Talking to myself about foreign policy, US politics, technology, &c.

The Corporate Social Contract

Corporations are one of the great the great bugbears of the left. I had a particularly fun time at my local precinct caucus a couple of years ago when my neighbors agreed to the elimination of the concept of corporate personhood, bedrock on which business has been built since, oh, we’ve had corporations. Sigh.

The problem with the soak-the-corporations logic, as Paul Tsongas pointed out at the 1992 Dem convention:
“You cannot redistribute wealth you never created. You can’t be pro-jobs and anti-business at the same time. You cannot love employment and hate employers.”

So if we don’t want to destroy them, we should instead embrace the age-old concept of doing good by doing well and enlightened self-interest. I feel one of the most important roles of the government in our market economy is to tilt the financial incentives such that businesses have profit motivations to do things that are in the public good; tax writeoffs for charitable donations are an excellent example. Some find that to be silly; that maximizing shareholder return is the only moral obligation for a corporation. Indeed, market forces do work in interesting ways; pressure groups spawned by outrage over Nike sweatshops, for example, probably did more to change working conditions in their factories than any regulations in the US could have. Target, on the other hand, reaps great publicity from their commitment to donate 5% of profits to charitable causes in local communities- it leaves folks with warm fuzzies. Contrast that with Wal-Mart’s public persona.

Anyway, the Economist had a very thought provoking article on on the Social Contract and corporations. It’s written by Ian Davis, a worldwide managing director of the huge consultancy McKinsey & Company- obviously not a raving commie.

The core thought as I read it is to extend the concept of the Social Contract, as we widely think of it between governed and government, to the consumer and producer relationship. He suggests that executives should be focused on “[T]he efficient provision of goods and services that society wants” rather than a slavish and short-term fixation on shareholder value. In such a bigger picture, profits come from following this implicit compact. For example, the recent obesity scandals and whiffs of lawsuits have caused Mickey D’s to radically overhaul their menus- profitably, it’s worth noting. What’s more, ignoring the mores of society and shifting preferences for acceptable environmental and social impact can come at catastrophic cost to a business. Development of a reputation as evil can sink billions in shareholder value, or even destroy a corporation (see: Arthur Anderson).

The legal code is something of a trailing indicator of the opinions of society. It behooves a corporation to not be caught flat footed by this, or any other change. It is accepted by the vast majority of scientists that global warming due to carbon emissions is a fact. Eventually, as in Schwarzenegger’s (!) proposal in California, legislation will catch up to societal opinions, and corporations will be forced to implement carbon abatement systems. By being ahead of the curve, they can reap the PR benefits of being on the side of the angels, and be able to adjust now, at their own pace, to the forced changes coming down the pipe. Sounds like that’s maximizing shareholder – and societal – value to me.

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