The Economy by Peter R. Crabb: Profitable businesses contribute to the social good of society

PETER R. CRABB, professor of finance and economics at Northwest Nazarene University in Nampa

PETER R. CRABB, professor of finance and economics at Northwest Nazarene University in NampaJune 25, 2013 

0129 local Peter Crabb

Our economy and society has many needs. But corporations often take a lot of flak when they make profits fulfilling these needs.

To overcome such stigma, a new type of corporation is gaining popularity: the benefit corporation. These new legal entities are designed with the hope of creating value for society and not just the owners of the corporations.

Maryland was the first U.S. state to adopt this new legal standing, and at least 12 states have followed its lead. Managers in benefit corporations will have some protection against shareholder lawsuits if they don't make a profit and lose their owners' capital.

As long as the company pursues a general public benefit, which is loosely defined as "a material positive impact on society or the environment," capital can be spent as the managers wish.

But having an impact on society is what business is already about. All businesses, mom-and-pop shops and big corporations alike exist to meet needs in society.

Every new business arises from some demand in society. Every business stays in business by meeting a need. Every business manager meets his or her responsibility to the owners by earning a profit while meeting that need.

In 1970, Nobel Prize-winning economist Milton Friedman wrote a powerful op-ed on the issue of corporate responsibility for The New York Times entitled "The Social Responsibility of Business is to Increase its Profits."

Friedman argued that all corporations promoting a social responsibility for business were actually "preaching pure and unadulterated socialism" and that such talk undermines "the basis of a free society."

This question really concerns only corporations, as individuals or sole proprietors are free to use their assets and resources any way they see fit. The new benefit corporations, however, allow some corporate managers to use other people's money for both profitable and unprofitable ventures.

The establishment of a corporation, a separate legal entity from its individual owners, creates what economists call a principal-agent problem. All employees of the corporation (the agents) are responsible to operate the business in accordance with the desires of the owners (the principals). Sometimes these two parties don't have the same goals, and employees may act in their own, personal interest.

If the principal-agent problem is going to be resolved in the new benefit corporations, the social objectives of these ventures will need to be true and real. That is, they cannot be simply window dressing or greenwashing, a term coined by environmentalist Jay Westervelt in the 1980s. If the need is true and real it will also be profitable. As professor Freidman wrote in 1970, "in practice, the doctrine of social responsibility is frequently a cloak for actions that are justified on other grounds rather than a reason for those actions."

The best way to ensure the principal-agent problem doesn't arise is for the corporation to simply make money. Every business with honest people doing honest work serves its social responsibility. To quote Friedman again, "there is one and only one social responsibility of business - to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud."

All businesses are social businesses. For our economy and society to do well, we don't need a new type of corporation - just good business people honestly seeking profits.

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prcrabb@nnu.edu

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