The Case Against Socially Responsible Business

Want companies to invest in a better future for society? Keep them focused on their bottom lines.

Last week, a constellation of corporate heavyweights and other worthies came out to launch the B Team, a coalition devoted to changing how companies do business. In the team's new "Plan B," people and the planet receive equal primacy with profits. That sort of triple-bottom-line thinking might work for some companies, but to abandon the pure for-profit model altogether would be a huge mistake.

"Plan A, where companies have been driven by the profit motive alone, is just no longer acceptable," the B Team's introductory video declares. Putting aside the question of "acceptable to whom?" -- plenty of shareholders seem happy with the profit motive -- the idea here is that most companies are operating in an unsustainable way that dooms society to ruin. If true, most chief executives must be fatalistic good-time Charlies who will get up and leave as soon as the party is over.

As believable as that image may be, the notion that the private sector seeks only short-term profits is naive. When resources are scarce, prices go up, and companies are forced to change. Those that can't are replaced by new companies with different business models. Some chief executives undoubtedly perceive this existential risk in the long term, and they plan their strategies accordingly. For those who don't, the B Team offers another maxim: "In the long run, what's better for the planet and its people is also better for business."

This, by contrast, is often true. Yet instead of invalidating the profit motive, this maxim actually reinforces its importance. As Jonathan Berman and I have written in the past, for-profit companies that take a long time horizon in their decision-making are likely to make more social and environmental investments. Things like training workers, bolstering communities, and protecting ecosystems can take a long time to pay off for private companies. When they do, the return -- including a stronger labor pool, a wealthier consumer base, fewer working days lost to strikes and protests, and greater employee loyalty -- can be comparable to other for-profit investments.

In fact, strictly for-profit companies can be among the best social investors because they apply the same discipline to these investments that they would to other parts of their core business. Energy and mining companies, for example, have some of the longest time horizons in the private sector, and they tend to be big social investors as well. Some European companies have actually stopped issuing quarterly reports to shift the attention of analysts to the long term. And because they are still targeting a single bottom line, profit, there's no loss of clarity about their mission or erosion of transparency for shareholders.

Clarity and transparency are important parts of the for-profit model's inherent value. Chief executives know what shareholders expect of them, and there is a straightforward, verifiable, and comparable way to measure their performance: profit and loss. This is not the case for companies with triple bottom lines. Even if companies measure the effects of their operations on people and the planet, every company may choose a different set of metrics, and the weight given to each metric in their decisions may be far from obvious. Shareholders in for-profit companies already have to worry about executives piling up perks and building empires; a triple bottom line may muddy the waters even more.

This is the essential problem with social enterprises. They may have admirable goals, but investors cannot always be sure of what they're getting; the company's mission depends on a concept articulated by a founder or a statement that's open to interpretation, rather than the simple goal of profit. Moreover, when the management or strategy of a social enterprise changes, so might the company's objectives. The Indian microfinance institution SKS, for example, began as a nonprofit but ended up selling shares on the stock market. At that point, was it purely for-profit or not? Could investors ever really know its goals? These kinds of issues can cause enormous and costly frictions in financial markets.

Social enterprises undoubtedly do great things, yet to encourage every company to be a social enterprise, as the B Team does, is a tremendous error. It's also an error that the B Team's founders would have been very unlikely to make earlier in their careers. When Richard Branson and Mo Ibrahim were building their businesses, did they tell potential investors that they would be trying to help people and the planet as well as turning a profit? Did they inform credit markets that debt repayment would be part of a triple-bottom-line strategy?

More likely, having now reached a comfortable moment in their professional lives, they have chosen to adopt the personas of benevolent elder statesmen. If this sounds familiar, it should. The United States, Western Europe, and other wealthy countries have taken the same attitude toward the developing world. Even though their industrialization occurred with little regard for people or the planet, they now insist that China, India, and the rest grow in a cleaner, greener way.

The B Team's rhetoric is not only hypocritical but also internally contradictory. The profit motive works just fine with the long time horizon they recommend. It keeps companies focused on what they do best, so they make social and environmental investments in the most efficient way.

If owners or shareholders want a company to be a social enterprise, that's great. But not every company has to be one. Strictly for-profit companies make our lives better just by creating and supplying the goods and services that we like, as well as giving us a way to earn a return on our savings. Isn't that enough?

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Daniel Altman

Calling Out the Austerians

Why starving the beast will kill the U.S. economy.

Just what do austerity policies really do to an economy? For countries at risk of defaulting on their debts, austerity may provide a path back to international credit markets. But for those with no trouble borrowing, austerity may have a much simpler and more sinister result: greater inequality.

Though backers of austerity may cloak their arguments in talk of budget deficits and belt-tightening, many of them have long wanted to reduce the size of the public sector. George Osborne, now the British chancellor, told me in 2005 that the heavy cuts he supported then were "not what you might call efficiency or productivity savings in the main" but rather "a reduction in government activity."

At the time, the United Kingdom was enjoying its 13th straight year of strong economic growth. Osborne's rationale had nothing to do with smoothing out the business cycle or trimming the country's debts. He simply thought that the British government played too big a role in the economy.

Given the chance to pursue his agenda under the cloak of austerity when the Tories took office in 2010, Osborne grabbed it with both hands -- as have right-leaning politicians around the world. During the worst days of the Great Recession in the United States, John Boehner, the Republican speaker of the House, repeatedly said that government was the problem, urging Congress to "get really serious about cutting spending." In a later speech, in 2011, he said the government had "crowded out private investment by American businesses of all sizes." With his colleagues, he succeeded in fending off a second major stimulus package.

Osborne's and Boehner's rhetoric might make sense from an ideological point of view, or perhaps even in some textbook models. But their policies do not take account of the realities of the economic downturn. Moreover, their words and actions make clear how little they understand of the way businesses and the economy as a whole actually work.

First, let's consider Osborne's prescription for the United Kingdom. The cuts he so dearly desired did not have the same effect in 2010, when he became chancellor, as they would have had when I interviewed him five years earlier. In April 2005, with the economy booming and the unemployment rate at just 4.7 percent, workers let go by the public sector might have been absorbed fairly quickly into the private sector; there was almost no slack in the labor market.

But in May 2010, the unemployment rate was 7.8 percent. It rose as the cuts began to take hold, peaking at 8.3 percent and not returning to 7.8 percent until July 2012. The suffering caused by the cuts was much greater than it would have been five years earlier.

Now let's look at Boehner's statement about private investment. In a closed economy, where all credit has to come from within the country's borders, crowding out can indeed occur. If the government borrows more, there is less money available to the private sector; interest rates rise, and private investment falls.

But the United States is not a closed economy. In fact, foreigners seeking relatively safe investments flooded the country with money during the economic downturn. They not only helped to finance private investment; they also helped to preserve the value of the dollar, even as the Federal Reserve injected billions into the markets by buying up securities. With a glut of foreign cash and an activist central bank, long-term interest rates hit rock bottom. There was no shortage of money for businesses looking to invest.

In short, austerity policies offered a way to make credit cheaper when credit was already cheap, and to deluge the labor market with jobless workers when the jobless rate was already high. Might they still have had a stimulating effect on the economy?

Let's say you're thinking about a big purchase -- something you'll be able to use for years to come, like a car. For you, a car is a capital investment. What do you think about when deciding whether to buy and how much to spend? One consideration is whether you'll be able to make the payments in the future or, if you're going to buy the car for cash, whether you might need those savings for something else. At the very least, you'll probably ask yourself how certain you are of your income in the years to come. And then you might try to figure out just how much benefit you'd get out of the car versus, say, taking public transportation. For a company, the decision is similar. Before making a big investment, its executives will gauge the effect on the firm's liquidity and conduct a cost-benefit analysis.

During the economic downturn, both of these assessments -- for households and for businesses -- were complicated by uncertainty. Companies wanted to see a few quarters of strong profits and good prospects for more before investing in new capacity. But austerity policies delayed this recovery in profits by keeping unemployment high, incomes stagnant, and demand low.

Austerity policies did not soften the immediate pain of the economic downturn, at least in countries with plenty of access to credit. Instead, their policies' main effect was to reduce the absolute size of the tax burden for people today and in the future. Did this actually make people better off?

The answer will depend in large part on what happens to incomes. A lower tax burden is wonderful as long as your income doesn't fall as well -- yet that's exactly what may happen to the long-term unemployed, who have likely suffered a permanent dent in their incomes as a result of austerity policies.

These workers tend to have lower incomes to begin with, which also means they pay very little in taxes. Meanwhile, the people who usually pay the bulk of income taxes have suffered much less joblessness. In other words, the outcomes of austerity policies may be lower taxes for high-income people and lower incomes for people at the other end of the spectrum.

There can be no better recipe for greater inequality. In the long term, it will depress economic growth, worsen social problems, and erode our meritocracy. Austerity policies may come clothed in the vestments of virtue and responsibility, but they will hurt our economies in other ways for years to come. Will it take the creation of a new, long-term unemployed underclass to see these policies for what they really are?

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