Thursday, May 31, 2012

Corporate Social Responsibility, Or Throwing Away The Shareholders' Money

Corporate Social Responsibility, Or Throwing Away The Shareholders' Money

Cover of "Wall Street (20th Anniversary E...
Photo: AP

Lately, during visits to business schools and various MBA groups, I’ve noticed a curious new trend: Rather than adhere to the fictional Gordon Gekko’s famous admonition that “Greed is Good,” it seems that curriculae are being infused with quite the opposite idea.
Graduate students are getting heavy doses of a sort of “Anti-Gekko serum”; they’re being told that businesses must cater to the needs of stakeholders other than shareholders, and that they have the obligation to distribute money to all sorts of needy causes and cultural and “societally beneficial” sports and recreational projects.
Don’t get me wrong: it’s good for businesses to be good corporate citizens and fund charitable or cultural activities out of hopefully well-endowed corporate foundations. And it’s great to encourage (I didn’t say “pressure”) employees to devote their own time and money to United Way, the Boy Scouts of America and similar worthy causes. And, of course, when earthquakes, floods, forest fires and the like devastate whole areas, it is right and proper for an automobile company, for example, to donate a few pickup trucks. That’s just common sense, and good PR.
My concern with this new call to use shareholders’ money for “social obligations” is one of balance.
I recently heard a European professor regale an audience with the tale of an Italian manufacturing baron who dispenses enormous amounts of money not only to employees, their families, and their social and sports clubs, but also to the municipality for restorations, new buildings, theater, opera and the like. By happenstance, said industrialist is also growing, almost excessively profitable: I believe he has a roughly 60%-70% market share in the luxury consumer product he manufactures.
Therefore, the good professor, citing this and other cases, postulated a causal relationship between “giving money away to society” and “achieving high profitability” — and that’s fatuous twaddle.
The two lines may both head up, but it would be hard to prove that wanton spending “causes” profits to go up.
What I think is going on in these cases is that the business is obscenely profitable, the sole owner (note: no shareholders) is awash in cash, and quite wisely and responsibly decides to assuage his guilt, secure his legacy, and presumably attain near-sainthood in the community.
While businesses must be aware of their role in society, most companies are owned by shareholders, and they are the ones to whom management owes loyalty and commitment. The biggest obligation corporate America has, and the greatest benefit it can bring to society, is to be hugely successful, reward its shareholders handsomely, grow, expand, re-invest in the right locations, create new, well-paying jobs which, through the multiplier effect, generate more economic activity in myriad ways. THAT’s the way to get wealth flowing into cities, towns, sports teams, youth clubs, operas and the like.
Reducing operating profit by giving away the shareholders’ rightful gain to social causes is morally wrong, not in keeping with the tenets of capitalism, won’t provide the largest benefit to society, and should not be taught in business schools. Where’s Gordon Gekko when we need him?

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