Message From the President: Do Good, Be Profitable

Message From the President: Do Good, Be Profitable

June 01, 1996

The failure of socialism has forced its former adherents to seek new means to achieve old goals. One of the now popular variants is "corporate social responsibility." Capitalism, former socialists concede, has an important role to play, but that role is limited because it omits important values, such as, the "fairness" of the work place, the ecological ramifications of business activities, the impact on children and minorities, the virtues of a stable workplace. The claim is made that, if we wed capitalist efficiency with social justice, the world will be a better place. Is this so?

Certainly capitalism has its negatives -- what Schumpeter called its "creative destructive elements." A large company goes bankrupt and plunges the lives of thousands into chaos. A product is badly designed or used in ways not anticipated and disaster results. A firm manages its residuals carelessly, harming downstream or downwind neighbors. Often, the cold impersonality of the market threatens the warm communal values of traditional society. To the Robert Reichs of the world, capitalism makes us all bit players in a remake of Arthur Miller's tragedy, Death of a Salesman.

"Wouldn't it be Loverly," if citizen-workers motivated by altruistic values in socially responsible corporations joined together to eliminate poverty, racism, genderism, pollution and bias from the world?

Well, such an effort could leave us all a lot worse off. The corporate responsibility movement does not understand the essential demands of modern society: the need for specialization and anonymous interactions. Altruism is too rare an attribute to form the basis of modern society -- there are not enough Mother Theresas around to run society. As Adam Smith noted, while even a generous and long life may yield only a handful of close friends, every day we peacefully engage a world of strangers via the market place. Communalism cannot suffice to organize modern society -- the reliance on self-interest to organize these relationships is not the result of mean-spiritedness, but of necessity.

A firm is well advised to concern itself with its shareholders and its immediate corporate "family" -- its employees and neighbors, its suppliers and customers. Those groups have a stake in ensuring that the firm prospers over time. However, to extend such relationships to the world -- to make every one a "stakeholder" -- is to give a meddling power to people who have no reason to learn anything about the value of the firm or to care anything about its survival. Modern society is possible only because we exclude most people from most activities. The institutions of the market -- private property, contracts, the corporation -- are all exclusionary devices. They all create limited spheres of responsibility and power in which each of us plays specialized roles to our mutual benefit.

A corporation is not intended to solve the world's problems. The corporate form distinguishes one group, the "shareholders" -- those who provide the capital to the firm -- from all others, in modern parlance, the "stakeholders." The firm hires individuals to manage the capital to benefit the shareholders with, as noted above, due consideration to the longer term responses of those economic interests relevant to the corporation. Even the shareholder interest is likely to be limited to the narrow question of whether the firm is profitable. Other diverse interests are expected to be addressed by the shareholders from their earnings or the management from their salaries. To blur this shareholder/stakeholder distinction -- to endorse a form of "This firm is your firm, This firm is my firm" collectivism -- is to undermine the basis of modern society, to threaten our future by returning to our tribal past.

--Fred L. Smith