Tag Archives: ethics

more on corporate social responsibility

Just thinking some more about yesterday’s post on the profit motive and shareholder value as the only responsibilities of business. I remembered a recent interview with Noam Chomsky where I thought he explained very well why profit maximizing entities do not automatically serve the greater good:

In market systems, you don’t take account of what economists call externalities. So say you sell me a car. In a market system, we’re supposed to look after our own interests, so I make the best deal I can for me; you make the best deal you can for you. We do not take into account the effect on him. That’s not part of a market transaction. Well, there is an effect on him: there’s another car on the road; there’s a greater possibility of accidents; there’s more pollution; there’s more traffic jams. For him individually, it might be a slight increase, but this is extended over the whole population. Now, when you get to other kinds of transactions, the externalities get much larger… Destruction of the environment is an externality: in market interactions, you don’t pay attention to it. So take tar sands. If you’re a major energy corporation and you can make profit out of exploiting tar sands, you simply do not take into account the fact that your grandchildren may not have a possibility of survival — that’s an externality. And in the moral calculus of capitalism, greater profits in the next quarter outweigh the fate of your grandchildren — and of course it’s not your grandchildren, but everyone’s.

What makes the gospel of shareholder value so insidious is that it gives the human beings inside corporations a shield to hide behind – an excuse to not ask any questions about right and wrong in their daily actions. I think Milton Friedman has it right that a business corporation on paper is a completely amoral entity. Now it appears that business corporations are evolving and molding a whole new species of human beings in their image! As children we are taught to think about right and wrong every day, but then as adults we don’t have to any more. This is not human at all, and we can reject it – the managers and employees at the car companies and energy companies have a responsibility to think about right and wrong every day and to make choices that are consistent with what they think is right. If the only thing that is right is not working for that company, then so be it. Consumers can do the same. The political system can provide somewhat of an ethical framework for society from the top down, but we individual humans need to take responsibility for our daily actions and meet it halfway.

the gospel of shareholder value

This article from the Boston Globe talks about the idea that maximizing profits and shareholder value (which hypothetically is the present value of all future profits) is the sole function of a corporation.

Experts on the history of business say the Market Basket saga is a window onto something deeper than a power struggle among the Demoulas clan that owns it. They see it as emblematic of a war over the future of the American corporation—what its purpose is, how it should be run, and whom it should be engineered to benefit. They argue that maximizing profit and shareholder value—an approach to running companies that drives investment on Wall Street and serves as the closest thing to modern management gospel—is only one way of defining corporate success, and a fairly new one at that…

Post and others argue that a well-run company can—and should—be managed in a way that benefits not just the investors who own its stock, but a wide range of constituents. As opposed to “shareholders,” they call these people “stakeholders”: a group that includes employees, customers, suppliers, and creditors, as well as the broader community in which the company operates, and even the country that it calls home. According to that view, Market Basket’s employees and customers are essential to the firm’s success and, thus, rightful beneficiaries of its prosperity.

It also links back to a 1970 Milton Friedman article in which he argued that it is unethical for a person employed by a corporation to try to be ethical on the company dime:

In a free-enterprise, private-property sys­tem, a corporate executive is an employee of the owners of the business. He has direct re­sponsibility to his employers. That responsi­bility is to conduct the business in accordance with their desires, which generally will be to make as much money as possible while con­forming to the basic rules of the society, both those embodied in law and those embodied in ethical custom.

The main problem I have with this is that the ownership of corporations is so diffuse these days that it is almost impossible for shareholders to exercise any sort of ethical control. Many shareholders are large institutions that collectively have no motives beyond the profit motive, even if individuals among them are ethical. No, the only way for society as a whole to behave ethically is for the vast majority of individuals to consciously act ethically every day – be they shareholders, employees, or customers. I don’t see that happening today.