07 May 2014

Social goals: neither barmy nor simplistic

Yves Smith does us all a service in exhuming and refuting Milton Friedman's claim that "corporations exist to maximise shareholder value". Friedman wrote, in 1970:
That responsi­bility is to conduct the business in accordance with their desires, which generally will be to make as much money as possible while con­forming to the basic rules of the society, both those embodied in law and those embodied in ethical custom.... The Social Responsibility of Business is to Increase its Profits, 'The New York Times Magazine', 13 September 1970
Perhaps that was believable back in 1970. Since then, it's become clear that the basic rules of society are there to be manipulated or ignored in pursuit of corporate earnings. As Mr Smith reminds us, corporations pursue corporate goals, rather than those of shareholders. Nevertheless, Mr Smith concludes:
Friedman’s simplistic, barmy idea found fertile ground. And it became self-reinforcing as executives learned to use it to line their wallets. The long-lived, difficult to displace but not lavishly paid corporate chieftain was over time supplanted by wildly overpaid straight-from-central-casting CEOs. Why worry overmuch about longevity if you can rake it in a 3 to 5 year tenure? ....  So again, repeat after me: “maximizing shareholder value” is an idea made up and promoted by economists, starting with Milton Friedman and his Chicago School cronies. And like many ideas that came out of the Chicago School, the public as large has suffered from treating a soundbite like a serious policy proposal.

All true and important. But perhaps the deeper and broader problem is the mismatch between metrics that become targets, and the well-being of society.

My hypothesis is this: In an older, less complicated, world the correlation between an accountant's view of a corporation and that corporation's success would be strong. So too would be the correlation between the success of a corporation and its contribution to social well-being. Since those days, as population has grown, as society has become more complex, and as our more basic needs have been more satisfied (largely thanks to the activities of these corporations), the correlations have become weaker. A corporation's success can have negative, non-market, impacts on the environment about which we feel more strongly. Its activities and products or services can contribute very little to social well-being, or even detract from it.

All this is not to deny that there are a lot of positive externalities arising from corporate activity. My point is that we have no systemic means of encouraging corporations to, in Friedman's words, conform to the  basic rules of society. If a corporation creates havoc in the social or physical environment, then we rely on government to put a stop to it: but often this is too little, too late, partly because of inevitable time lags, partly because government relies on corporate taxes, and partly because big business and government are just too close and corporations find it easy to subvert or ignore those basic rules.

Accountants' measures of success are less and less reliable indicators of social well-being. And the single over-arching accountancy-derived metric is that of Gross Domestic Product (or GDP per capita) which is explicitly or implicitly targeted by almost all governments (except, probably, that of Bhutan).

We need new targets; targets that correlate strongly with society's real aspirations. Targets that reinforce conformity with existing and enhanced basic rules; that countervail current incentives to subvert or ignore them.

That's where Social Policy Bonds could enter the arena. The bonds would act as a meta-system, into which corporate activity would fall. They would target broad social and environmental goals and reward people for achieving them. They would reduce the incentives for corporations, and their friends in government, to aim for goals that satisfy accountants as distinct from, or against, society and the environment. It's time we moved on from identifying the narrow, short-term goals of big business with those of ordinary members of society. They aren't identical; they can conflict, and they might even be diverging.

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