{"id":45765,"date":"2013-09-04T07:10:56","date_gmt":"2013-09-04T08:10:56","guid":{"rendered":"http:\/\/www.corporate-eye.com\/main\/?p=45765"},"modified":"2013-09-04T07:10:56","modified_gmt":"2013-09-04T08:10:56","slug":"social-responsibility","status":"publish","type":"post","link":"https:\/\/www.corporate-eye.com\/main\/social-responsibility\/","title":{"rendered":"The Financial Theory of Corporations Versus Social Responsibility"},"content":{"rendered":"

\"tibetan-yak\"
\nWhen it comes to social responsibility, corporations are in a tough spot. Traditional financial theory holds that corporations exist in order to maximize profits for shareholders. To the extent they divert corporate resources to fund social or environmental causes unrelated to their business, it represents a transfer of wealth from shareholders to a different constituency.\u00a0 Further, it is a transfer of wealth over which shareholders \u2013 the owners of the company –\u00a0 have little or no say. This is troublesome because corporations do not exist to redistribute wealth.\u00a0 To the extent that any institution exists to redistribute wealth, that role goes to governments.<\/p>\n

This does not mean that corporations should not be concerned with the environment or the social context in which they operate. Rather, it means that corporations should be paying careful attention to those issues where they can have an impact and where the cost of ignoring them will have a detrimental effect on the company\u2019s future prospects, image or share price.\u00a0 Spending money to make a difference in environmental and social issues that are part of how they operate is an acceptable corporate expenditure.\u00a0 Spending money to fund the chairman\u2019s pet charity to save the Tibetan yak is usually not, unless you are in the business of mountain expeditions.<\/p>\n

How does all of this fit into investor relations?\u00a0 In my twenty-five years of talking to investors, it has been rare that major institutional investors raise these types of issues.\u00a0 Institutional investors focus on your company\u2019s future prospects, back-tested against your current performance.\u00a0\u00a0 Unless your company\u2019s future prospects are being impacted by environmental or social issues, most investors don\u2019t seem to care.\u00a0 There are a few socially responsible investment firms, but I\u2019ve never really seen them have much more than a gadfly effect.<\/p>\n

So does this mean corporations should just ignore the issue?\u00a0 You probably can, but I would hope not.\u00a0 Your company is probably doing things that you can point to as responsible corporate citizenship. Most companies are constantly testing ways to save money by eliminating waste and inefficiencies.\u00a0 The best of these ideas often result in both costs savings and benefits for the environment.\u00a0 For example, every social activist\u2019s favorite target, Wal-Mart, has done many such things. Here\u2019s an illustration from the book The Wal-Mart Effect<\/i>, by Charles Fishman<\/a>: in the 1990s, Wal-Mart came to the conclusion that there was no need for deodorants to come in a separate box.\u00a0 The cardboard box added cost, took up shelf space and required trees to be cut down to make the cardboard.\u00a0 Yet the box didn\u2019t add anything to the customer experience and surrounded what was already a perfectly good container.\u00a0 So Wal-Mart worked with manufacturers to get rid of the boxes.\u00a0 As a result, the product cost less to produce, some of which was passed along to consumers, and the environment benefited because the demand to cut down trees for cardboard was reduced.\u00a0 (One can only hope that they are working on the same thing with respect to blister packs.)<\/p>\n

Good companies undertake these types of projects all the time. A good investor relations practice is to make a list of all the projects your company does to eliminate waste and inefficiencies or to make the work environment safer.\u00a0 The next time you\u2019re questioned about your company\u2019s commitment to the environment or social causes, pull out your list and discuss it along with the comment \u201cLook, we can\u2019t be all things to all people \u2013 our resources, just like everyone else\u2019s, are limited. But we do choose to try and change things for the better where we can have an impact.\u201d\u00a0 Better yet, be proactive and talk about these things as part of your regular communications.<\/p>\n

I am not enough of a Pollyanna to think that this will mollify activist investors with a militant agenda, but you\u2019re not going to make them happy anyway.\u00a0 The objective here is to have a well-reasoned response that shows you are influencing things to benefit your customers and the environment in which you operate.\u00a0 And, like Wal-Mart, you probably shouldn\u2019t expect to receive too much credit for what you do.\u00a0 After all, as Kermit the frog said, \u201cIt\u2019s not easy being green\u201d.<\/p>\n

 <\/p>\n","protected":false},"excerpt":{"rendered":"

When it comes to social responsibility, corporations are in a tough spot. Traditional financial theory holds that corporations exist in order to maximize profits for shareholders. To the extent they divert corporate resources to fund social or environmental causes unrelated to their business, it represents a transfer of wealth from shareholders to a different constituency.\u00a0 […]<\/p>\n","protected":false},"author":9,"featured_media":46302,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_lmt_disableupdate":"","_lmt_disable":"","_genesis_hide_title":false,"_genesis_hide_breadcrumbs":false,"_genesis_hide_singular_image":false,"_genesis_hide_footer_widgets":false,"_genesis_custom_body_class":"","_genesis_custom_post_class":"","_genesis_layout":"","footnotes":""},"categories":[9,3],"tags":[],"class_list":{"0":"post-45765","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-best-practices","8":"category-investor","9":"entry"},"yoast_head":"\nFinancial Theory Corporations vs Social Responsibility | Corporate Eye<\/title>\n<meta name=\"description\" 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