Why should companies do good?
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Why should companies do good?

For companies to pursue anything other than profit would be “pure and unadulterated so­cialism”, declared economist Milton Friedman in a famous and often quoted essay in 1970. It formed the ideological basis for ‘shareholder capitalism’, which established the supre­macy of shareholders over other ‘stakeholders’, like employees, customers, communities, taxpayers or the environment.

Almost half a century has passed since and Friedman’s analysis, which was meant as an ideological statement but had morphed over time into a broadly excepted model of the workings of capitalism.

His ‘theory’ seemed to explain the world as it is, and not as it should be, sharply contrasting it with the utopia of communism. The ‘magical hands’ of the markets should never be impeded by political meddling. Profit seeking was seen as the sole, legitimate motivation of all economic agents, who were expected to act ‘rationally’. Being charitable was not their agenda.

Friedman’s model, despite its clarity and elegance, became disreputable over the years. The damage done to societies by automation, outsourcing, lay-offs, globalisation, environmental dumping, financial arbitrage and corporate tax ‘optimisation’ started to grate and culminated finally with the financial crisis. When banks and corporations had to be bailed out by the taxpayer, citizens in the developed world who had an increasingly hard time making ends meet, felt fooled and betrayed.

Even conservative economists began to bemoan growing income inequality; thinkers started to rehabilitate Marx, and central bankers started to question the societal usefulness of sleek financial institutions. Spiritual leaders like Pope Francis and the Archbishop of Canterbury, bemoaning the cruelty of corporate misbehaviour, were increasingly em­braced by academia. Big business had lost its paternalistic benevolence and was now seen as the ‘great vampire squid’.

The list of corporate misdeeds is long and keeps getting longer. Immoral behaviour apparently is not the prerogative of the defence and tobacco industries alone. Resource-extracting companies prop up corrupt and unsavoury regimes. Consumer goods companies exploit poorly paid labour, hiring children and convicts. Plastics producers shrug off the shocking lifecycle of their products with 90 per cent of their wares ending up in landfills and the sea.

The service industry is subjugating their workforce in zero-hour contracts, paying only when outright necessary. They replace labour by making their customers work for free – at the petrol station, the supermarket or the airport terminal. The gig economy, praising the efficiency of ‘sharing’, enabled by its ephe­meral existence, pilfers our personal data and uses them against us with impunity, while dodging even the most meagre taxes levied on them. Financial institutions create profits out of thin air, enriching themselves at the expense of economic stability and society at large.

And all of them dance happily on the volcano of climate change, risking the livelihood of billions of humans, still dependent on life on earth – other than artificial intelligence which, having re­placed labour, may still thrive.

Was Friedman therefore wrong all along? When I grew up in the 1960s, companies behaved way more paternalistically. We spent the weekends as a family on a lake house in the outskirts of Vienna, paid for and maintained by my dad’s firm. We went on skiing vacations to the company’s employee chalet in the mountains, and enrolled in the workers’ tennis club. My dad had lunches in the canteen together with his colleagues from 12 to one o’clock every day – at least when he was not abroad on business. Pensions were designed for a final benefit of 80 per cent of the last salary, which increased over the lifetime of his employment. No one was ever fired.

It is hogwash to expect corporations to act selflessly

I encountered such largesse again only in the last days of Soviet Russia, where sanatoriums, kindergartens, activity clubs and shops were still funded by the State-owned enterprises, which never had to bother about pro­fitability or productivity. Gospan, the State planning authority, dictated what had to be produced in which quantities, thereby ruling what consumers could buy, or not.

No one was unemployed in this workers’ paradise, everyone had the same salary and the same dearth of choice. The State pretended to pay, as the adage went, while workers pretended to work. Everyone was, in fact, subsidising everyone to a complete standstill. Communism finally came to end when all enterprise failed collectively.

The difference between my dad’s firm and Russia’s experiment with total equality was, I believe, the keen observation of profitability. My dad’s company had paid for its workers’ perks not out of altruism but because it had to fight a deficit of hands after the war. It had to keep workers loyal, because other enterprises were competing for em­ploy­ment and acquired skills. The company was not a good-doer but acting out of selfishness. Eventually all such benefits disappeared and only strict labour laws could offer a mutualised form of protection – until shrinking birth rates started to create unproductive budget deficits and a growing debt burden.

Friedman was right in many respects. Perhaps the biggest achievement of his essay was to put an end to corporate hypocrisy. Companies are not founded to be charitable. Throughout human history, businesses were deve­loped to earn money, by either making investors rich or by fleecing them. To pretend otherwise is flimflam. To ask firms to act for the common good voluntarily is ludicrous. No­body pays taxes, sponsors fami­lies or public life voluntarily. It is up to governments to make sure that social justice is maintained and common interests stay protected. Left to their own devices, companies would act as cartels, monopolies, rent seekers and free riders. Politicians have to make sure that the pursuit of profit is not damaging to all.

When we in Malta build businesses that are not sustainable, infringe on open space, live on rubbish, or let private enterprise get away with extortionate profits at the expense of the taxpayer, it is not corporate misbehaviour but political failure. This is where quality journalism and civil socie­ty has an important role to play: only what you can’t see and what you can’t measure will turn the striving for profit into evil.

Profitability is a valuable yard­stick for corporate beha­viour. It is easy to measure and quintessential. Nobody praises an army for losing a war, no matter how morally impeccable its soldiers behaved. Companies making careless losses will not survive, taking their workers and their tax contributions with them. In a society where consumers and investors are given a choice, it’s up to them to de­cide if they want to stick with a company that damages society. If we buy chicken from a laying battery because it’s cheaper, it will make us guilty, not the company management.

Where Friedman erred was in his defence of shareholder supre­macy. He argued that the majority of risk lied with the capital providers who were entitled to privileged returns. To think that a retail investor putting a few quid in a single company, or an institutional inves­tor putting money in many stocks at once had more at stake than consumers, workers, or suffering communities at large was wrong. This is why the theory of ‘stakeholder’ capitalism is gaining ground with quite some justification.

But it is equal hogwash to ex­pect corporations to act selflessly. When CEOs declare that they care about the gender pay gap, their environmental impact, sustainability, or minimum salaries, they do so because they fear the loss of public reputation and consumer boycotts. And they care about the environment because they have family themselves.

If companies take responsibili­ty today, they do so because they know that one day they will be taken to task. By class-action lawyers and by a new generation of politicians who will punish them for the failures of previous governments. Corporations fill a political void, as they see their future profits in peril.

This political void is not only due to dishonest populism and political incompetence alone, but increasingly caused by nationalism ‘first’. Policies can only grow teeth when acting in a supranational concert. Such necessary cooperation is in the vane. This is why companies are all of a sudden expected to do good. I am not sure if they are up to the task. They talk the talk. But will they walk in the right direction?

Andreas Weitzer is an independent journalist based in Malta. He reports on the economy, politics and finance. The purpose of his column is to broaden readers’ general financial knowledge and it should not be interpreted as presenting investment advice or advice on the buying and selling of financial products.

andreas.weitzer@timesofmalta.com

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