Do Corporations Have a Social Responsibility Beyond Stockholder Value? BECKER

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

Comments

[Frank Riely]

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?

[Corey]

No

[Corey]

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

[Marcin Tustin]

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.

[josh]

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.

[Joseph Heath]

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.

[jim hayes]

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'.

[Dr. Ernie]

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?

[Wes]

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.

[Matt Burgess]

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.

[W. S. Robins]

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.

[Chris Green]

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.

[Palooka]

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.

[Wes]

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 wishesI 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.

[Jim S]

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.

[Matt Burgess]

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.

[MikeTheBear]

Dr. Beckerís example involving wages paid to foreign workers illustrates how something that seems ìbadî 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 ìintellectual drainî within a nationís 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. Donít 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.

[Chris Green]

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.

[jim]

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

[Palooka]

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.

[Matt Burgess]

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.

[Wes]

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; andSociety, 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 decisionsOr 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?

[http://www.qdbd.com/vig_rx_1.htm]

"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.

[Bernard Yomtov]

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.

[Chris]

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.