The Limits On Corporations’ Good Intentions
Debate continues on what business should do with respect to social responsibility. Attention should also be paid to what business can do. And it turns out that what business can do, beyond normal profit seeking, is quite minimal. And that is true even if corporate leadership is fully committed to a mission of improving the world.
Two constraints limit corporate social benefits potential results: return on capital and corporate capabilities.
Investors usually expect a return on investments. For traditional profit-seeking companies, investors will understand if executives pay lip service to social goals. But if the lip service results in lower returns, then most investors will shun the company. That will lead to difficulty raising additional capital, as well as damage to the executives’ reputations when they seek other management jobs.
Some businesses are set up as benefit corporations, in which the stated goals include things beyond profit, which might include sustainability, equity and community philanthropy. Such a corporate structure prevents investors from complaining that management is failing to maximize profits.
Even for benefit corporations, though, investors look at financial results. They have heard that socially responsible companies earn as much as old-fashioned profit-seeking businesses. If that does not hold true, some investors will bail. Others will accept lower returns to do good, but only to a point. In short, don’t expect investors to be philanthropists. They want good financial returns.
Corporations are limited in their ability to solve social problems even without the return on investment constraint. Consider a simple corporation, such as a plywood manufacturer. They know how to buy good logs, peel the wood into veneer, glue thin layers of veneer into thick sheets, trim the products and get them to market. Can such a company solve the problem of homelessness? Not likely. The people in the company are pretty good at making plywood—or else they would not have survived in a competitive industry—but many social problems are very far afield from the production and marketing challenges the business regularly faces.
Some small steps for the benefit of the community are possible. Businesses can address inequity in society by offering jobs to traditionally disadvantaged people. However, that only works for people ready to learn the job and follow the rules. People who need too much remedial effort will thwart good intentions in the hiring process. And that concept expands to sustainability and other goals. Corporations may have a little room within their capabilities to pursue broader social goals, but they will fail when they step outside of their expertise trying bring about world peace and the end of global hunger.
Does that mean corporations are simply drains on society and not contributors? Far from it. The essential task of a company is to convert low-value resources into higher-valued goods and services. Take that plywood company. They are filling a need that real, live, breathing human beings have: a need for walls. Our oldest ancestors may have lived in caves or perched on tree limbs, but they built houses when they could. Plywood isn’t absolutely necessary, but it helps make stable houses more affordable, meaning within the means of more people. When the company is profitable, it is buying resources such as logs, glue, energy and labor. After some production activity, the final product has a higher value—as determined by purchasers’ willingness to pay—than the resources used, as valued by the seller’s willingness to accept payment.
The real social value of business is in providing goods and services that people want, at a price that people find advantageous. That social goal was summed up well by Sam Walton’s dictum: “We save people money so they can live better.” The goods and services that corporations provide are their greatest benefit to society. Diverting companies from the task of providing those products effectively and efficiently won’t help society.