In my previous post I wrote that firms may not necessarily be run by managers in ways that reflect the interests of the shareholders, and this separation of control from ownership can lead to sub-optimal economic outcomes. Here I will argue that the current trend of statements by politicians, commentators and even business leaders regarding the mission of firms has a high risk of missing the mark and moreover create adverse consequences that could erode the role of government and the balance between manager-controlled corporations and the public, in addition to causing economic inefficiencies.
Here are some examples that feed this controversy. Larry Fink, head of BlackRock, a huge wealth management firm, has admonished business leaders to take a leadership role in public affairs, be it of social or political content. David Brooks, as I previously mentioned, laments that economic priorities have overtaken social priorities in the decisions of corporations. Microsoft recently announced the commitment of $500 million to mitigate the high-cost of housing in Seattle. A Deloitte survey found that millenials overwhelmingly chose “improve society” as the goal of firms.
To assign the duty of social responsibility to firms is fine, but it also needs clarification. Firms do have a socially responsible purpose and this is to meet human needs by producing honest products and services and selling them at fair prices. From getting a haircut to getting a life-saving medication we rely on small or large enterprises we generically can call firms. Making a profit is only a condition for a firm to stay in business and remunerate those that provide its capital. Unless we start with this purpose in mind, we risk taking our eyes away from ensuring that firms deliver the products and services they promise and compete fairly in setting prices.
What about, however, other priorities, like supporting charities, civic associations, cultural institutions, education, research? That is, how about using the firm’s money to support the community and society at large? That’s where the difficulties start? Who has the right to make these choices? The managers or the shareholders? In an often-cited article published in the NYT in the 1950s, the late economist and Nobel Prize winner Milton Friedman argued that managers should concentrate on making profits and let the owners decide on how they wish to use (or not use) their profits for social causes and charities. Friedman’s suggestion makes sense. Managers cannot tell what charities or social causes all shareholders favor. Therefore, managers should abstain from using firm resources for such ends and instead let each individual shareholder decide for him/herself. Besides, managers may direct firm resources to charities and causes that build social capital for the manager without necessarily creating commensurate benefits for the firm or the shareholders.
No matter how honest firms may be in regards to their products and prices, their operations can have adverse consequences on their communities. Concentration of firms in an area may drive housing costs up, congest traffic, pollute the environment, even invite criminal activity. These are what economists call negative economic externalities. Don’t firms have an obligation to bear some of the public cost of these externalities? This is the question asked by E. Tammy Kim (NYT 1/19/19) in discussing Microsoft’s commitment to alleviate housing costs in Seattle. Her suggestion of levying a tax to defray the cost of corporate negative externalities may sound controversial but it’s a good start in addressing the impact of large corporations on the quality and cost of living.
In the same newspaper Emily Badger worries that if we accept types of initiatives like that of Microsoft’s as the new model of corporate giving, we risk transferring core public sector responsibilities and policy decisions to corporations. This not only erodes the scope of government, it can also undermine the principle of democratic representation. Besides shareholders whose social or political priorities may not be fairly represented by managers, voters as well can be frozen out of the process of deciding how various community problems ought to be resolved. Take this model to its logical extensions and we may very well end up with a corporatist governance. Again, the main concern is not whether corporations should have a role in shouldering public costs, but what form the cost sharing should take, as, for example, in the form of taxes, with public sector institutions maintaining authority over the decision-making process. As with Milton Friedman’s suggestion, let corporations operate in their business sphere (i.e., produce, sell, make profits, pay taxes) and let governments take care of public problems.
The 2010 Supreme Court decision on Citizens’ United, which recognized free speech rights to corporations, is also pushing corporations toward actions outside their business sphere. The concern here is not about the legal validity of the decision. It’s rather with the opportunity the case opens for corporations to interject themselves in the electioneering process under a corporate governance model that potentially allows political speech to reflect the views of managers rather than those of shareholders.
Although shareholders as owners of the firm have the ultimate right to decide how its resources are used, giving primacy to the voice of shareholders does not necessarily solve the problem of fair representation in decisions of social or political engagement by firms. Today, the vast majority of public shares are held by institutional investors, like pension and mutual funds, trust funds (of universities and other non-profits) and hedge funds. The shift from individual to institutional stock ownership means that these institutions may not vote in the interests, economic or political, of the owners (i.e., us) of the stocks they manage. Increasingly, the power to make or affect corporate decisions that go outside the business sphere rests with a shrinking pool of decision makers. And yes, individual shareholders can mount efforts to have their voice be heard but this can be often done at a prohibitive cost. And lest we forget, many voters are not shareholders. How are they represented in the social and political decisions of firms?
As this discussion shows, the call for corporate social responsibility outside a firm’s business is fraught with problems and challenges that can impact economic prosperity and the political process.
Let's Reason 
Thank you, George, for raising some interesting questions. If corporations are people with free-speech rights, and if money is regarded as a form of speech, then where does that leave the ordinary citizen with far fewer resources than, for example, a large corporation? Not to mention extremely wealthy individuals who utilize their personal resources in order to influence the legislative outcome(s) of public policy initiatives. Should our cultural institutions, museums, concert halls, art galleries, theatres, be accepting donations from entities whose profits are derived from business enterprises which may have failed to ensure the public good, i.e., damage to public water resources, or other environmental damages. What place, if any, does morality have at the nexus of private sector interest and public policy, and, if so, who makes those decisions?
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