Building Respected Companies

I was pleasantly surprised by Jordi Canals's book Building Respected Companies: Rethinking Business Leadership and the Purpose of the Firm - most authors who address corporate ethics seem to take the perspective that a corporation is the means to other ends, primarily as a milk-cow to provide funding to various social causes that are irrelevant and sometimes hostile to the interests of the firm itself or, at the opposite end of the spectrum, that the firm is merely a money mill to generate returns for the stockholders by any means possible. Canals took a different and surprisingly rational approach.

His principle thesis was that a business is an organization that is created with a purpose in mind, which is generally expressed as a mission to sell goods and services to the customers. Even if it does nothing more to demonstrate its social responsibility, a firm is creating a benefit for society, as the customers who purchase the goods or services of a firm derive some benefit, as evidenced by their willingness to pay for it.

In that way, a business is likened to most other organizations: a nonprofit or governmental organization delivers some benefit, usually a service than a good, to its beneficiaries - the main difference is that beneficiaries of a non-profit or government organization do not value the good with which they are provided enough to voluntarily pay for it - but they'll gladly enjoy the benefits if someone else is made to pay the bill. (Conceded: there's some argument that the beneficiaries "need" but cannot afford to pay - which is sometimes valid, though far less often than some purport.)

A second segment of society that is served by firms is its employees: in the salary they draw, the immediate non-cash benefits they receive, and the personal growth they derive from their profession. There's the sense that a firm can profit by exploiting its workers, but firms that take a long-range perspective must provide adequate compensation and opportunities for development to retain their personnel in a competitive environment - or else a competitor who sees their value will hire them away.

It's interesting that the importance of employees is considered at least to some extent by classical economists such as Adam Smith, who indicated that industry creates goods by leveraging labor and capital (they also separate "land," but it's always seemed an odd distinction, as land is just a kind of capital) - but the current-day perspective of companies seems to grant an inordinate amount of the reward (profit) to the suppliers of capital (investors) and undercompensate the suppliers of labor (employees). But I suppose that's just the effect of the present economic situation, where there is a glut of supply and a dearth of demand in the labor market. When the situation is reversed, and labor is in short supply, firms are brought to the reluctant admission that labor is a valuable input.

On the topic of shareholders, this is the third segment of society that companies serve, by providing a fair return on their investment, supplying the requisite capital without which the firm would not exist. Canals didn't explore the needs of this group in much detail, as firms already seem to recognize and over-emphasize the degree to which investors deserve to enjoy the financial rewards of the firm, and quite often support their interests to the detriment of other stakeholders whose claim to a share of the reward is just as valid.

But there is a significant point to be made about the nature of investment in the present age: it seems that many people still cling to the notion of investment being the realm of individuals who are already quite wealthy and were simply seeking to become even more wealthy, but participation in investing has become far more widespread: the vast majority of investment funds in these days comes not from a small handful of billionaires, but from the great multitude of middle-class workers who each have a small stake in pension plans and retirement accounts that, in aggregate, amount to trillions of dollars. This, itself, constitutes a problem because the individual with a few thousand dollars in a retirement fund is far more callus and indifferent to the firms in which he invests, and far more interested only in his financial returns, than the plutocrat who own a sufficiently large propotion of a firm to feel personal interest in and accountability for its behavior.

The last, and least important segment of society that companies service is consequently the one that is most often the very same that those who misunderstand ethics believe that the firm should primarily serve: the community at large. Canals's take is that most philanthropy by business is a dodge - a firm that conspicuously donates to charity is likened to a pimp who donates to the church: they give some small fraction of what they have extorted from others to charitable causes in order to appear to be magnanimous, and it's disappointing how readily the public falls for it.

That's not to say that companies have no interest in being charitable, just no moral obligation to provide financial support to organizations that are indifferent or hostile to their own interests. For a firm that operates in a given community to donate to educational establishments is well in line with its purpose - it creates more knowledgeable customers and more capable workers, some of who will buy from and work for the firm itself and contribute to its primarily social function: to render a good or service that delivers a benefit to its customers.

It's been a long meditation and has likely only scratched the surface of the book, but it's a worthwhile read and likely the most reasonable and rational approach to corporate ethics I've read in many years - much more to come on this topic, I expect.