Corporate profits are socially responsible

The Business Roundtable recently released a statement announcing it had redefined “the purpose of a corporation.”

Signed by almost 200 of the most powerful CEOs in America, the statement “affirms the essential role corporations can play in improving our society,” according to one of its signatories. Specifically, it suggests that companies should focus on serving the needs of “stakeholders” like customers, employees, and communities as much as those of their shareholders.

That’s ludicrous. Decades ago, Nobel Prize-winning economist Milton Friedman debunked this fashionable notion of “corporate social responsibility.” In his book “Capitalism and Freedom,” and later in a 1970 essay for New York Times Magazine, he wrote, “There is one and only one social responsibility of business — to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game.”

That’s still true today — despite the ramblings of the CEO class to the contrary.

The Business Roundtable’s declaration assumes that every single business will shirk its responsibilities to society if doing so can deliver an extra dollar of profit. But as Friedman points out, this is a fallacy. There’s no inherent tension between pursuing profit and benefiting society. In a market economy, profits indicate that a company has created value — and not just for investors.

Corporate profit-seeking helps each of the stakeholders highlighted by the Business Roundtable — customers most especially. When American Airlines upgrades its planes, it’s certainly trying to attract new paying customers, increase revenues, boost profits, and please shareholders. But the linchpin of that strategy is a better experience for customers. The same is true when Apple unveils a new iPhone, or Coca-Cola releases a new soft drink — and so on, for all of the Business Roundtable’s member companies.

The shareholder model also benefits workers and the environment, the other groups at the center of the Business Roundtable’s statement. Share prices drop in response to things like strikes, government fines, and the bad press that follows. Consequently, it’s in companies’ long-term financial interest to treat employees well, avoid polluting the environment, and be responsible members of their communities.

Executives don’t need to be hectored by corporate moralists to do those things. They’ll do them on their own, if they’re being faithful stewards of their shareholders’ interests.

If anything, an inflated sense of corporate social responsibility could harm the stakeholders the Business Roundtable aims to help. As Friedman puts it, whenever an executive pursues an altruistic cause “at the expense of corporate profits,” he is “spending someone else’s money for a general social interest.”

These social interests are rarely better uses of other people’s money. Supporting a $15 hourly minimum wage, for example, might bolster a CEO’s reputation. But setting the minimum wage at that level would reduce aggregate real income by $9 billion and could eliminate up to 3.7 million jobs in just five years, according to a recent report from the Congressional Budget Office.

It could also serve the CEO’s selfish interests by limiting competition. Behemoths like Walmart and Amazon would likely have little problem absorbing a government-mandated higher wage. It would be much harder for smaller competitors with thinner margins to do the same.

What better way to vanquish business rivals than to get the government to do it for them — and to garner positive press coverage in the process?

Finally, by declaring that they serve not just shareholders but a broader stakeholder community, the executives at the Business Roundtable have actually diminished their accountability. No longer will shareholders have the standing to oust executives who are delivering subpar — or even negative — returns. After all, corporate leaders can claim they’re devoting the company’s resources toward good citizenship — toward the interests of their “stakeholders.”

The investors and employees who have their savings tied up in the company’s shares may beg to differ. Those who could benefit from its continued growth — customers, job-seekers, communities that benefit from the taxes the firm pays — would likely feel the same.

Companies have just one responsibility: maximizing profits for their shareholders within the bounds of the law. Fulfilling that responsibility benefits millions more Americans than some misguided effort to advance the interests of ill-defined “stakeholders.”

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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