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The author is a professor at the University of Chicago booth school. This work is based on his work with Luigi Zingales.
Private American companies have dialed their diversity, equity and inclusive efforts after increasing them over the past decade. Others have revised their pledge regarding becoming green. Did the company’s statement acknowledge their social responsibility as more than a political theatre of performance?
The CEO’s views on corporate goals are changing, especially in their arguably their most important official statement: annual letters to shareholders. In the 1950s, these usually refer to one or two company performance goals, such as improving financial performance, growth, and improving customer service.
In the mid-1960s, as the civil rights movement rose with political and public consciousness, CEOs issued more statements about increasing diversity in the workforce. But these were Richard Nixon’s successful appeal against angry southern whites in the 1970s and the encouragement of economist Milton Friedman, who said that the sole social responsibility of business is to increase profits. These have decreased as they changed.
The global financial crisis, in which profit-oriented CEOs took excessive risks, highlighted the limitations of Friedman’s views. The number of targets supported in letters to shareholders has since risen to an average of seven by 2020. Many of these were social goals ranging from increasing DEI and sustainability to increasing philanthropy. The increasing number has removed statements intended to maximize shareholder value.
Perhaps the broader purpose expression was intended to reconstruct the legitimacy of the company. They were also responding to broken politics, which seemed unable to address major challenges such as inequality and climate change. But once again, it appears that businesses are quickly abandoning their pledge as political opposition grows. Given their flip-flops, what social responsibility can you reasonably expect from a company? How much credibility should we place on their promises?
We must begin by realizing that the primary purpose of a private company is to sell the desired product or service at an attractive price, while following land laws. In doing so you deserve privileges such as limited liability, indefinite living, and legal rights to coordinate corporate activities. Private companies that fail to achieve their primary objectives will lose their social licences, regardless of other purposes. This is what distinguishes companies from NGOs.
However, profits and stock prices are partial and are measures of distortions in whether a company is working towards its primary purpose. Many actions that further promote these efforts, some of which fall under the corporate social responsibility rubric, come with upfront costs, but reward over time. For example, companies can perform better when they develop talent in groups and places that are traditionally overlooked. Companies can reduce costs by reducing their energy footprint, thus attracting young talented, green employees. Companies that are well thought out by the board and clarified by management can protect some social responsibilities. These don’t have to change to the political winds.
There are social behaviors that do not directly benefit the purpose of a company, but society as a whole. It is probably better to leave these to the government, as it is appealing for businesses to voluntarily step into violations. We attempted Unilever’s attempts in the early 2010s to make the business more sustainable. Although initially considered visionary and wise, these efforts have led to changes in practices around the world, their operations, their supply chains, and even their customers. The company has lost sight of its main purpose of producing better consumer products.
Moreover, corporate governance is simply not structured to guide decisions about whether communities should obtain clean drinking water or which emission mitigation technology industries to adopt. These are political decisions, and are best made by people who have the mandate.
Of course, this mission will change and have dizzy consequences for businesses. If the DEI program once helped them obtain government contracts, then you can now denounce businesses as contractors. Continuous policy changes are not a way to tackle the challenges of our time, but this is something that businesses face until the country settles into something that works. However, many will simply relate the necessary social policies for their primary purposes and continue as before. That should be.
