Rob the BusinessPundit has a post on corporate philanthropy that echoes my own sentiments:
I tend to err on the side of business and say that a business is only responsible for major, direct, negative effects of its policies (like pollution). My problem with making companies too concerned with social activities is that the causes they champion aren’t necessarily the causes I, as a shareholder, would prefer they champion. Why should they get to make the decisions about which charities get funding? Shouldn’t they give that money to shareholders and let them decide what to do with it? Ultimately, I wish these people that hate corporate profits so much would form their own non-profit companies. Let them figure out how to produce pharmaceuticals and computers and cars and everything else without using profitability as a guide. If they succeed, then great we will all be better off. But my guess is that they will fail. When companies follow profit, they follow what consumers want. Profit comes from satisfying consumer needs. That is social responsibility. There is a demand for solutions to societal problems. Over time that demand is being met. That is why a poor person today eats better than a king did several generations ago.
It’s worth reading in full.
UPDATE: Lex and I have a long exchange of views in the comments.
I agree with Rob — but only in the abstract.
Businesses engage in lots of activities because they are worried about the political and legal context they work within. They look at the public and they see customers, but they also see voters who may hate them and want them regulated out of existence, or jurors who will recall a bad impression if they get into the newspapers. A large corporation exists within a web of political and regulatory and legal constraints. Moreover, any large business faces competitors who are trying to use this framework to their own competitive advantage. For example, to get a particular ingredient which a competitor uses to be deemed hazardous, so he has to remove a competitive product from the market; or to cause the regulatory standards to be raised because your new factory can meet them, but your competitor’s old factory cannot. This type of conduct goes on all the time. More on point, if a company wants to build a plant, it will try to get a tax break, and it will need local political leadership to eminent domain land to build access roads, etc. In that case, being “a good corporate citizen” is part of the political pitch you need to make to do what you need to do to manufacture your product profitably.
Managers who are sensitive to these things are engaging in rational behavior by engaging in these propaganda/philanthropic efforts. Also, the kind of people who criticize corporations are, of course, not going to come up with anything useful themselves. Their lives revolve around being gadflies. But such people cannot be wished away. They are a permanent part of the environment in which businesses function. They can no more be ignored than can people selling competing products.
This post reminds of any number of things which libertarian-type thinkers come up with. Such people agree that people are rational utility maximizers, but then start raising all kinds of moralistic arguments about what that entails in the real, messy world. When they see defense business behavior like this, they make a moralistic objection that businesses should just “do business”. The answer is, if they tried to do that, they’d be out of business — and being rational profit maximizers, they do what they need to do.
Lex, you are right about some of this but not all. First, you are ignoring the companies that engage in “socially responsible” activism to the point of alienating customers. Benetton and, I think, Levi Strauss, fit into this category, with their lefty-activist poses. There are plenty of other companies that do this, just as there are companies where the CEO pisses away shareholders’ capital on the company jet or whatever. Waste is waste, whether it’s spent on jets or opera. And notwithstanding post-Worldcom/Enron reforms, there are still badly run companies whose managements pursue their own interests at the expense of their firms’ long-term value. To train managers (and biz-school students who may become managers) to engage in philanthropy on the shareholders’ dime is to invite these kinds of problems. The shrewd corporate operator who uses politics and philanthropy as long-range tools to maximize value is not necessarily typical.
Also, don’t knock corporate activism per se. Most corporate gadfly types are probably cranks, but some are productive in improving corporate management by drawing attention to bad management. For example, Nell Minow, who I used to think of as a crank, is a thoughtful gadfly. And there are plenty of non-activist types (e.g., mutual-fund managers) who perform a similar function in a more systematic way.
Free enterprise is great, but the corporate world still has plenty of slop and room for mischief in it. Philanthropy done with other people’s money may do some good, but on balance it’s also bound to lead to the rationalization of a lot of unwise or corrupt spending by corporate managers with agendas.
There’s also a problem of moral hazard, in that corporations that give money for government projects encourage politicians to shake down private businesses.
Benetton and Levi Strauss are fashion companies selling a brand and an image. They may have bet wrong, but associating over-priced pants with some political image is not necessarily wrong. Birkenstock sandals are probably happy to be associated with Lefty/Hippie people. That’s their niche. Vendors of image, fad or fashion follow rules of their own.
I don’t think “corporate philanthropy” is in the same category as a CEO who has Roman orgies on the shareholders’ dime. That is a totally different set of problems, under the rubric of agency costs, managing the managers. Again, these managers are rational utility maximizers who will spend every dime they can get their hands on on themselves unless there are strong constraints which only reward them for doing something useful or profitable. So, I agree this is an enormous problem, but it is a different species of problem, and maybe a less interesting one, than the one you address in your post.
I don’t knock activism per se. I said that these people are part of the landscape and always will be, so you need to deal with them. Corporations are major actors in American life, and they will always be subject to suspicion and hostile scrutiny. And that is not all bad. Nell Minnow is a good example of the right way to do it, pushing for good corporate governance. And she is probably not in favor of corporate philanthropy. But she is exceptional. Most activists (e.g. Jesse Jackson) see corporations as bags of money which can be extorted into giving them something for free. The more earnest and ignorant ones (any group of college students with picket signs), think corporations are simply evil, categorically bad, but cannot offer one complete, coherent sentence to support this vague but vehement notion.
So, I think we agree that we don’t like the conduct, and that corporations frequently ill-serve their shareholders and customers and look for opportunities to get money and protection and other advantages from the government. I just don’t think merely saying corporate philanthropy is per se bad, because it is not part of a business’s core function, gets us very far. The interesting questions are: Why do these phenomena exist? Why do businesses care about image? Why do managers give away money in this way? What do they think they are getting in return? What to they actually get? Can it these things be measured?
My sense was that BusinessPundits’ post stopped at the easy and comfortable level of mere moral disapproval. But in good Adam-Smithian fashion, I am sure we will find a rational profit-maximizing firm, or a rational utility-maximizing manager expropriating a firms assets, behind all of this.
Exclude the Roman orgies and we are left with corporate philanthropy as philanthropy and corporate philanthropy as protection money.
I think philanthropy is best handled by individual shareholders, but if people want to buy shares in corporations that spend shareholder funds on philanthropy, I suppose that’s up to them.
OTOH there’s philanthropy as protection money. In that case business managers are often behaving rationally (look what happened to Bill Gates), and the problem lies more in overweening government. I wish that the people who run corporations took this problem on directly, by subsidizing economics education and free-market think tanks, rather than by conventional philanthropy that temporarily placates the pols.
“…overweening government…”
“…subsidizing economics education and free-market think tanks…”
You are missing something basic. Businesses don’t perceive “overweening government” unless it is costing them something specific. Often government is the way they make their money, by taking advantage of the tax code or regulators to attack competitors for example or prevent competitive technologies from threatening them. The political and regulatory aspects of business dedisions are no less “real” than the decisions about product quality or marketing. If you get any of these things wrong, you go out of business. The regulatory apparatus in this country was built by businesses, for their own interests, or captured by businesses after it was put in place. It is not a problem to be solved. It is part of the environment, like air.
As to having businesses spend money to educate people in economics, that is more wildly idealistic than any leftist proposal on the table — alter the consciousness of a whole society? Spend a lot of money now so that someday more people will want to have the government do less to regulate you? That is not rational profit maximizing, it is utopianism. It is a non-starter. Some eccentric rich people will support think tanks. Bully for them. But it will never be a sensible policy for businesses, generically, to do so.
“Protection money” is a pejorative. Philanthropic spending, and all such image-focused activities, are a political investment. Why make a pejorative out of it? Because in some imaginary world businesses don’t have to answer to voters, jurors and politicians? But they do and always will.
Managers who failed to correctly assess and address these risks would be failing their shareholders no less than if they allowed an uncompetitive product to be manufactured.
Businesses are not yearning to function in an Ayn Randian shark tank of cut-throat competition. They want to find rent-seeking opportunities in the tax code, or in other regulations, or by imposing tariffs, or by colluding and forming cartels. That is rational profit maximizing. That is American capitalism as it has existed for 100 years.
Adam Smith observed that no two businessmen could have a conversation without conspiring against the public interest. Smith understood both capitalism and capitalists.
Saying, “businesses should not do this”, is merely saying “I wish the world was different”.
(Jonathan — This is like one of our phone conversations, except we can’t interrupt each other.)
Businesses don’t have to roll over and play the political game. In the 1970s and ’80s Mobil Corp. ran pro-market op-eds, disguised as advertisements, in the NYT. The ads were influential and didn’t cost much. Nothing prevents businesses from doing that kind of thing, which in the long run seems (to me, anyway) more likely to improve the business climate than does using government against one’s competitors. But what do I know — I’m merely a crank and we all know corporate executives are visionaries.
Most businesses are small, and I suspect that most small businesspeople would rather get the government got out of their hair than use government to their advantage against competitors. I would. One of the reasons why big corporations can get away with squandering shareholder funds on the hobby interests of CEOs is that the big companies are effective in using government against upstart competitors. This may be a natural pattern but it’s a corrupt one and should be discouraged.
While there are plenty of parasites and rent seekers in the business world, the innovation that drives productivity increases, and is therefore ultimately responsible for wealth increases, comes from creative people who are generally going to be more creative the more free they are. In general they will be more free to the extent government is reduced.
The size of goverment is still the main problem in our society. Lobbying for smaller government, and contributing to economics and other education that helps citizens to understand the hidden costs of government, is no more utopian than are donations to cultural institutions. Payoffs to politically favored charities are certain to impress people whose money isn’t at stake, but what do potential investors think?
There are enough examples of successful corporate managers who don’t play the game (e.g., T. J. Rodgers) to suggest that corporate philanthropy is driven mainly by cultural considerations in the world of managers rather than by expected long-term business benefits.
I think we should have a live debate, moderated by the Pontani sisters.