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Roula Khalaf, editor of the FT, selects her favorite stories in this weekly newsletter.
The writer is a professor at the Booth school at the University of Chicago. This piece is based on work with Luigi Zingales
American private companies are now marking their efforts of diversity, equity and inclusion after increasing them in the last decade. Others have reviewed their promises to become green. Did the statements of the companies recognize their social responsibility once more than a performative political theater?
CEO’s opinions on corporate objectives have changed, especially in what is possibly their most important official statement, the annual letter to the shareholders. In the 1950s, we find them typically mentioned One or two corporate performance objectives, such as the best financial performance, growth and best customer service.
In the mid -1960s, as the movement of civil rights increased in political and public consciousness, the CEOs made more statements about the increase in the diversity of their workforce. But these were calmed in the 1970s as the political environment changed with the successful attractiveness of Richard Nixon to the angry exhortation of economist Milton Friedman that the sole social responsibility of business is to increase profits.
The global financial crisis, where CEO with the mentality of profit took excessive risks, highlighted the limitations of Friedman’s opinions. In its consequences, the number of objectives defended the CEO in their letters to the shareholders rose to an average of seven by 2020. Many of these were social objectives that range from the improvement of DEI and sustainability to the increase in philanthropy. A growing number eliminated statements that sought to maximize the value of shareholders.
Perhaps the expressions of a broader purpose intended to rebuild corporate legitimacy. They were also an answer to a fractured policy where the government seemed unable to face important challenges such as inequality or climate change. However, once again, as the political opposition has grown, companies seem to be abandoning their promises quickly. Given their flip flops, what social responsibility can we reasonably expect from corporations? How much credibility should we impose on your promises?
We must begin by recognizing that the main purpose of a private corporation is to sell a desirable product or service at an attractive price, while obeying the laws of the land. Doing so deserves privileges as limited liability, an indefinite life and the legal right to coordinate intra-circulated activity. Any private corporation that does not achieve its main purpose loses the company’s license, regardless of the other purpose that serves. This is what distinguishes an NGO corporation.
However, the profits and prices of the actions are only a partial measure and sometimes distorted if a company is working for its main purpose. Many actions that promote these efforts, some of which are under the rubric of corporate social responsibility, imply initial costs but bear fruit over time. For example, a corporation can work better if it encourages talent in groups or places traditionally overlooked. A company can reduce costs by reducing its energy footprint, also therefore attracting young people talented of green mentality. Designed properly by the Board and articulated by management, companies can assume some social responsibilities. These do not need to change with the political wind.
There are social actions that do not directly benefit the purpose of the corporation but society in general. Tentler for the corporation voluntarily enter the violation, governments are probably better. Take Unilever’s attempt in early 2010 to make your operations more sustainable. Although initially it was considered with a vision of the future and sensible, these efforts went beyond their operations, the supply chain and even customers to changing practices worldwide. The company lost sight of its main purpose of making better consumption products.
In addition, corporate governance is simply not structured to guide decisions about which communities obtain clean drinking water or what emission mitigation technology industry should adopt. These are political decisions, better taken by those who have the mandate of the people.
Of course, this mandate changes, with vertiginal consequences for corporations. Where the programs were once useful for obtaining government contracts, they can now obtain companies disbursed as contractors. Constant policy change is not a way of addressing the challenges of our time, but this is what corporations face until nations conform to what works. But many will simply win social policies that are necessary for their main purpose and continue as before. That is how it should be.