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Back in 1997 Gregory Bresiger penned a piece for the Free Market
tearing apart the notion of "socially responsible investing" (SRI).
Managers focused on social issues instead of profits will perform poorly as
resources are diverted to unproductive uses. Bresiger
looked to close the argument with this seemingly absurd proposition:
But SRI funds do point the way to
solving a myriad of political debates in this country. Whenever a politician
suggests a new tax, mandate, or regulation on business, let's first try it
out on one of these "Socially Responsible" companies, purely on a
voluntary basis. Let it pay higher taxes, insurance premiums, and
wages, while adopting ever more rigid quotas and union rules. Then we can
watch what happens to its stock price relative to everyone else's. Any
takers?
More than a decade later there are
takers. The Wall Street Journal reports
that in seven states companies can register as benefit corporations, allowing
the firms to pursue social and environmental goals without the worry of
shareholders suing them for not maximizing shareholder value.
These corporate charters aren't tax
exempt or nonprofit. Companies choosing to be benefit corporations pay Uncle
Sam like any other for-profit company, but have the prerogative to make
profits an afterthought.
Casey Sheahan,
chief executive of outdoor-apparel company Patagonia Inc., changed his
company's charter right away, believing that his company's shareholder value
should take a backseat to the common good.
Jeff Furman, a Ben & Jerry's
director since the 1980s and its current chairman, told the WSJ that
had the socially conscious ice-cream maker been a benefit corporation back in
2000, they would have never sold out to Unilever PLC.
Ben Cohen and Jerry Greenfield are
the stuff of legend for turning an initial $12,000 investment in an ice-cream
store, located in a renovated gas station, into an ice-cream juggernaut the
two sold 22 years later for over $300 million.
In addition to the cash price,
Cohen and Greenfield negotiated
to have the Netherlands conglomerate commit 7.5 percent of Ben & Jerry's
profits to a foundation, agree not to reduce jobs or alter the way the ice
cream is made, and also contribute $5 million to the Ben & Jerry's
foundation, along with creating a $5 million fund to help minority-owned
businesses and others in poor neighborhoods, and distribute $5 million to
employees six months after the merger.
Surely Unilever would have paid an
even higher cash price without all the social responsibility stipulations,
which Unilever must have factored into its bid. As it is, based on Furman's
comments, the Ben & Jerry's folks still harbor seller's remorse.
The law requires benefit
corporations to spell out company social and environmental goals each year in
a "benefit report" and then measure progress toward those goals. Of
course progress toward goals that are impossible to quantify will be
impossible to evaluate, providing a convenient cover for underperforming
management. Shareholders will have no real basis to judge management, who by
choosing this type of charter are saying, "we
don't care about financial profits; we want to make the world a better
place."
However, while a business owner may
make grand pronouncements that the environment or some social issue is more
important than profits, what he or she is really saying is that the company
believes these issues are more important than customers.
It is customers who are in command
of the profit-and-loss system. Producers who don't serve the buying public
best suffer losses and are replaced by those who do. Ludwig von Mises explained that it is the urgent demands of
customers that dictate the adjustment of production activities. These
adjustments relentlessly continue, driven not by the ideology of the
entrepreneur or the opinions of management but by the customer. As Mises explains in Profit and Loss,
Profit and loss are ever-present
features only on account of the fact that ceaseless change in the economic
data makes again and again new discrepancies, and consequently the need for
new adjustments originates.
The idea at the root of benefit
corporations is that profit should be abolished. But the results of that
would be disastrous. Mises points out that if
profits were given to the customers (or, in other words, if prices could not
exceed costs), this maximum-price decree would paralyze markets and require
goods to be rationed.
For the firm's employees to receive
profits, no capital could be accumulated to grow the business or innovate production functions. And finally if the state
were to tax 100 percent of profits, customers would no longer be supreme and
producers "would just be people who have the power to deal with
production as it pleases them."
Murray Rothbard
explained in Man, Economy,
and State, the aim of any action is to make gains that exceed
the costs derived from that action, but that profit and loss in this sense
are "psychic phenomena and as such not open to measurement and a mode of
expression which could convey to other people precise information concerning
their intensity."
For instance, environmentally
conscious CEOs can try explaining to shareholders that using more expensive
materials or processes to create goods is beneficial to the earth and thus
more worthy than using less environmentally friendly but less expensive materials
and earning a higher profit, but the net benefit is impossible to measure.
The CEO and board are merely asking shareholders to subsidize their
worldview.
Rothbard explains that
financial profit and loss are expressed in a certain amount of money that
determines what individual enterprises made or lost.
However, this is not a statement
about a social phenomenon, about the individual's contribution to the
societal effort as it is appraised by the other members of society. It does
not tell us anything about the individual's increase or decrease in
satisfaction or happiness. It merely reflects his fellow men's evaluation of
his contribution to social cooperation.
Mike Brady, the president of Greyston Bakery, a Yonkers, New York, supplier of
brownies to Ben & Jerry's, claims benefit corporations "add another
level of accountability and transparency." But it's hard to understand
how directing resources to unprofitable ends at the expense of custoers accomplishes this.
Mr. Brady's bakery has 50 full-time
employees and hires from its local, underprivileged neighborhood. This is
fine if these employees are the best employees he can find for the wage he's
paying, but if they are not, he is wasting capital that could be used to
improve production that could drive down costs, benefiting his customers with
lower prices.
A free society cannot survive
without entrepreneurial action as well as entrepreneurial profit and loss.
Entrepreneurs adopting benefit corporation charters may be well-intentioned,
but they should heed the words of Mises:
The elimination of profit, whatever
methods may be resorted to for its execution, must transform society into a
senseless jumble. It would create poverty for all.
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