Corporations will do less for society if they are mandated to do more

Corporations will do less for society if they are mandated to do more
© Aaron Schwartz

Treasury Secretary Steve Mnuchin recently criticized 181 CEOs of leading corporations, including Apple, Amazon and Walmart, who signed a statement redefining the purpose of a corporation.

The statement identifies corporate purpose as valuing customers, investing in employees, dealing fairly with suppliers and supporting communities. This is a dramatic turnabout from the 1997 corporate statement issued by the same group, which defined maximizing shareholder value as the sole purpose of corporations.

Mnuchin said he wouldn’t have signed the new statement, “because there is no simple answer” regarding the purpose of a corporation.

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But there is a simple answer, one that has worked well since corporations have existed. Corporations answer to their shareholders. Period. This corporate purpose is as relevant and important today as ever.  

That purpose, however, is no longer politically acceptable, which is why these CEOs created this statement. It is the predictable response of corporations trying to get out in front of criticisms that blame corporations for socioeconomic problems ranging from wealth and income inequality to the opioid crisis.

By voluntarily repurposing the corporate mission, these CEOs are trying to avoid potentially damaging legislation, including Elizabeth WarrenElizabeth Ann WarrenTrump says his Doral resort will no longer host G-7 after backlash Ocasio-Cortez: Sanders' heart attack was a 'gut check' moment Ocasio-Cortez tweets endorsement of Sanders MORE’s Accountable Capitalism Act, which would require corporations to provide 40 percent of board seats to candidates elected by workers, and that corporations must provide a “public benefit” to stakeholders other than shareholders.

Imposing social responsibility on corporations sounds good. But it will deliver much less social value than if corporations focused solely on answering to their shareholders.

One reason is that corporations are already doing what is in the repurposing statement.  These companies are indeed investing in their workers, valuing their suppliers and supporting communities, even as they focus foremost on maximizing shareholder value.

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That’s because investments in workers, supplier relationships and communities is in corporate best interest. This is a fundamental feature of a market economy that is completely missed by politicians and others who want to have a say in what corporations do.

Corporations invest in their workers and create new jobs because it is profitable for them to do so. There are thousands of workers who would love to be employed at one of the corporations whose CEOs signed this statement because they invest in their workers and treat them well. 

Investments benefit not just those who make them. Last year, Apple announced it would be investing $30 billion in capital expenditures over the next five years, which will create jobs and significantly raise their workers’ productivity and compensation.

Regarding community support, these corporations are making enormous investments in their communities. In Silicon Valley, home to Apple, Google and other tech giants, housing is extremely expensive because local governments have not approved new housing construction to keep up with increased demand. The median Silicon Valley home is about $1.2 million. Rents are so expensive that even workers with six figure salaries are living in vans.

Silicon Valley’s tech giants are taking the California Bay Area’s housing crisis in their own hands by purchasing land for building homes and retail space. Google, which revolutionized how we conduct internet searches, will soon be the Bay Area’s biggest developer, with plans to invest $1 billion to help build 20,000 new homes.

While land development and construction fall far outside Google’s business model, it is profitable for them to take the lead on major housing and construction projects because local governments have failed their responsibilities.

But these investments are just a drop in the bucket of the social value that corporations create for us. Today’s corporations create enormous value through remarkable innovations that give birth to new technologies and new products and services.

Society is best off when corporations do what they do best, which is to create, innovate and take risks in the hope of earning profits for their shareholders. This process has literally transformed the way we live. Imagine life without Apple, Microsoft, Walmart, Costco, Amazon or FedEx.

There is no doubt that their shareholders have prospered. But shareholder value is tiny compared to the value that these companies create for society.

The most remarkable aspect of a market economy is that for-profit creations can unintentionally change hundreds of million lives. Take the smart phone, which was created by Apple, one of the most profitable companies in the world.

Apple never set out to raise millions of Africans out of poverty. But the smart phone has done just that. In 2000, the cell phone was virtually unknown in Africa. Today, more than 700 million Africans have reasonably reliable phone service where landlines were either nonexistent or nonworking.

Africans now communicate over long distances. They conduct banking services where few have a bank account and even fewer have a credit card. They become informed about world events and become politically active. They learn how to manage their farms, increase yields and protect the environment. The World Bank calls the introduction of the cell phone “the most significant revolution in . . . how [African] people live their daily life.”

We want corporations to continue to take risks and create transformative products and technologies. It is a mistake to allow non-shareholders to direct what corporations do. The “shareholder only” model is not perfect, but it has compiled an amazing historical record. Departing from this would almost certainly deliver much less to society.

Lee E. Ohanian is a professor of economics and director of the Ettinger Family Program in Macroeconomic Research at UCLA. He's also a senior fellow at the Hoover Institution at Stanford University.