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Profits Count More Than Ever, Not Corporate Virtue-Signaling

justin trudeau

justin trudeau

There has been much discussion, as the economy begins to reopen, as to what the role of businesses under the “new normal” should be.

A recent article in Fortune magazine predicts the public will be more demanding of corporations to use their resources “for the benefit of society at large.”

An Ernst & Young report similarly notes there will be increased public pressure on companies “to proactively address societal challenges, from income inequality to climate change.”

Much of the corporate world has already shifted towards this “stakeholder capitalism” model. The pandemic has clearly accelerated the shift.

Seizing on this changing perception of the role of corporations, the Trudeau government is using its “Large Employer Emergency Financing Facility” program to browbeat businesses into declaring their support for “environmental sustainability and national climate goals” in order to access a bridge loan from the federal government and survive the lockdown-created recession.

Businesses shouldn’t just be doing business, apparently; it’s also their responsibility to support the federal government’s climate agenda.

The main problem with tasking corporations with addressing climate change — or for that matter income inequality, community development, or any other item on a long list of public issues — is that corporations already have an important responsibility.

Taking on additional ones will detract from the purpose for which they exist.

The real social responsibility of corporations was identified most famously by Milton Friedman 50 years ago in an essay in The New York Times Magazine, with the admirably succinct title: “The Social Responsibility of Business Is to Increase Its Profits.”

Nothing since has altered this fundamental responsibility of business. Corporations are still owned by shareholders. It is still the interests of those shareholders — and they are generally interested in maximizing profits — that corporations should serve.

There are also compelling practical reasons, which have only been strengthened by the current economic crisis, for businesses to be responsible for increasing profits rather than achieving collateral objectives.

With massive declines in employment and income in recent months, a speedy and robust economic recovery is urgently needed. The recovery must and will be led by private-sector hiring and capital investment, which are what enable productive activity.

But without profits, hiring and investment cannot be sustained. With the economy in its worst shape since the 1930s, profits are therefore now more important than ever. Corporations need to focus on their bottom lines.

If they are distracted by collateral activities like reversing climate change, the economic recovery will be weakened and delayed.

It is by pursuing profits that corporations ultimately benefit the wider society. Earning profits allows them to deliver financial returns to investors, productive jobs to workers, and goods and services that enrich consumers’ lives.

The Friedman doctrine on the responsibility of businesses was influenced by Adam Smith.

According to Smith, a person in a capitalist economy who puts his capital to work intending his own gain is “led by an invisible hand to promote an end which was no part of his intention … By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it.”

By contrast, Smith continued, “I have never known much good done by those who affected to trade for the public good.”

The first part of Smith’s quote highlights the fact that corporations must do good in order to earn profits.

The idea that they should instead focus on “social” goals to achieve good mistakenly assumes that profit-maximizing corporations ordinarily are operated rapaciously, to the detriment of workers and consumers.

The reality is that competition renders any such abuse unsustainable and unprofitable. Businesses must deal fairly with both employees and customers or risk losing them to competing firms.

What of the firms that do affect to trade for the public good? The result of their efforts is often to waste resources.

People who run telecommunications companies, for instance, presumably are experts in telecommunications.

But there is no reason to suppose they have special knowledge about climate change, income inequality, community development, or any of the other issues activists might want them to address.

Holding corporations responsible for solving climate change is like hiring a plumber to complete your tax returns or an accountant to repair your sink. The task assigned does not match the skill or occupation.

Efforts and resources will be wasted — which is the last thing we should want when trying to recover from the worst economic downturn in generations.

Read more at Financial Post

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