The Sole Purpose of Corporations - Profit

This was written initially as part of an email argument with a friend who was bemoaning the lack of ethics in corporations. For example, he believes it's wrong for James Hardie to structure themselves in order to minimise compensation payouts to asbestos victims.

My central argument (in a nutshell) is that right or wrong do not enter the equation. The purpose of a corporation is to maximise shareholder value - nothing else - and our actions (investment) encourage that goal.

Rather than criticise corporations for a lack of ethics, we would be much better served by accepting them for what they are, and looking elsewhere for our social goals to be fulfilled.

I have tried to make it a bit more generic than it was, but it's still clearly aimed at changing the mindset of one particular person. Use of the word "you" should not be taken to mean you, unless you share my friend's mindset.

***

My son is 18 months old. In one of the books we have on raising children it explains that toddlers are like a busy airport with an unmanned control tower. That is, there's a lot of activity, but no control. More to the point, when toddlers do bad things its not because they're bad, they're just wired up to do random stuff. If you expect your toddler to behave in an enlightened or adult way, you're labouring under a delusion, and your dealings with your toddler will be fraught with tensions and disappointments on both sides.

On the other hand, if you accept your toddler for what he is, then you can both take great delight in the relationship, and as a parent you can exert pressures appropriately to improve your toddler.

Obviously I don't mention that to tell you about parenting....

One of the greatest problems in the world is that people refuse to recognise things for what they are, preferring to see tham as they "should be". Part of this problem is that no two people share the same idea of what this is. On the other hand, when something is recognised for what it is then all can agree, and people can relate to the thing in an appropriate manner.

Corporations are vehicles for generating profit.

They are not vehicles for protecting the environment - that's what Greenpeace and the Wilderness Society are for - unless protecting the environment is profitable.

They are not vehicles for protecting the rights of workers - that's what unions are for - unless protecting the rights of workers is profitable.

They are not vehicles for setting public policy - that's what the government is for.

They are not vehicles for deciding what is legal and what is not - that's what the courts are for.

They are not vehicles for determining what is ethical and what is not - one could argue that that is the church's role, although it is also the role of every individual in society.

Naturally, a corporation contains people who must make decisions on ethics, but:

  • there is wide variance in what is considered ethical

  • the corporation has an existence beyond that of most of its workers, and people will make decisions on behalf of the corporation that they wouldn't make on behalf of themselves

  • the overriding purpose of the corporation is to generate profit.

This is not, as you have suggested, a cynical viewpoint. There is no cynicism in understanding what the goals of a thing are. It's not cynical to imagine that the soccer player on the other team is going to try to take the ball from you and kick it in exactly the direction you don't want it to go, because that is the goal of the other soccer player.

The goal of the corporation is to make money. There is no other logical goal for a corporation.

To see why this is so, you need look no further than yourself. Where would you invest your money? Your goal as an investor is clearly to maximise your profits. You will give your money to the fund (or buy the share) that promises the best return. Other than an occasional interest in so called "ethical funds", you are solely focussed on the fund with the greatest returns. And this is simply logical behaviour for an investor. No investor in the whole world wants to lose money. People who don't mind losing money are wastrels rather than investors, and would prefer to spend their money on big gooey ice-cream sodas.

To be the fund with the biggest return, you must invest in the companies that maximise shareholder value the most. To attract investment from large investment funds (including your superannuation fund), a corporation must maximise profit.

Ask yourself - who is going to put money into a corporation which does not have, as its goal, making money?

Further, most investors (company owners) do not make ethical decisions about their investments. In particular, you, as a person who favours maximal-return mutual funds, abrogate your ethical investing duties to a fund manager who is unlikely to share your ethics, and is only interested in retaining you as a client by maximising your returns.

You expect other people (the people employed by the corporation, and therefore indirectly by you) to be ethical, but you, as the owner, bring no ethical force to bear.

Investors are the owners of corporations.

Most people are lazy and greedy.

Thus, most investors are too lazy, or too greedy, or both, to ensure ethical running of their corporations.

It's ridiculous to have expectations of other people that you don't live up to yourself.

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Ethical Funds

"Ethical" funds are not relevant to the discussion at hand. To see why, just consider - would you invest your money in a company that promised to be a good world citizen regardless of cost? Would you put your money in an 'ethical' fund if it was demonstrably losing 10% per annum?

No you wouldn't.

Would you invest in ethical funds if they showed the same return as the best mutual funds?

Yes, you probably would, because you've already maximised your returns, so you can afford to choose the ethical over the non-ethical. This is not ethics though, this is just feel good. The ethics cost you nothing.

Would you choose an ethical fund if it consistently ran 4% behind the best mutual funds? Maybe you would, maybe you wouldn't. Maybe you'd put some of your money in an ethical fund - this is still just feel good stuff - "get my returns here, my ethics there"....

Yes, some companies are ethical and some are not (given any particular definition of "ethical"). There's little investor interest in ethical companies which do not make a profit however. Such investing really comes under the heading "charitable donations" which most people keep in a separate mental box from "investing".

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The crux of this essay is my anger at your refusal to see things (including your own behaviour) for what they are, preferring to set up imaginary scenarios about what they should be and then complain about them not being those things.

You say corporations should be ethical when they demonstrably are not, and logically are not. The "should" has no meaning. It's no less a wish than "I should win Lotto tomorrow". It's the stamping of tiny little feet when the world doesn't go the way a toddler thinks it should. It's pointless fantasy that leads to being constantly unpleasantly surprised by the world.

You think I'm negative and cynical, but I'm not. I think the world is a much more beautiful and exciting place when you look at what is really there, instead of the limited, wrong, constantly disappointed vision you have for it in your head ("you" in general, not you personally).

If you accept corporations for what they are, then you can revel in their ability to make money, or you can fight them appropriately with your purchasing power, your investment dollars, your vote, your union, whatever. All of which beats saying "they should do this or that".

If you expect a certain behaviour from a corporation, then you will act in ways that will allow the unwanted behaviour to continue, since your expectations have no effect on anything.

But if you (we, society) accept that corporations will behave in unscrupulous ways, then we are working from a basis of reality and can put in place the necessary regulations to try to bring them into line. But it's our responsibility. If we abrogate that to the corporations we are simply deluding ourselves and will continue to be disappointed.

Patrick Jordan - patrick@ariel.com.au - 2004-08-05