Non-Evil Firms

Are corporations intrinsically evil because they must by law only maximize profits? I don’t think so, but if you do, you might prefer to do business with a benefit corporation whose goals you respect. By law, a benefit firm must first try to achieve its declared goals:

Fifteen benefit corporations have been created in the three months since new [Maryland] legislation, signed into law in April, took effect. … At its core, benefit corporations blend the altruism of nonprofits with the business sensibilities of for-profit companies. These hybrid entities pay taxes and can have shareholders, without the risk of being sued for not maximizing profits. Companies can consider the needs of customers, workers, the community or environment and be well within their legal right.

A benefit corporation, for instance, could choose to buy from local vendors at a higher cost to reduce its carbon footprint, much as the Big Bad Woof does. The company, as a part of the incorporation, is required to file an annual report on contributions to the goals set forth in the charter and submit to an audit by an independent third party. … There are no tax breaks or procurement incentives for benefit corporations in Maryland, but the classification offers a competitive advantage … A 2010 Cone study … [found] 61 percent of consumers surveyed had purchased a product because of the company’s long-term commitment to a cause or issue. …

Shortly after Maryland passed the benefit corporation legislation last year, Vermont got in on the act. Several other states, including New York and California, are considering similar bills. New York is one of 31 states with a “corporate constituency statute,” which allows for the consideration of non-financial interests but lacks the full protection of the new law. (more)

As Mr. Burns would say, “Excellent.”

So if benefit firms became more common, would people still habitually think them evil?  Would it matter much?

GD Star Rating
loading...
Tagged as: ,
Trackback URL:
  • http://www.gwern.net/ gwern

    > So if benefit firms became more common, would people still habitually think them evil?

    Do people consider charities evil? They have many properties in common with corporations. (Actually, aren’t most charities corporations?)

    If they don’t, it would be very strange if they considered benefit corporations to be as evil as regular corporations.

  • Desertopa

    One outcome that strikes me as plausible is that as benefit corporations gain more recognition, the public may gain an even lower opinion of regular corporations than they already had, for not being benefit corporations given the option.

    • JasonSL

      This reminds me of “covenant marriages”. The option to have a harder-to-dissolve marriage makes it so that one can no longer have a standard marriage by default. This is also similar to J. David Velleman’s argument against a “right to die” — if a terminally ill person is allowed euthanasia, then he or she must justify continue staying alive.

      While I agree with Robin that corporations are not intrinsically evil, they allow otherwise non-evil persons to engage in evil more easily, by making the evil farther away and bureaucratizing the evil. Changing the rules so that those who wish to make it less easy for them to do evil (or, perhaps, easier for them to do countervailing good) can do so seems to me eminently praiseworthy.

  • Scott H

    Or, as Dr. Spock would say, “Fascinating”. My observation is that this has already been going on for sometime without state sanction. Morals have always played a role in consumer decisions. This will be an economists dream as it will become easier to measure the tradeoffs between money and morality.

  • Robert Koslover

    Many corporations, without calling themselves “benefit” corporations, have long histories of generously supporting charities of many kinds, sponsoring food banks, school clubs, sports, theater arts, bands, athletes, offering scholarships, etc. Just think of how many charitable events you have witnessed where one or more corporate names are cited as matching the contributions. Or how many school theater productions you have attended where the program lists a local generous business (bank, supermarket, department store, etc.) that provided funds for the props, etc.

    • Desertopa

      This is true, but corporations also have a long history of cultivating the appearance of altruism for the sake of their reputations while not living up to the spirit. The practice of greenwashing is a particularly well known example. When some companies are allowed to prioritize social benefits over profit maximization, and some are not, those that are not stand to look less honest in comparison. The public might start to demand that companies which purport to uphold good social standards become benefit corporations as a sign of sincerity.

      I suspect it’s more likely that the public on the whole will not take a great deal of active interest in which corporations are benefit corporations and which are not though.

  • fburnaby

    Does anyone more familiar with the legislation know how easy it would be to incorporate with goals such as “spread the word of the lord”, “provide safe access to assisted suicide technologies”, or other controversial goals?

  • Al

    Why do you mean “Americans” by saying “people”? Ask the majority of the globe population – let’s say the Chinese what they think of discriminating them as sellers while preferring other values than profit. ;>

  • fburnaby

    It seems that this brings in an interesting potential for competition between consumers’ near and far values.

    Presumably, most decisions made by consumers are “near”. “Do I want product X, ignoring all possible externalities associated with the purchase? Yes/No”.

    Would a consumer be more likely to consider their far-mode values in a market of benefit corps? It feels like I would begin asking myself “Do I want X, and do I want its maker to try and optimize for goal Y?”

    On the other hand, it seems like brand loyalty is already a heavily used method of signaling. Maybe my sympathies wouldn’t be swayed by a benefit corp much more than by a good marketing campaign that exploits the same far-mode values.

  • RobertB

    What’s confusing about this is that the idea that corporations are under a legal compulsion to maximize shareholder profits is basically a polite fiction. Under something called the business judgment rule, decisions of directors cannot be judicially challenged unless they are self-dealing or completely irrational, and the second standard is never met unless there is no deliberative process whatsoever. The rules are tighter in certain acquisition contexts, but there’s no question that corporations can give to charity, reduce their carbon footprint, or shop locally, even if it doesn’t result in immediate shareholder returns.

    The real reason that corporations have a ruthless focus on efficiency is that management compensation is highly dependent on shareholder returns. The reason for that is partially tax and partially because big shareholders started pushing corporations to be more responsive.

    A benefit corporation that compensates its officer in the same way (or that is closely-held) should be basically indistinguishable from a normal corporation. Any corporation that is large enough to not be private is probably constrained by tax to compensating its officer with performance pay. So, I predict little to no actual change. We’ll see if the public falls for it though.

    • Mercy

      Right, and companies like Cafe Direct will be/claim to be careful when drawing up their articles of association, using golden shares or similar, to prevent their being forced to maximize profits. These policies sound like attempts to make greenwashing and so on easier.

  • gregorylent

    work environment alone is enough to classify corporations as evil.

  • Proper Dave

    Why would people not differentiate… They may still think maximizing for-profits is evil, this may actually make it worse as more “good examples” enter the market. Also there is a power factor, this is obvious because small firms is fairly powerless thus by definition cannot do much evil.
    Prime example would be Google of course, you don’t hear the “don’t be evil” philosophy much nowadays.
    Where did you get the impression that the reputation of one group would change the reputation of another (with a bad one) significantly. I don’t think Mr. Burns will be saying excellent…

  • anon

    IIRC, most if not all corporations prior to the mid-19th century had to include a mission statement in their corporate charter, and were subsequently required to comply with that statement. This practice was abandoned as corporate law became more permissive, but now it may be coming back, if only as an alternative to the modern corporate form.

  • Pingback: Linkblogging For 30/01/11 « Sci-Ence! Justice Leak!

  • http://daedalus2u.blogspot.com/ daedalus2u

    As someone who is pretty liberal, I don’t think of corporations or profits as “evil” per se, what I think is evil is the externalization of costs. I think that is evil no matter who does it. I think it is especially evil when it is done “inefficiently”, where an entity externalizes a small cost by passing that problem onto another entity which must pay a large cost to deal with it.

    Moving costs around is close to zero sum, or negative sum. Very rarely is it positive sum unless it is done voluntarily. I appreciate that most of what present CEOs try to do is externalize their costs. That includes lobbying to complicate the tax code to give themselves tax breaks that others must pay for. Others must also pay for greater accounting due to the complexities of the tax code. The first entity has reduced their taxes, but that reduction must be made up elsewhere, and now everyone has to deal with a more complicated tax code. A negative sum solution.

    At one time, dumping waste into the nearest river was an acceptable way of dealing with it. It was one of the cheapest ways because the only “cost” was a pipe to the river. The “cost” of a polluted environment wasn’t accounted for, so everyone could pretend it didn’t exist. Until it started showing up in your water supply, but then those who mattered could afford to buy bottled water and so could still pretend it didn’t exist.

    This is the dark side of “competition” that doesn’t get acknowledged and dealt with. Much of what passes for “competition” is a race to externalize costs, in effect privatizing gains and socializing loses. Why the proponents of “free markets” don’t acknowledge and deal with this is why many people do not trust “free market” proponents. To them, markets are only “free”, when they are “free” to privatize gains and socialize loses. In any other context that would be called “welfare”.

  • http://entitledtoanopinion.wordpress.com TGGP

    I’m going to guess that nothing much will come of this.

    daedalus2u, you mention distorting the tax code. What are some other large externalities you see CEOs focusing on? You can answer either in order of interest to the general public or any particular CEO.

  • http://daedalus2u.blogspot.com/ daedalus2u

    I mentioned the tax code and pollution. Not in any particular order.

    Not following regulations externalizes the cost of following those regulations. Manipulating (lobbying) the regulatory system to result in weak regulations that don’t prevent harm from pollution or the company’s products does the same thing.

    Lobbying the government to spend money on things that enrich certain companies. TARP for example, deregulation of energy (what preceded Enron). Military spending, for example Haliburton’s no-bid contracts.

    The tobacco companies lied about the health effects of their products and that their products were addictive. They externalized the costs of the adverse effects of their products.

    Subsidies (such as farm subsidies) count too.

    In the US health insurance industry there is the practice of dumping people when they get sick rather than covering their health care expenses. The US government does that too, especially with veterans.

    Deceptive advertising, rather than delivering the product value the buyer expects, the buyer gets something less valuable. Hidden fees for example.

    Paying wages and benefits so low that employees are forced to rely on Medicaid and food stamps.

    http://www.daytondailynews.com/news/ohio-news/employees-of-big-companies-fill-ohios-medicaid-food-stamp-rolls-report-says-323224.html

    Raiding employee pension funds, or under funding pension funds.

    • http://entitledtoanopinion.wordpress.com TGGP

      Your low pay example is probably the worst. There is an externality from people using public funds, but the employer did not actually cause that. True, they didn’t lift the employees above the eligibility level. Neither did you or I. If the company instead chose not to employ those people (just and you and I don’t employ them) it would not reduce any externalities. Katja put it better than I could.

      I’m not actually sure whether screwing over someone you have a contractual relationship counts as an externality in the official economics sense, though the consequences intuitively seem the same. By making people wary of entering into contracts for fear of getting screwed over and producing deadweight losses of gains to trade, I suppose it could be fit into the standard third-party externality framework. Since Robin is the resident economist here, I’ll ask for his ruling from the chair.

  • dave

    Do these corporations still have boards of directors elected by shareholders with the power to select decision making executives?

    If so the choices the company makes will be guided by the wishes of the shareholders, just like they are for every single company already. If shareholders demand profit maximization, they get it. If they don’t demand it, they won’t get it.

    What’s different?

    • Jordan

      Nothing’s different; this just makes it not illegal for the management to do the right thing even with the knowledge that it won’t maximize profits. It’s a legal loophole that permits corporations to not be evil at will.

  • http://daedalus2u.blogspot.com/ daedalus2u

    It is not the maximization of profit that bothers me, it is the externalization of costs.

    Who benefits from the enforcement of property rights by the legal system, the justice system, the legislative system, and the police system? It seems to me that the people with the most property benefit the most from the enforcement of the arbitrary system of property rights that allows them to control so much property. It seems to me that the people with the most property should pay the most for the system that enforces property rights.

    Just because shareholders want something and can find a CEO that is willing to do it, doesn’t make it an acceptable thing to do. If shareholders demanded the CEO take hostages and hold them for ransom, should the CEO do it? What if the shareholders demanded the CEO sell to other companies that take hostages and hold them for ransom? Taking hostages and holding them for ransom is viable business plan in Somalia. They run it like a business, raise money, sell shares, buy weapons, hijack ships, take hostages, get ransom, pay off shareholders. Just filling an unmet “need”.

    http://en.wikipedia.org/wiki/Piracy_in_Somalia#Weaponry_and_funding

    The pirates of Somalia do purchase weapons and other supplies, who sells to them? Who sells to those suppliers?

    How is what the pirates of Somalia are doing different than what Madoff did or what Enron did, or what the banks that were “too big to fail” did?

    • JasonSL

      Daedalus,

      I’m sympathetic to the distinction you wish to draw between on the one hand generating social value and trying capturing as much of that value for oneself and on the other hand the ill that comes from one’s enterprises, but I have a hard time maintaining this distinction so long as social ill and social good are commensurable.

      A corporation may create a large amount of social good, and internalize a share of that less than the social ill the corporation externalizes. The corporation, in this case, is improving society’s Kaldor-Hicks efficiency. I would go a step farther and impose Pigovian taxes or other intervention to compensate those whom the corporation harms.

      Bernie Madoff externalized a large amount of ill, but his entire enterprise was a negative-utility one. What about positive-utility enterprises that nonetheless have nonzero negative externatlities?

      On the other hand, our moral intuition has problems with people who make lots of money, but, even if they do so such that they impose zero negative externalities or fully compensate those whom they harm in the course of making money, then keep all the money for themselves and don’t “give back” to the society that allowed them to make so much money. It certainly reflects a poverty of spirit as well as great disutility (the extra million bucks for the billionaire could much better serve utility being split into a hundred parts with each part given to someone indigent). The policy reflection of this moral intuition would be high tax rates on the top brackets, and deductions for charitable donations.

      • JasonSL

        Me: A corporation may create a large amount of social good, and internalize a share of that less than the social ill the corporation externalizes.

        What I meant to say was that the corporation may leave uninternalized a greater amount of social good than the social ill it externalizes.

  • Willem

    I think the bias against ‘big firms’ is too strong to (ever) let the stated or even realized goals of firms come into the equation for popularity ratings among general public.

    In my petite country of the Netherlands many insurers are mutuals, who basically give most of the profits back to the insured. Still the general consensus is that insurers are evil, only to maximize profits and minimize compensation.

  • http://monex.to/ Monex

    For some people the thought of a corporation working to help benefit society might seem like an oxymoron. Businesses large companies in particular are sometimes considered soulless slaves striving to maximize profits for the benefit of their investors alone.

  • Pingback: Weekly Roundup 113: A Curated Linkfest For The Smartest People On The Web | SimoleonSense