Given that The Shareholder Commons is all about making private enterprise act more responsibly, readers might believe we would be all about the current efforts to endow corporations with greater purpose. Larry Fink, who runs the largest asset management firm in the world, used the term “purpose” 21 times in his annual letter to shareholders this year. More recently, and as I described last month, the Business Roundtable released a statement redefining the purpose of corporations from making money to . . . , well to something better.
The spirit behind these pronouncements is certainly admirable. The idea is that if corporations are doing awful things today in the name of making money (hooking kids on new nicotine delivery devices, lending money for recovering petroleum from tar sands and buying legislators), then assigning them a higher purpose will impose a greater conscience on corporations, leading to their doing more good things and fewer bad things. I am skeptical, however.
THE MYTH OF THE GOLDEN AGE
The corporate purpose story often includes an historical account of corporate law that starts with business corporations being created by the state to achieve a specific public purpose. The idea is that these entities were granted the privileges that a corporation enjoys — limited liability for shareholders and the ability to contract beyond the lifetime of any single investor — and in turn were obligated to fulfill a public purpose: trading companies supplied foreign goods, turnpike companies built roads and canal companies reduced transportation costs.
But, the story goes, at some point we just started granted corporate charters to anyone who wanted to start a business, and eventually the purpose of business changed to simply earning money for shareholders — with a big push from Milton Friedman. As a consequence, this all-encompassing purpose suppressed ethical behavior, so that corporations are now willing to do anything legal to make a buck, including warming our planet, oppressing the disadvantaged, and avoiding responsibility for taxes.
Like many mythologies, there are a few holes here. Does anyone think early Dutch and English trading companies were unmitigated forces for good? That railroads and canal companies cared about human rights and living wages? Or that all for profit entities created for general purposes (that’s how we do it today) are bad? Volkswagen had a purpose of becoming the biggest car manufacturer in the world and look what we got. Perhaps the relevant distinction is not purpose, but something more fundamental.
PROFITS CAN BE GOOD, EVEN IF GREED IS BAD
What would it mean for corporations to have a “higher purpose” than profits in a market economy? We actually rely on the profit motive to discover the correct prices for labor, goods and services. When market economies work efficiently, they create much more wealth to go around than economies where someone in authority just decides how much grain should be grown, how many widgets should be made, etc. That’s why capitalism outperforms communism.
The problem with corporations isn’t that they chase profits instead of “purpose.” The problem is that all profits are not equal. Some are derived from efficiency and innovation that help the world make more from less (think solar panels). But other profits are derived from circumstances where markets fail, such as when the costs of an activity are borne by people who don’t have a say (think about a polluting factory). Government tries to protect us from the “negative externalities” involved in such greedy profits, but it doesn’t always succeed.
This problem is especially severe today, not because corporations lack purpose, but because they lack restraint and because global markets are very interconnected and planetary boundaries for social and ecological health are being violated. As a result, corporate behavior that creates external costs can lead to catastrophic effects on all markets, as we saw in the 2008 financial crisis, and as we are seeing now with increasing climate risk.
THE RESPONSIBLE AND SUSTAINABLE CORPORATION
In order to address some of the most difficult issues that face us, business should be required to seek authentic profits that come from creating real value, and to forgo illusory profits that come from exploiting costly externalities and other market failures. In a different context, I have suggested this means requiring corporations to act “responsibly and sustainably.” Here is what such a requirement might look like:
A corporation shall endeavor to:
(a) fairly account for the well-being of persons affected by its operation;
(b) ensure that it uses fair and proportionate shares of available environmental, social and economic resources and capacities and contributes fair and proportional amounts to the public good, and
(c ) incorporate principles of equity so that gains from its activities are fairly shared.
While that may not be as rousing as “purpose,” it might be just what we need. For how such a regime might be imposed, check out this article that explains our theory of change.
From The Shareholder Common’s October 2019 Newsletter. Sign up for our newsletter here to get more updates from TSC on our work, research, and opportunities for action.