The Social Responsibility of Corporations--Posner’s Comment

I agree with almost everything that Becker says, but will suggest a few qualifications. I can think of one situation in which "pure" charitable donations by corporations, i.e., donations that do not increase profitability, could benefit shareholders. Assuming that most shareholders make some charitable donations, they might want the corporations they invest in to make modest charitable donations on the theory that a corporation will have more information about what are worthwhile charitable enterprises than an individual does. For example, charities differ greatly in the amount of money that they spend on their own administration, including salaries and perquisites for the employees of the charity, relative to the amount they give to the actual objects of charity. Presumably corporations are in a better position to determine which charities are efficient than individuals are; if so, then shareholders may impliedly consent to some amount of charitable giving by their corporations. But not much. The reason is that one person's charity is another person's deviltry: a shareholder who is opposed to abortion on religious grounds would be offended if his corporation contributed to Planned Parenthood. The practical significance of this point is that corporations avoid controversial charities, so that the issue of implied consent becomes whether the shareholder would like his corporation to make a modest contribution to some set of uncontroversial charities. For the reason suggested above, the answer may be "yes"--and for the additional reason that there is a tax angle. If the shareholder receives a dividend, the corporation will have paid corporate income tax on the income from which the dividend is paid. Suppose the corporation and the shareholder are both in the 20 percent bracket. The corporation earns $10, pays $2 in tax, and gives the shareholder $8. The shareholder gives the $8 to charity, which costs him $6.40, since he gets a 20 percent tax deduction. If the shareholder wants the charity to have $10, it has to dig into his pockets for another $2, which costs him $1.60 (because of the 20 percent deduction), and so the total cost to him of giving the charity $10 is $8. Now suppose that, instead, the corporation gives the $10 to charity, a deductible expense, at a cost to it therefore of $8. Then the charity receives $10 rather than, as before, only $8. The shareholder loses his $2 deduction, which means that the total cost to him of the transfer is, as before, $8. But the corporation is better off to the tune of $2, since it avoids the corporate income tax on the $10 in income that it gave the charity. And anything that benefits the corporation benefits the shareholder. Given product market as well as capital market competitive pressures, charitable spending that is not profit-maximizing because the cost exceeds the private benefits that Becker lists (public relations, advertising, government relations, and so forth) is unlikely to be significant. Even if corporate managers are not effectively constrained to profit maximization by their shareholders, expenditures that do not reduce the cost or increase the quality of the corporation's products will place it a competitive disadvantage with firms that do not make such expenditures. A more difficult question has to do with a corporation's policy on obeying laws. From a strict shareholder standpoint, it might seem that corporate managers should obey the law only when the expected costs of violating it would exceed the expected benefits, so that managers would have a duty to their shareholders to disobey the law, perhaps especially in countries in which law enforcement is very weak, a country for example which had a law against child labor but was unable to enforce the law. This would be a case of a pure clash between ethical and profit-maximization duties. My view is that, given external (i.e., social as distinct from private) benefits of compliance with law, the ethical argument should prevail, so that a shareholder would be precluded from complaining that corporate management, by failing to violate the law even when it could get away with it, was violating its fiduciary duty to shareholders. Another argument based on an externality, an argument that lies behind the law that forbids U.S. firms to engage in bribery abroad, even in countries where bribery is extremely common, is that reducing the amount of bribery in those countries will benefit U.S. firms in the long run by making the markets in these countries more open, to the advantage of efficient firms. The fact that it will sometimes be in the shareholder interest for management to violate the law provides, moreover, a ground for punishing corporate managers sufficiently severely for corporate crimes that the punishment is not offset by shareholder gains for which the managers could be expected to be rewarded.

Comments

[Amy Allen]

Judge Posner, sir, that is a very, very, apt, cogent, and thought-provoking analysis of the much-debated point of charitable contributions made by corporations. Hats off, sir. Sir, one could also apply the scenario in which a corporate entity engages in law-abiding or otherwise ethically or morally preferable behavior at the cost of its bottom line to charitable contributions, particularly if the behavior, while not compulsed by the law, is nonetheless admirable(or behaviors that break laws, but out of a putative motivation for justice, i.e. civil disobediance). Again, sir, hats off. You, sir, are indeed, one of the nation's keenest legal minds.

[Corey]

What's that sucking sound?

I wouldn't even know where to begin disagreeing with this week's posts, all I can say is that they are so far from my way of thinking about the world that it isn't even worth debating.

I believe I will go and volunteer my time. Have fun.

[Gene]

Reading the above comments I could not help but think, What a corporation does with its money effects me if I am a shareholder or not.

If I am a customer, I want to know why my money is being used to support an organization that I might disagree with, If I am a share holder I ask myself why don't they just let me decide who to give to and how much. Corporate big wigs usually contribute based upon their personal agenda and politics plays the most important role, not the goals of the agency receiving funds.

Often times the larger charitable organizations are the most charitable to the directors and higher level employees; case in point was approximately 10 years ago the CEO of Public TV in Los Angeles was the highest paid CEO in the Los Angels area.

[M. Webb]

Judge Posner raises an intresting question with regard to violations of the law. Sepcfically he suggests that companies should never be encouraged to violate the law. In general I would agree with this concept in principle. However, thinking about it in more depth raises interesting questions. For example, imagine that a company is asessing whether to take action A or action B. Action A is morexpensive but almost certainly complies with the law. Action B is less expensive but there is a 25% chance that it will be found to violate the law (say an environmental law or a safety law. Further presume that if action B does in fact violate the law the criminal fines associated with it will make it more expensive than A. If the company takes action B and is subsequently found to have violated the law should the shareholders be able to sue. Conversely if the company took action A and it later became clear that action B would not have violated the law (say a competitor took action B and was acquited) should the shareholders be able to sue. I don't see a clear brightline test in these cases. As a result I am forced to rely on a "reasonable person standard." However, this can be subject to a lot of manipulation, emotion etc. ANyone ahve a better suggestion.

[RWS]

I would disagree on the potential for a corporation to be better able to find good charities and monitor donations than an individual, because there are much better ways for an individual to solve those information problems than for the corporation to do it. United Way, church donation systems, and many other entities provide for a monitoring method that solves the information shortcomings that an individual has and without causing the corporation to donate potentially in a way that would either offend or disregard other shareholders' wishes with the money.

I would also add that, obviously, just because money is not being donated does not mean it is not doing good. It is either saved, which allows others to borrow it, or spent, which helps others' businesses. Both activities, in my assessment, tend to do more good dollar for dollar to reward those who want to work hard and better themselves than most charitable efforts ever will.

[leslee]

A corporation does not break the law without action by human agents. If the humans are held to account (both high and low ranking); the question of holding the corporation accountable (and therfore the shareholders) wouldn't arise. Also the economic benefit of the corporation complying with laws is maintaining a civil society with known consequences; the breakdown in a civil society results in few corporations (except the pirates) choosing to do business there...Iraq, for example.

[N.E.Hatfield]

Just one theoretical issue: Is not a corporation created as a "person" by legal fiction in order to apply the Law? And if viewed as person by the Law, doesn't the Society and Culture which is the creator of the Law, have the same demands on it (the corporation) as it would any other person (individual)that benefits from living in the Society or Culture? Without personal responsibilty and action there is no Social order or Culture. Hence Society's demand for Social responsibility; either corporate or individual.

[Wes]

The fact that it will sometimes be in the shareholder interest for management to violate the law provides, moreover, a ground for punishing corporate managers sufficiently severely for corporate crimes that the punishment is not offset by shareholder gains for which the managers could be expected to be rewarded.The problem here comes from the uncertain status of stockholders. When it comes to control (and deciding the purpose of a corporation), then the stockholders want to be treated like owners of the corporation. When it comes to liability, then the stockholders want to be treated like lenders to the corporation.I can see two possible solutions.In the first solution, stockholders are considered to be owners and are considered to be ultimately in control of the corporation. To the extent that the stockholders want the purpose of the corporation to be maximizing shareholder value, then that is the purpose of the corporation. If, however, any laws are broken or anyone is harmed by this policy then the individual stockholders are personally liable - both criminally and civilly. People who own stock in companies that break the law are sent to jail. This would guarantee that people only owned stock in corporations that had a clear policy against breaking laws or intentionally harming anyone.In the second solution, stockholders are considered to be lenders and the purpose of the corporation would be established by contract and the nature of the loan would be established by contract. Stockholders would only be liable to the extent that they loaned money to corporations whose purpose was consistent with breaking the law or intentionally harming people. Naturally, the contract could also clearly define what constituted corporate profits and the criteria to be used in deciding whether those profits were to be paid as dividends, given as bonuses to top management, reinvested in the corporation, given to charity or something else entirely.

[David]

I confess that I don't "get" much of this debate. Aren't these matters for the shareholders and the board? If the owners of a corporation decide to give to a charity, adopt a "socially responsible" environmental policy, or pay above-market wages, why should anyone else care? The board should have discretion to determine that such things are good business. I certainly don't think they should be the basis for a shareholder derivative suit that the management is somehow compromising the "value" of the company. Corporations should be allowed to innovate and to seek out customers, markets, and good will in any legal way, including being "socially responsible."

I admit that my knowledge of corporate law is limited, but doesn't this all fall within the broad bounds of the business judgment rule? I sense that this debate is really about right-wing extremists, who hate environmental rules and the minimum wage, trying to impose their politics on corporations, many of which are much more "liberal" than the conservative academics who study them. Indeed, it's amazing how "liberal" many big corporations are regarding affirmative action, benefits for domestic partners, etc.

Anyway, just my random thoughts.

[John Kelsey]

You describe corporations deciding whether to follow laws, but in the context of laws that are more-or-less moral (if sometimes inefficient). A more interesting question, to me, is whether corporations should be willing to disobey laws that aren't moral, or whose morality isn't shared by the company's employees or shareholders.

For example, if state X passes a law forbidding any benefits for employees' gay partners, but there's no real enforcement mechanism, should the corporation follow the law? How about if country Y specifies that women are only to be allowed to work in certain conditions (say, physically separated from any men)? Or country Z specifies that their least favorite ethnic group is not to be employed at all?

Clearly, it may be prudent to follow those laws. But would it really be wrong for the company to ignore them if it could get away with it?

[Jeremy]

One other aspect of corporate charity which wasn't covered in these otherwise excellent posts is the psychological power of collective action. While individual donors might feel that they are unable to have an effect on a large problem, if they feel that their charity is part of a group effort they are much more likely to fulfil their preference for charitable giving. One only needs to look at the power of telethons and other mass-charity events to see this. Being a collective, a corporation is in a position to fulfil this "communal giving" desire which an individual shareholder is unable to do so on their own.

This is, perhaps, irrational by the standards of homo economicus but we all should realise by now that homo sapiens isn't entirely rational :)

[RWS]

David,

you misconstrue the essential issue. Becker and Posner are responding to the calls by activists who say that corporations have a moral duty to act altruistically and those which do not are symptomatic of the amoral nature of capitalism. Milton Friedman, I think, first popularized this argument with an op-ed titled "The Social Duty of the Officers is to Increase Shareholder Value" or some such. In the 70s, I think, there were increasingly calls for top officers of major corporations to act charitably, even when it contradicted the interests and desires of shareholders.

Becker and Posner are clearly not saying that corporations whose owners wish to engage in charitable giving should not do so. I'm sure they're perfectly happy for corps. whose shareholders want charity done to do so.

[David]

RWS -

Becker, if I read him correctly, argues that corporations should never engage in "socially responsible" behavior if it would risk lowering the price of the stock. His basic theme is, as I read it: managers can give to charity from their own salaries, or they can reduce their salaries by the amount that the company gives to charity, but they cannot use company funds for charitable purposes. He even argues that a corporation cannot pay higher wages than the prevailing market rate and muses that a corporation might have a fiduciary duty to bribe foreign officials.

Posner mostly agrees with Becker but argues that charitable giving could be okay and that corporations should follow the law.

As I see it, neither Becker nor Posner are saying merely that corporations have no duty to be socially responsible. Rather, they seem to be saying that corporations have no *right* to be socially responsible if the effect could be a lower stock price. That seems to be a quite narrow and rigid view of the purpose of a corporation. Not to mention a "heartless" one.

I agree that corporations do not have any obligation to be Santa Claus. But they do not have an ethical obligation to be Scrooge either. I do not understand the Becker/Posner extremism on this issue.

Finally, I find it ironic that those of a certain ideological bent are quick to criticize "socially responsible" spending by corporations but do not seem concerned about the ridiculous salary packages offered to exectivies -- even to mediocre ones or to bad ones who drive the company to ruin. If Becker thinks that a corporation has a fiduciary duty to minimize the cost of workers' salaries, how about minimizing the cost of executives' salaries? What we have here is layer upon layer of hypocrisy.

[Palooka]

"Becker and Posner are clearly not saying that corporations whose owners wish to engage in charitable giving should not do so."

Actually, I think Becker is saying that. The reason would be that while a majority wants the firm to engage in charity a minority does not, while in contrast every shareholder wants the firm to maximize the value of the stock. There is no justification to coerce the minority to support charity when the individuals which make up the corporation may personally support whatever charity they want. Corporations are not designed to be government-like in that they tax the minority because the majority believes they should be.

[Palooka]

David,

There is nothing "heartless" about allowing individuals to make the choices on which charities their money will support. The corporate form, because of its composite nature, robs shareholders of that choice.

Why are you afraid of letting individuals make those decisions instead of corporate management? One should compare this attitude with the typical liberal inclination to distrust corporate America and the supposed desire empower the little guy. That is precisely what would be done if corporations only maximized shareholder value--removing corporate America from decisions and empowering the little guy. The shareholder is empowered through greater income or stock price, and can choose which charities to support with those resources.

[David]

Palooka: I am just asking why isn't this an internal matter for the corporation, just like any number of ways in which a corporation might spend money to establish good will? Is enhancing corporate reputation through giving any different from doing it through an advertising campaign?

Also, I think it's hypocritcal to suggest that corporations violate their fiduciary duty by giving some money to charity when they waste money on all kinds of excesses, like billion-dollar compensation packages for executives, private jets, first class tickets for travel, first class hotels, skyboxes at ballparks, large offices in downtown Manhattan skyscrapers, etc., etc. I would think that anyone who believes in "judicial restraint" would not favor having courts micro-manage corporate expenditures that companies believe are helpful in maintaining their corporate image or good will..

[Palooka]

I am wondering.... If corporate America is so prone to mismanagement, excess, and violations of their fudiciary duty, then why is it appropriate they manage shareholders' money to further their views of "social responsibility?" That's a prescription for what, exactly? Especially when these decisions can be made by individuals themselves, I don't see any justification for it, and you are apparently drawing a blank as well.

And I never suggested courts get involved in these decisions. These ARE matters for each corporation, and I am making the case they should reject, at least in part, the idea of "social responsibility."

[Peter]

I second Corey (way above) in saying both Becker and Posner are completely and utterly encapsulated by the reductionist framework of a specific doctrine of economic thinking (basically, age old neoclassicism from what I can tell).

Within the purview of their field, they are brilliant, adept and accurate thinkers. Critical even.

However, in light of serious, substantive and compelling arguments (hielbroner, shiva, hackett, etc) against the entire bedrock assumptions and concepts of neoclassicism, such brilliant argumentation ends up sounding profoundly narrow.

Only the most ideologically blind person could reduce corporate phenomena and normative impacts to the social good of market based competition, or a few unfortunate externalities and leave it at that. The whole concept of socially responsible corporations (itself a contradiction in terms with some inherently unethical firms/sectors i.e. fossil fuel exploration/development/marketing) is a pale mainstream reaction to a significant backlash against the most egregious excesses of global market capitalism.

While I see enormous merit in markets and capitalism, when properly construed and limited, archaic neoclassisism deserves its intellectual niche in the 19th century.

Worthy critical thinking takes the literature of skeptics and alternative frames of analysis into account. Becker and Posners latest foray on 'socially responsible investing' is as capitulative as that of Mr. Friedman, on an issue that is far from bereft of more enlightening criticism.

[N.E.Hatfield]

I think the point of the form of a dialogue is being misunderstood; the stasis (fixed point of discussion), a position "Pro" and a position "Contra". Without these three, the dialogue never gets off the ground and knowledge and understanding is not created.

"Uncle Milty" understood this, the only problem was, knuckle-heads came along and took it all as Gospel.

[RWS]

David and Palooka, I think you're misconstruing my post and maybe Becker's post. Becker is saying that, where a majority of a corporation's stockholders do not want the corporation to engage in charity just for its own sake, managers should not try to buck that preference. This is a question of what to do in a chain of authority, and it should not be controversial: if your boss tells you not to give away company money, don't do it. Becker is implying that there is not some responsibility out there to buck the owners' wishes.

He did say that there may be stockholders and managers who want to engage in social activism and charity, and that is perfectly fine. However, there is no responsibility to do so in a corporation where stockholders primarily just want financial success, and in fact doing so is itself ethically problematic, given that it involves disobeying authority.

[David]

RWS - I stand by my previous posts. It is ridiculous to require a shareholder vote before a company can give to charity or pay above-market wages to assembly line workers, when one is not required to give a CEO a multi-billion dollar compensation package or to buy a private plane. I know that I have overused this word, but it smacks of hypocrisy. The rich and powerful get richer and more powerful, while the workers and the poor get the shaft. Maybe a corporation has the right to run its business that way, but to say it has an obligation to do so is extremist gobbledigook.

Just a general thought: I read this blog because of my great respect for Judge Posner. He is an amazing intellect, an excellent judge, and one of the most innovative thinkers of our time. But if this blog is a bellweather, I have grave doubts about the direction of modern economic thought. It seems to me that today's thinkers, consciously or not, have become pawns of certain powerful economic interests that do not have in mind the good of society at large. Their theories might be defensible on some sort of macro level, but they are really at bottom a recipe for oligarchy. This isn't the sort of thing I would have said a few years ago; I used to be moderate to right-of-center on economic issues. But the debate has moved so far to the right, it's off the charts. Anyway, just my random thoughts.

[Peter]

David,

I would evaluate you as being among the more enlightened of economic thinkers. Some of the most central economic theories, (rational self interest, phillips curves, ricardian comparitive) suffer from a preponderance of counter-theoretical behaviour in the real world. Even supposedly bedrock critiques such as hardin's 'tragedy of the commons' face empirical re-evaluations (boyle, 2004).

Historical factors of (state assisted) oligarchy, protectionism and the fiscal benefits of imperialism are readily identified as playing a significant factor in regulating the list of nations at the top of the economic pie.

Conventional mainstream economics has long since divorced itself from any credible evaluation of the world in a holistic way, and as such, it is accurately viewed (in its exclusive form) as a discipline of the myopic as compared to the empirical and theoretical validity of more interdisciplinary trends.

Essentially, conventional economic "theories" should rationally be downgraded to compelling "hypotheses" subject to a variety of real world constraints and limitations.

[ben]

David

Have you actually thought about this? Are you seriously equating charity on behalf of shareholders with paying a CEO a high wage?

If a CEO's wage is based on charity rather than actual value, consider the implication: shareholders, large and small, from all over the world and at all major companies are foregoing an opportunity to make money in failing to reduce their CEOs' wages.

What has allowed this to continue for so long and what prevents them finding a way to fix this? Since CEOs demonstrably can be fired by their boards, why do they offer millions to the next guy? And why do they raise the wages of leaders when their companies succeed?

[Wes]

Wow, I sure seem to have a lot to say...On this topic Becker and Posner focused more on what they believe then on why they believe it. Paradoxically, not knowing their underlying reasoning makes it difficult to know exactly what they believe.Overall, there seem to be a couple possible questions here.First, is there a particular group that should control/own corporations? Possible answers include: society as a whole, the lenders, the management, the workers, and the customers.Second, to the extent that a particular group should control corporations, does it have the right to allocate "profits" in any way that it wants (eg. to itself or to charity)?My answer to the first question would be that ultimately society as a whole should control corporations but that most of the time they should delegate control to the lenders and most of the time the lenders should delegate control to the management and most of the time the management should delegate control to the workers and most of the time the workers should delegate control to the customers.As to the second question, it's not clear that "profits" is a meaningful concept. In a perfectly competitive economy there would be no profits. Customers would pay exactly what the product had cost to produce, workers and management would earn exactly as much as they were worth, lenders would earn exactly the value of their money and society would tax exactly as much as it needed to accomplish its collective goals.In practice, of course, it's always possible to skim a bit off the top of a corporation's resources and so the real question seems to be how much should be skimmed and who gets the skimmings. In modern practice, top management skim as much as possible and give themselves as much of the skimmings as their personal ethics allow (usually most of it).To the extent that a corporation has substantial profits/skimmings, it most likely indicates either mismanagement of the corporation or mismanagement of the economy (eg. a monopoly). Either customers are being overcharged, workers or managers are being underpaid, lenders are getting too low a return on their investments or society isn't taxing fairly.As something of a side note, in the interest of discouraging skimming/mismanagement, it would, in my opinion, be entirely legitimate to prevent top management from giving themselves the skimmings. In particular, limits on executive compensation (by the government, if necessary) seem entirely appropriate in this analysis.Now, to the extent that some level of profits/skimmings are inevitable, there is the question of who should get them. In terms of maximum benefit, it seems that they should go to society (the government) to be distributed to poor people. To the extent that people are poor because of flaws in an economy and to the extent that profits/skimmings are also the result of flaws in an economy then there is even a certain justice to such a policy.On the other hand, there seems to be prevailing view that the lenders (specifically the stock holders) are entitled to the skimmings. A careful consideration of the net cash flow between stockholders and corporations (dividends and stock buy-backs less IPOs) compared to the total amount of cash that stockholders have tied up in the stock market leads to the conclusion that stockholders are getting a much smaller return from corporations than they think they are.This does not mean, however, that stock holders are not receiving the fair market return for their investments. Even if the actual inflation adjusted return is less than one percent, stocks have such high liquidity that they can be considered to be a form of currency that is not susceptible to the government induced inflation that plagues formal government issued currencies. This is particularly relevant when many investments do not actually keep pace with the real inflation rate.Furthermore, while I have already said more than enough about this issue in response to Becker's comments, in my opinion stock ownership does not constitute a formal agreement that a corporation will give any profits/skimmings exclusively to stockholders. If I loan money to a neighbor with the agreement that the neighbor will pay me back if and when he feels like it, the financial risk I am taking with that agreement does not obligate the neighbor to devote his life to paying me back at as high an interest rate as possible.In fact, risk does not result in higher return on investment, risky investments will fail at a rate that exactly offsets the higher return when they succeed meaning that the average return is exactly the same as less risky investments. Overall, the value of money is set by the government (setting of the interest rate among other things) and people who lend money to corporations as stockholders need to accept that.

[RWS]

Regarding excessive CEO packages, I think they are unnecessarily high, but that is the result of the failure of the shareholders to protect their interests by electing pro-shareholder board members. One great reason for Warren Buffett's success is that he buys controlling shares of corporations and then clamps down on excess at the top. Smart shareholders will align themselves with these sorts of funds like Berkshire Hathaway and deserve to be rewarded for it. Those that do not act to protect their interests should not complain when a little gets skimmed off their dividends.

Again, I believe that the central point of Becker and Posner here is that there is not any inherent "authority" or "responsibility" to act contrary to shareholders' desires as expressed through the board of directors. Insofar as one might posit a metaphysical duty to engage in charity, that duty would fall on shareholders themselves, not officers fancying up their own idea of what that duty might be or how far that duty might go.