In a comment on my latest TCS column on the shareholder wealth maximization norm, Bruce Kesler writes:
I’ve written many times about the matter of imposing restraints on U.S. hi-tech companies selling Internet technology to China, Vietnam, and MidEast states that use it to repress free speech and dissent. Aside from my concern for human rights generally, my emphasis is that:
* This behavior undermines U.S. foreign policy to encourage the growth of democracy abroad for a more benign environment;
* This behavior goes beyond undermining the general U.S. foreign policy, but abets campaigns against the U.S. and the West, often incited by these buying states – such as the current “cartoon” intifada -- by furthering one-sided information being available to their populace; and
* The resentments bred among future leaders abroad may well undermine the long-range economic success of these firms....
I do not argue for changing the “basic rules of corporate governance,” heaven forbid. I do argue that there are rare times when there are other “basic rules,” like not undermining U.S. foreign policy, that must come into play. This is one of those times.
There are basically two ways for a democratic capitalist society to regulating corporate behavior. First, you can do so directly by taxing or regulating corporate behavior you don't like. Second, you can authorize corporate managers to be "socially responsible." Under current law, while management has a lot of discretion as to means, the end goal of corporate governance must be the maximization of shareholder wealth within the constraints of law. Some folks, however, want to give management an open-ended authorization (and, in some cases, a mandate) to go out and be socially resposible.
The gist of my TCS column is that the former is preferable, as Bruce recognized in an update to his post. As I explained in a comment to an earlier blog post:
The question is NOT whether "business can or should be charged with some level of effort to repay that contribution society has made." Of course business can. And business is so charged. It's called taxes. And regulation. My argument is that so long as management operates within the bounds of law, both business AND society are well served by a regime in which the legal fiduciary duties of directors require them to maximize shareholder wealth. You want business to internalize certain costs, then pass a law. But don't change the rules governing whose interests management pursues.
There are two problems with pursuing social policy through a general mandate to management to be "socially responsible." First, as I explained in the TCS column, managers who are responsible to every social interest end up being accountable to none:
... absent the clear standard provided by the shareholder wealth maximization norm, the board of directors will be tempted to allow their personal self-interest to dominate their decision making. Put another way, directors who are allowed to consider everybody's interests end up being accountable to no one.
Second, relying on managers to be socially responsible is risky. It only works if managers share your definition of social responsibly behavior. Despite the criticism most liberals direct at corporate elites, my guess is that on a host of social issues management elite views of what is socially responsible would be closer to those of Hillary Clinton than that of Bruce or myself.
Consider, for example, what I wrote about John Kerry and Warren Buffett back in May 2004:
John Kerry is wooing corporate CEOs (whom he was calling Benedict Arnolds not so long ago, albeit while taking their money) and with some success:
Mr. Kerry disclosed that he has launched a major push to enlist corporate supporters and touted two stars he has landed so far: investment sage Warren Buffett and technology executive Steve Jobs, both of whom will be advisers, the senator said.
Why does this not surprise me? Consider what Christopher Lasch had to say about elites, including business elites like Buffett and Jobs:
[T]he new elites, the professional classes in particular, regard the masses with mingled scorn and apprehension. In the United States, “Middle America”—a term that has both geographical and social implications—has come to symbolize everything that stands in the way of progress: “family values,” mindless patriotism, religious fundamentalism, racism, homophobia, retrograde views of women. (The Revolt of the Elites: And the Betrayal of Democracy at 28.)
As far as the elites are concerned, Middle America and the Republican Party are synonymous. Given the trend for religious voters to lean Republican, while secular voters lean Democrat, moreover, Lasch's comments about elite attitudes toward religion are particularly telling:
A skeptical, iconoclastic state of mind is one of the distinguishing characteristics of the knowledge classes. ... The elites’ attitude to religion ranges from indifference to active hostility. (Id. at 215.)
What I'd like for folks - like my friend Tom Smith - who think that "A corporation is no more entitled than you or I to do something wicked, just because it is necessary to maximize profits" would operationalize that claim while also preventing management from using social responsibility arguments as a camoflauge for self-interested behavior and ensuring that management's definition of socially responsible conduct reflects majoritarian values. Until somebody does so, and no one has to date, I'll stick with shareholder wealth maximization.
