "exorbitant" salaries to CEOs, give to symphonies and operas, and adopt anti-pollution policies, it's because these corporations believe such actions will pay off on the bottom line.

I apologize for not reading all the comments before drafting a reply, so it's possible that someone has lready brought this up. The broader question is whether anyone has an obligation called "social responsibility" of the sort that is implied. For instance, how does one manage a commons without such a sense of constitutional obligation, and if it exists for individual actors then it's just as valid for incorporated actors. The same goes for social obligations such as patriotism if the corporate entity is coherently "national" in character and history. And even if it's not... then it must bear some such obligation to a world community rather than a single nationa-state. That is, the simple fact that a corporation establishes itself as a global entity with no ties of allegience to a nation, doesn't mean that it escapes such an obligation simply because it transcends the nation-state tutelage into the lawless condition of a non-sovereign world non-order. If it's a law unto itself then it's also no longer under the protection of the law. It's fair game..

I don't think these social obligations extend to charity any more for corporations than for individuals, however. To that extent I agree with Posner and Becker. To put it as simply as poossible, the social obligation born by an actor, whether individal or incorporated, depends upon which "tribe" or coalition of tribes it belongs to... because its onthe tribe that its claim on sovereignty rests (whether the tribe is local or universal).