Over the last few days I have had an interesting email exchange with your classmate Natasha Bencerraf, on the subject of the proper goals of a corporation and corporate social responsibility in the context of increasing political polarization in the United States. With Natasha's assent, and with thanks for her contribution, I have turned our conversation into the following blog post, in the form of a dialogue.
NB: I came across an interesting article today. The CEO of Panera is stepping down to spend “more time to debate Wall Street's obsession with short-term growth.” It brought me to this article from last year about short-term thinking, and the dangers of being too focused on maximizing value for shareholders: The CEO of Unilever Paul Polmon said: “The strategy ends up being focused on the shareholders versus other stakeholders,” (...) “If ultimately the purpose of a company is maximizing shareholder return, we risk ending up with many decisions that are not in the interest of society.” I know we talked in the first class about how one of the main purposes of the firm is to create shareholder value, but I wonder if that’s becoming an outdated mindset as society evolves, and if the stakeholder view will win!
RW: These are great links. I actually agree with the author of the second article. A couple of observations:
1) I hope the takeaway from the first class was not that I advocated for maximizing shareholder value to the exclusion of other considerations. What I tried to do was to show that there were several views of the role of a corporation. The view you describe, associated with Milton Friedman, is that the primary goal of a company is to maximize shareholder value. An alternative view, associated with the Business Roundtable, is that businesses should cater to a broader set of stakeholders. The first view is simpler and easier to implement, but is subject to the caveat that companies should respect “the law and ethical custom”. The second is perhaps more explicit about ethical concerns, but provides little guidance on how to prioritize between stakeholders with competing interests. For instance workers want high wages but consumers want low prices. Who should win out? I think both views have pluses and minuses, but which one you espouse is a personal decision.
2) I argued that in our modern information-rich environment, both views increasingly coincide: not catering to a broad set of stakeholders means that companies could take hits to their reputation that imply that they would not be maximizing shareholder value. A company that routinely pollutes or disregards worker rights would ultimately see these things catch up with them, reducing profits.
3) Even if your view is that companies should maximize shareholder value, this does not imply short termism. Short termism means maximizing today's profits, or profits in the immediate future. But the shareholder view of the role of a corporation is very clear that the proper goal is to maximize value, which is to maximize the present discounted value of all future profits, not just immediate profit. The future should be discounted, but at a market rate of discount (say 5%), as is proper whenever making decisions about the future. Short termism benefits neither shareholders nor other stakeholders.
NB: I don’t think it came off as maximizing shareholder value should be the main goal of a corporation. There are definitely other options of course, though I sometimes feel that it’s what companies mostly focus on.
On your second point, I wonder where the balance is between catering to shareholders and catering to stakeholders. Catering too much to the stakeholder can cause problems (see the Keurig case).
I wonder what your thoughts are on the role of the company as society becomes more politicized. I would be interested in reading a blog post on that, but that may be too political for class. The other question is how companies will focus on long-termism, which is beneficial, without alienating their stakeholders.
RW: I certainly agree that the balance is hard to find. There is some guidance from the non-market forces (media, threat of litigation, regulation) that induce companies to “do the right thing” (i.e. maximizing profits under these constraints) but as mentioned in class, it is a blunt instrument.
I think you want to clearly keep separate the issue of corporate social responsibility from the issue of politicization. Most major companies have CSR policies and departments. They are actively engaged in relatively “uncontroversial” CSR activities like limiting pollution, donating to charity and treating employees ethically (or at least trying to project the image of doing these things!). Most however shy away from heavily politicized advocacy, and when they fail to do so they pay a heavy price, as the article you just sent illustrates. There is no contradiction in principle between catering to a broader set of stakeholders (beyond shareholders) and remaining apolitical.
To answer your question I think that as society becomes increasingly polarized along political lines, it will become increasingly important for companies to avoid hot button issues and remain neutral and mainstream. Otherwise they risk alienating half of their customer base overnight, and information travels fast nowadays. The savvier firms will manage that well. Others will make mistakes, like Keurig did.