Is it really illegal for a company to act ethically?
June 13, 2008 3:20 PM Subscribe
"[Companies] have a legal responsibility to make their shareholders lots of money, which means they *MUST* rip you off for as much as they can get away with." Really?
I've heard that sentiment many times (the above is a direct quotation) and it doesn't make sense to me. According to Carrotmob, "It's illegal for a corporation to behave in a socially responsible way -- unless that socially responsible behavior happens to be identical to the behavior that maximizes profit."
Proponents of the above argue that if a company shows "record profits", that's a sign that they've been ripping off customers. According to them, companies only think about their shareholders and the Board, and therefore must make as much money as possible regardless of ethics.
Is this true? Is it really illegal for companies to act ethically unless it makes money?
To me, it seems that if the above sentiments were true, social enterprises would not be able to exist. Also, it would make Corporate Social Responsibility illegal.
When shares are bought in a company, they are traded away very quickly, and aren't share prices usually determined in large part by the public perception of the company? Surely shareholders and Boards would notice if the customers are being ripped off or if the companies are acting unethically, and respond negatively to unethical corporate behaviour?
It seems to me that these notions come from the idea that "for-profit" = "evil bad conglomerate", but I can't seem to find any actual legal or economic basis for saying that companies must be unethical to profit.
Is there actually any basis to those points? Is it really illegal for a company to act ethically?
I've heard that sentiment many times (the above is a direct quotation) and it doesn't make sense to me. According to Carrotmob, "It's illegal for a corporation to behave in a socially responsible way -- unless that socially responsible behavior happens to be identical to the behavior that maximizes profit."
Proponents of the above argue that if a company shows "record profits", that's a sign that they've been ripping off customers. According to them, companies only think about their shareholders and the Board, and therefore must make as much money as possible regardless of ethics.
Is this true? Is it really illegal for companies to act ethically unless it makes money?
To me, it seems that if the above sentiments were true, social enterprises would not be able to exist. Also, it would make Corporate Social Responsibility illegal.
When shares are bought in a company, they are traded away very quickly, and aren't share prices usually determined in large part by the public perception of the company? Surely shareholders and Boards would notice if the customers are being ripped off or if the companies are acting unethically, and respond negatively to unethical corporate behaviour?
It seems to me that these notions come from the idea that "for-profit" = "evil bad conglomerate", but I can't seem to find any actual legal or economic basis for saying that companies must be unethical to profit.
Is there actually any basis to those points? Is it really illegal for a company to act ethically?
It's just an excuse. Anecdotes aren't data, but even if it is legally required (which I doubt), it's a meaningless unenforceable law -- like saying "it's illegal for the sun to go down".
I've invested in companies that are not interested in maximizing their profits, much to my chagrin. I mean it: actively wasting as much money as possible by hiring as many redundant staff from one particular community as they possibly could. Profit meant they could hire more redundant staff, until they got the profit margin back down as low as they thought they could get away with, fiscally.
How did I find out? The strategy was actually mentioned in the quarterly investor conference.
posted by aramaic at 3:33 PM on June 13, 2008
I've invested in companies that are not interested in maximizing their profits, much to my chagrin. I mean it: actively wasting as much money as possible by hiring as many redundant staff from one particular community as they possibly could. Profit meant they could hire more redundant staff, until they got the profit margin back down as low as they thought they could get away with, fiscally.
How did I find out? The strategy was actually mentioned in the quarterly investor conference.
posted by aramaic at 3:33 PM on June 13, 2008
In theory a company is beholden to its shareholders. If its shareholders are happy with them doing something other then maximizing profits, then godspeed. Of course theoretically shareholders can replace management, and the board is supposed to represent the desires of the shareholders first. In real life it doesn't work that way, but in theory.
So no, it is not illegal for a corporation to act "ethically".
posted by JPD at 3:42 PM on June 13, 2008 [1 favorite]
So no, it is not illegal for a corporation to act "ethically".
posted by JPD at 3:42 PM on June 13, 2008 [1 favorite]
There are two strains to this argument, the legal and the moral. The form you've given of the legal argument is overstated.
The legal argument: typically, corporate management is legally obligated to generate returns for you, the owners. In principle, "socially responsible" behavior arguably violates this obligation because it sacrifices profit (shareholder interest) for something else. Generally, though, corporate management cannot be held to account for such behavior. I believe (IANALY) this is an application of the "business judgment rule," which gives management wide discretion to decide what's best for the corporate interest. Under the business judgment rule, "socially responsible" won't get management in trouble, even if it harms profits, because the law is structured to protect management's discretion and to not require proof that some business plan or another is the best possible such.
The moral argument was famously stated by Milton Friedman (paraphrasing?): a corporation's social responsibility is to maximize profits. I'm not going to elaborate this for you.
posted by grobstein at 3:45 PM on June 13, 2008
The legal argument: typically, corporate management is legally obligated to generate returns for you, the owners. In principle, "socially responsible" behavior arguably violates this obligation because it sacrifices profit (shareholder interest) for something else. Generally, though, corporate management cannot be held to account for such behavior. I believe (IANALY) this is an application of the "business judgment rule," which gives management wide discretion to decide what's best for the corporate interest. Under the business judgment rule, "socially responsible" won't get management in trouble, even if it harms profits, because the law is structured to protect management's discretion and to not require proof that some business plan or another is the best possible such.
The moral argument was famously stated by Milton Friedman (paraphrasing?): a corporation's social responsibility is to maximize profits. I'm not going to elaborate this for you.
posted by grobstein at 3:45 PM on June 13, 2008
The Carrotmob site is a pitiful joke. There are so many things wrong with the logic and basic assumptions on it that any success at deriving actual *meaning* or 8truth* from the gobbled mess would be accidental.
I'll leave it for others to check out the site, but to respond directly to the post above:
"[Companies] have a legal responsibility to make their shareholders lots of money"
Most companies are in it to make money. But they don't have a legal responsibility to do so, and the "lots of" qualifier speaks pretty loudly for what a dumb comment this is. Plenty of companies don't have shareholders, either, and are purely at the whims of their owners, who may or may not care about making lots of money. Additionally, the writer's premise seems to lead to the illogical conclusion that all companies operate illegally no matter what they do. If they don't "rip people off," they're breaking the (imaginary) law wherein they must make money for shareholders. If they do "rip people off," they're breaking consumer protection and other ethics-based laws. Quite the conundrum!
Is there actually any basis to those points? Is it really illegal for a company to act ethically?
The only basis to those points is that companies have been known to do naughty things to make money. But the reality is that most companies are generally honest. "Ethics" is a tricky thing; I wish companies acted in more ethical ways in many senses, but the reality is that most do adhere well to their own sense of ethics. We don't all agree on what ethics companies should maintain, but it's safe to say that most companies are concerned with the issue to some extent. It's often been said that there's no thing as a stupid question, but that last one comes pretty close. I can name myriad companies who behave far more ethically than most individual people do.
posted by Dee Xtrovert at 3:46 PM on June 13, 2008
I'll leave it for others to check out the site, but to respond directly to the post above:
"[Companies] have a legal responsibility to make their shareholders lots of money"
Most companies are in it to make money. But they don't have a legal responsibility to do so, and the "lots of" qualifier speaks pretty loudly for what a dumb comment this is. Plenty of companies don't have shareholders, either, and are purely at the whims of their owners, who may or may not care about making lots of money. Additionally, the writer's premise seems to lead to the illogical conclusion that all companies operate illegally no matter what they do. If they don't "rip people off," they're breaking the (imaginary) law wherein they must make money for shareholders. If they do "rip people off," they're breaking consumer protection and other ethics-based laws. Quite the conundrum!
Is there actually any basis to those points? Is it really illegal for a company to act ethically?
The only basis to those points is that companies have been known to do naughty things to make money. But the reality is that most companies are generally honest. "Ethics" is a tricky thing; I wish companies acted in more ethical ways in many senses, but the reality is that most do adhere well to their own sense of ethics. We don't all agree on what ethics companies should maintain, but it's safe to say that most companies are concerned with the issue to some extent. It's often been said that there's no thing as a stupid question, but that last one comes pretty close. I can name myriad companies who behave far more ethically than most individual people do.
posted by Dee Xtrovert at 3:46 PM on June 13, 2008
Response by poster: Just as an important point: the quote above the fold (about ripping off customers) comes from this discussion about Australian banks, not Carrotmob. But it is a sentiment I'd heard in many other places.
posted by divabat at 3:56 PM on June 13, 2008
posted by divabat at 3:56 PM on June 13, 2008
Understand: it isn't illegal to to what you're talking about. But if the corporate management screws over the shareholders in order to be "socially responsible", it can be actionable.
No one goes to jail for this, but they can be sued.
Gross profit isn't the real issue. The issue is shareholder value, which is to say the stock price. There are a lot of ways a corporation can be managed to maximize revenue in the short run which will destroy the company in the long run, and those are not in shareholder interest.
By the same token, corporate philanthropy isn't necessarily counter to shareholder interest. A corporation's good name can affect its long term value, because people are more likely to buy from corporations they think well of.
But all the "socially responsible" behavior has to be justifiable in terms of shareholder interest. Things which are "socially responsible" which harm the shareholders are actionable.
That's for publicly traded companies, too, and certain privately held ones. There are exceptions to that. When Paul Newman mostly retired from acting, he set up a food company called "Newman's Own" and part of the corporate charter is that all profits from it are given to charity.
And the reason that's OK is that the owner (Newman) isn't going to sue, because he's the one who set up the company that way. Rumor is that when he dies the company will be given over to some charity, who will continue to run it that way.
posted by Class Goat at 3:59 PM on June 13, 2008
No one goes to jail for this, but they can be sued.
Gross profit isn't the real issue. The issue is shareholder value, which is to say the stock price. There are a lot of ways a corporation can be managed to maximize revenue in the short run which will destroy the company in the long run, and those are not in shareholder interest.
By the same token, corporate philanthropy isn't necessarily counter to shareholder interest. A corporation's good name can affect its long term value, because people are more likely to buy from corporations they think well of.
But all the "socially responsible" behavior has to be justifiable in terms of shareholder interest. Things which are "socially responsible" which harm the shareholders are actionable.
That's for publicly traded companies, too, and certain privately held ones. There are exceptions to that. When Paul Newman mostly retired from acting, he set up a food company called "Newman's Own" and part of the corporate charter is that all profits from it are given to charity.
And the reason that's OK is that the owner (Newman) isn't going to sue, because he's the one who set up the company that way. Rumor is that when he dies the company will be given over to some charity, who will continue to run it that way.
posted by Class Goat at 3:59 PM on June 13, 2008
Here's what one ex corporate lawyer says about this topic:
[T]the law, in its current form, actually inhibits executives and corporations from being socially responsible...
[T]he people who run corporations have a legal duty to shareholders, and that duty is to make money. Failing this duty can leave directors and officers open to being sued by shareholders. Section 716 [the relevant law in Maine] dedicates the corporation to the pursuit of its own self-interest (and equates corporate self-interest with shareholder self-interest). No mention is made of responsibility to the public interest...
Corporate law thus casts ethical and social concerns as irrelevant, or as stumbling blocks to the corporation's fundamental mandate. That's the effect the law has inside the corporation. Outside the corporation the effect is more devastating. It is the law that leads corporations to actively disregard harm to all interests other than those of shareholders. When toxic chemicals are spilled, forests destroyed, employees left in poverty, or communities devastated through plant shutdowns, corporations view these as unimportant side effects outside their area of concern. But when the company's stock price dips, that's a disaster.
posted by overglow at 4:08 PM on June 13, 2008
[T]the law, in its current form, actually inhibits executives and corporations from being socially responsible...
[T]he people who run corporations have a legal duty to shareholders, and that duty is to make money. Failing this duty can leave directors and officers open to being sued by shareholders. Section 716 [the relevant law in Maine] dedicates the corporation to the pursuit of its own self-interest (and equates corporate self-interest with shareholder self-interest). No mention is made of responsibility to the public interest...
Corporate law thus casts ethical and social concerns as irrelevant, or as stumbling blocks to the corporation's fundamental mandate. That's the effect the law has inside the corporation. Outside the corporation the effect is more devastating. It is the law that leads corporations to actively disregard harm to all interests other than those of shareholders. When toxic chemicals are spilled, forests destroyed, employees left in poverty, or communities devastated through plant shutdowns, corporations view these as unimportant side effects outside their area of concern. But when the company's stock price dips, that's a disaster.
posted by overglow at 4:08 PM on June 13, 2008
No corporate law doesn't inhibit the managing directors of a company from doing anything. It mandates that they must listen to their shareholders. That is not the same thing.
If I own a business and I choose to make less money, that is fine I am both the only share holder and the sole director. In the case of a public company there is a separation between management and ownership. Management's task is to execute on the wishes of the shareholders. For most companies this happens to be "maximize returns on investment' but it could also be "put a sow in every home" If management ignored this and instead maximized returns, then shareholders could remove them.
posted by JPD at 4:16 PM on June 13, 2008
If I own a business and I choose to make less money, that is fine I am both the only share holder and the sole director. In the case of a public company there is a separation between management and ownership. Management's task is to execute on the wishes of the shareholders. For most companies this happens to be "maximize returns on investment' but it could also be "put a sow in every home" If management ignored this and instead maximized returns, then shareholders could remove them.
posted by JPD at 4:16 PM on June 13, 2008
I'm sure that ex corporate lawyer doesn't have a bone to pick...
"When toxic chemicals are spilled, forests destroyed, employees left in poverty, or communities devastated through plant shutdowns, corporations view these as unimportant side effects outside their area of concern. When the company's stock price dips, that's a disaster."
Oh, sure... because spilling toxic chemicals, mistreating employees, and shutting down plants doesn't impact stock prices at all. Nope. Completely unrelated.
Out of curiosity, who should a corporation be beholden to, if not its owners? Some guy down the street?
posted by toomuchpete at 4:21 PM on June 13, 2008
"When toxic chemicals are spilled, forests destroyed, employees left in poverty, or communities devastated through plant shutdowns, corporations view these as unimportant side effects outside their area of concern. When the company's stock price dips, that's a disaster."
Oh, sure... because spilling toxic chemicals, mistreating employees, and shutting down plants doesn't impact stock prices at all. Nope. Completely unrelated.
Out of curiosity, who should a corporation be beholden to, if not its owners? Some guy down the street?
posted by toomuchpete at 4:21 PM on June 13, 2008
toomuchpete - you need to know the right code word -"stakeholders"
posted by JPD at 4:24 PM on June 13, 2008
posted by JPD at 4:24 PM on June 13, 2008
That's definately one philosophy. Many people subscribe to some form of Corporate Social Responsibility theory. There is no right answer.
posted by blue_beetle at 4:29 PM on June 13, 2008
posted by blue_beetle at 4:29 PM on June 13, 2008
Its law it isn't philosophy. CSR is a wonderful concept I fully support, as do I'm betting the vast majority of investors in public companies. The notion of shareholder rights and CSR are not necessarily at odds with one another.
posted by JPD at 4:36 PM on June 13, 2008
posted by JPD at 4:36 PM on June 13, 2008
In theory, there's a limit to how much a company can "rip you off" because they're usually in competition with other companies, and the consumers will go with whoever offers the best value for money, service, product, environmental or social responsibility etc.
posted by UbuRoivas at 4:49 PM on June 13, 2008
posted by UbuRoivas at 4:49 PM on June 13, 2008
I would recommend anybody interested in this topic to read Thom Hartmann. The big secret that few people understand is that our founders intended corporations in America to work in the best interest of the people. Period. Technically, (and sadly now only a technicality), the public offers a charter to a corporation with the powers of revocation. The truth of corporations and the response to the "in the best interest of the shareholders," lie can be found in the book Unequal Protection by Thom Hartmann. Also, this article is an excellent introduction on how corporate "personhood" is based - on a clerical error! I'm glad you asked this question as it's an opportunity to tell the truth about the corporations that are chartered, for the public good, by the people of this country. We also have the power (unused) to revoke that charter when corporations fail to serve the public interest. You are right, we hear the "in the best interest of shareholders" lie all the time. It is, in fact, unconstitutional. Great question!
posted by Gerard Sorme at 4:52 PM on June 13, 2008 [1 favorite]
posted by Gerard Sorme at 4:52 PM on June 13, 2008 [1 favorite]
It is, in fact, unconstitutional.
In the US, arguably. divabat's in Australia, and a Malaysian citizen, from memory.
But yeh, the history of corporate 'personhood' (dating back to the formation of the East India Company after the Indian mutiny of 1847, if I'm not mistaken) initially included the concept that their legal personhood can be revoked if the company misbehaves.
Adbusters push the line of "death penalties" for criminal corporations a bit, if anybody wants to poke around there.
posted by UbuRoivas at 5:24 PM on June 13, 2008
In the US, arguably. divabat's in Australia, and a Malaysian citizen, from memory.
But yeh, the history of corporate 'personhood' (dating back to the formation of the East India Company after the Indian mutiny of 1847, if I'm not mistaken) initially included the concept that their legal personhood can be revoked if the company misbehaves.
Adbusters push the line of "death penalties" for criminal corporations a bit, if anybody wants to poke around there.
posted by UbuRoivas at 5:24 PM on June 13, 2008
Response by poster: UbuRovias: the people I've heard this from come from Western nations - mainly US, UK, and Australia. Seems to be common with the far-left "socialist revolution!" types.
posted by divabat at 5:30 PM on June 13, 2008
posted by divabat at 5:30 PM on June 13, 2008
Well, I'd put it like this: it's illegal to do illegal things. Ripping off customers usually is illegal. Doing illegal things is contrary to maximizing shareholder value, at least in the long term.
Beyond that, the only ethical thing to do is sell their good at a price the market will bear.
posted by gjc at 6:11 PM on June 13, 2008
Beyond that, the only ethical thing to do is sell their good at a price the market will bear.
posted by gjc at 6:11 PM on June 13, 2008
And it's definitely not illegal (in the criminal sense) to not maximize shareholder value. Any legal troubles that can arise from not running the company properly would be civil matters (lawsuits).
posted by gjc at 6:13 PM on June 13, 2008
posted by gjc at 6:13 PM on June 13, 2008
JPD: For most companies this happens to be "maximize returns on investment' but it could also be "put a sow in every home"
This is a very salient point that so many people are just ignoring. Investors are simply putting their money toward a business plan. If that plan says, "we intend to provide X to society at a profit of $Y", and a majority of shareholders agree with that plan, there's nothing wrong with that.
posted by mkultra at 6:27 PM on June 13, 2008
This is a very salient point that so many people are just ignoring. Investors are simply putting their money toward a business plan. If that plan says, "we intend to provide X to society at a profit of $Y", and a majority of shareholders agree with that plan, there's nothing wrong with that.
posted by mkultra at 6:27 PM on June 13, 2008
consider if a company lowers its production costs (for example, through achieving economies of scale) in order to maximize profits. then the initial quote clearly makes no sense, as the consumer benefits from potentially lower prices. therefore, higher profits do not preclude benefits to the consumer.
posted by whitedoor at 6:54 PM on June 13, 2008
posted by whitedoor at 6:54 PM on June 13, 2008
"And it's definitely not illegal (in the criminal sense) to not maximize shareholder value."
If it's in conflict with the "public interest," - the charters CAN be revoked. In America, this is exactly what the founders expected. See the links above. Incredibly, this is nary mentioned in business schools.
posted by Gerard Sorme at 8:52 PM on June 13, 2008
If it's in conflict with the "public interest," - the charters CAN be revoked. In America, this is exactly what the founders expected. See the links above. Incredibly, this is nary mentioned in business schools.
posted by Gerard Sorme at 8:52 PM on June 13, 2008
Okay, I searched and searched for some better citations, but everything I could find seemed to dance around them. Here's a quote from a recent opinion by Delaware's Supreme Court (Delaware being the state in the U.S. where most corporations are headquartered):
"The good faith required of a corporate fiduciary includes not simply the duties of care and loyalty, in the narrow sense that I have discussed them above, but all actions required by a true faithfulness and devotion to the interests of the corporation and its shareholders. A failure to act in good faith may be shown, for instance, where the fiduciary intentionally acts with a purpose other than that of advancing the best interests of the corporation[emphasis mine], where the fiduciary acts with the intent to violate applicable positive law, or where the fiduciary intentionally fails to act in the face of a known duty to act, demonstrating a conscious disregard for his duties. There may be other examples of bad faith yet to be proven or alleged, but these three are the most salient."
IANAL, but it seems like a couple different things are getting mixed up here.
You asked:
Is it really illegal for a company to act ethically?
I know you're paraphrasing, but obviously not, no.
Then you asked:
According to Carrotmob, "It's illegal for a corporation to behave in a socially responsible way -- unless that socially responsible behavior happens to be identical to the behavior that maximizes profit"... Is this true? Is it really illegal for companies to act ethically unless it makes money?
The second part of the sentence is as important as the first. If corporate directors believe that socially responsible/ethical behavior will have a positive effect on profit/shareholder value, then their fiduciary duty is actually that they should behave in those ways. If they think it'll have a neutral effect, then it's up to them. But yes, if the decision-makers believe the decisions will harm profits/the best interest of the shareholders, and do it anyway, then my understanding is it's illegal. (Again, IANAL!) That doesn't mean they're likely to be sued for it, but theoretically I think they could be.
When shares are bought in a company, they are traded away very quickly, and aren't share prices usually determined in large part by the public perception of the company? Surely shareholders and Boards would notice if the customers are being ripped off or if the companies are acting unethically, and respond negatively to unethical corporate behaviour?
This is a whole 'nother issue entirely, and gets at what "the best interests of the shareholders" really is. Honestly I would love to see share prices plummeting because people believe a company is socially irresponsible. But in actuality I don't think that's the case, there aren't enough shareholders who care more about social responsibility than profit. So if the unethical behavior in question is likely to hurt the company's value in the long term (even if it's good in the short-term), then yes, it would be bad for shareholders; but if the behavior is unethical but likely to continue making a profit, then you'd expect the shareholders o benefit and hence it's the CEO's responsibility to do so.
posted by EmilyClimbs at 9:34 PM on June 13, 2008
"The good faith required of a corporate fiduciary includes not simply the duties of care and loyalty, in the narrow sense that I have discussed them above, but all actions required by a true faithfulness and devotion to the interests of the corporation and its shareholders. A failure to act in good faith may be shown, for instance, where the fiduciary intentionally acts with a purpose other than that of advancing the best interests of the corporation[emphasis mine], where the fiduciary acts with the intent to violate applicable positive law, or where the fiduciary intentionally fails to act in the face of a known duty to act, demonstrating a conscious disregard for his duties. There may be other examples of bad faith yet to be proven or alleged, but these three are the most salient."
IANAL, but it seems like a couple different things are getting mixed up here.
You asked:
Is it really illegal for a company to act ethically?
I know you're paraphrasing, but obviously not, no.
Then you asked:
According to Carrotmob, "It's illegal for a corporation to behave in a socially responsible way -- unless that socially responsible behavior happens to be identical to the behavior that maximizes profit"... Is this true? Is it really illegal for companies to act ethically unless it makes money?
The second part of the sentence is as important as the first. If corporate directors believe that socially responsible/ethical behavior will have a positive effect on profit/shareholder value, then their fiduciary duty is actually that they should behave in those ways. If they think it'll have a neutral effect, then it's up to them. But yes, if the decision-makers believe the decisions will harm profits/the best interest of the shareholders, and do it anyway, then my understanding is it's illegal. (Again, IANAL!) That doesn't mean they're likely to be sued for it, but theoretically I think they could be.
When shares are bought in a company, they are traded away very quickly, and aren't share prices usually determined in large part by the public perception of the company? Surely shareholders and Boards would notice if the customers are being ripped off or if the companies are acting unethically, and respond negatively to unethical corporate behaviour?
This is a whole 'nother issue entirely, and gets at what "the best interests of the shareholders" really is. Honestly I would love to see share prices plummeting because people believe a company is socially irresponsible. But in actuality I don't think that's the case, there aren't enough shareholders who care more about social responsibility than profit. So if the unethical behavior in question is likely to hurt the company's value in the long term (even if it's good in the short-term), then yes, it would be bad for shareholders; but if the behavior is unethical but likely to continue making a profit, then you'd expect the shareholders o benefit and hence it's the CEO's responsibility to do so.
posted by EmilyClimbs at 9:34 PM on June 13, 2008
I can't seem to find any actual legal or economic basis for saying that companies must be unethical to profit.
Economically speaking, the contrary is true. The belief that profits are unethical created 50 years of economic misery in India. Before the reform of 1991, the draconian system of regulation meant you effectively needed license to profit, which the government gave but rarely.
The profit-is-ripoff interpretation -- which is still widespread in India -- comes from thinking of the market as a zero-sum game, which it is not. The power of the free market is contained in the moment where the seller and the buyer say to each other "Thank you - Thank you." Both gain from the trade. More importantly, the advantage to the buyer exists regardless of the profit margin of the seller.
There is a restaurant near work that serves me launch for 8$. I eat there every day because no other 8$ expense brings me as much joy. Perhaps if they refused to make a profit lunch would be 6$. It would be 4$ if the restaurant refused to pay its employees -- to give them their part of the profit. It would be 2$ if the farmers farmed for fun. And so on. But that's neither here nor there. The transaction is advantageous to me at its current price, otherwise I would not enter into it.
Even though the restaurant is clearly profitable, I don't think anyone would call it a rip off (the food is excellent). To define ripoff, you have to look elsewhere.
There are companies that maximize their profit by amplifying market failures. Stadiums refuse outside food so visitor are locked-in to the concessions. Music producers organized an oligopoly so they can go price-fixing. Users of DRM undermine libraries and secondhand bookstores. By doing this, they deny society of the advantages of a free market. It is unethical, and often illegal. The market distortions observed in these cases are the real ripoff.
India's confusion between profits and market failures had grave consequences. Interestingly, the United States has the same confusion, but backward. By celebrating profit as a force of good, and refusing to regulate, they are giving free rein to market failures. It caused Enron, the subprime collapse, of the sorry state of its cell phone market when compared to Europe or Japan.
It's illegal for a corporation to behave in a socially responsible way -- unless that socially responsible behavior happens to be identical to the behavior that maximizes profit.
It is certainly legal for a company to declare in their charter that their objective is not profit maximization, so long as the stockholders know what they are getting into. In practice this hardly matters. Most companies' charter promises to maximize profit, and so they are required act accordingly. Corporate Social Responsibility policies are common because they coincide with profits. Badly behaved companies lose their market share once their behavior is uncovered to the public. In the imaginary ideal market, with perfect information, the backlash is immediate. (Thus one strategy is to regulate towards more information.)
I believe that on the whole humans are a constructive force, and would rather not oppress each other when given the chance. I would rather pay more for coffee than have it processed by children. The arrival of the Fair Trade label, despite all its shortcomings, gave me a way to express that intent. Unfortunately, the finance world has no such mechanism. I own stocks through my investments in mutual funds. I may be unhappy with their profit maximization objective, but I am voiceless.
So, yes, the original criticism of corporations stands. While some company are founded by dangerous individuals, and I do not need external help to misbehave, the legal structure of the stock market divides us, and sometimes forces respectable people to behave against their ethics.
posted by gmarceau at 3:03 AM on June 14, 2008
Economically speaking, the contrary is true. The belief that profits are unethical created 50 years of economic misery in India. Before the reform of 1991, the draconian system of regulation meant you effectively needed license to profit, which the government gave but rarely.
The profit-is-ripoff interpretation -- which is still widespread in India -- comes from thinking of the market as a zero-sum game, which it is not. The power of the free market is contained in the moment where the seller and the buyer say to each other "Thank you - Thank you." Both gain from the trade. More importantly, the advantage to the buyer exists regardless of the profit margin of the seller.
There is a restaurant near work that serves me launch for 8$. I eat there every day because no other 8$ expense brings me as much joy. Perhaps if they refused to make a profit lunch would be 6$. It would be 4$ if the restaurant refused to pay its employees -- to give them their part of the profit. It would be 2$ if the farmers farmed for fun. And so on. But that's neither here nor there. The transaction is advantageous to me at its current price, otherwise I would not enter into it.
Even though the restaurant is clearly profitable, I don't think anyone would call it a rip off (the food is excellent). To define ripoff, you have to look elsewhere.
There are companies that maximize their profit by amplifying market failures. Stadiums refuse outside food so visitor are locked-in to the concessions. Music producers organized an oligopoly so they can go price-fixing. Users of DRM undermine libraries and secondhand bookstores. By doing this, they deny society of the advantages of a free market. It is unethical, and often illegal. The market distortions observed in these cases are the real ripoff.
India's confusion between profits and market failures had grave consequences. Interestingly, the United States has the same confusion, but backward. By celebrating profit as a force of good, and refusing to regulate, they are giving free rein to market failures. It caused Enron, the subprime collapse, of the sorry state of its cell phone market when compared to Europe or Japan.
It's illegal for a corporation to behave in a socially responsible way -- unless that socially responsible behavior happens to be identical to the behavior that maximizes profit.
It is certainly legal for a company to declare in their charter that their objective is not profit maximization, so long as the stockholders know what they are getting into. In practice this hardly matters. Most companies' charter promises to maximize profit, and so they are required act accordingly. Corporate Social Responsibility policies are common because they coincide with profits. Badly behaved companies lose their market share once their behavior is uncovered to the public. In the imaginary ideal market, with perfect information, the backlash is immediate. (Thus one strategy is to regulate towards more information.)
I believe that on the whole humans are a constructive force, and would rather not oppress each other when given the chance. I would rather pay more for coffee than have it processed by children. The arrival of the Fair Trade label, despite all its shortcomings, gave me a way to express that intent. Unfortunately, the finance world has no such mechanism. I own stocks through my investments in mutual funds. I may be unhappy with their profit maximization objective, but I am voiceless.
So, yes, the original criticism of corporations stands. While some company are founded by dangerous individuals, and I do not need external help to misbehave, the legal structure of the stock market divides us, and sometimes forces respectable people to behave against their ethics.
posted by gmarceau at 3:03 AM on June 14, 2008
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posted by J-Train at 3:31 PM on June 13, 2008 [1 favorite]