The Firm’s Goals vs. Society

Discussion on Adam Smith’s “Bottled Up: For the social-entrepreneur CEO of Belu, pursuing a profit might be easier if he pursues a profit too” (Time Magazine, August 2009).

 The British company Belu is successful in several measureable ways. Belu, a producer of carbon-neutral bottled water, has enjoyed significant increases in sales since 2004, the year of its inception. In addition, Belu’s profits (which are modest because of the down economy) are put back into projects that deliver clean, sustainable water to deficient parts of the world. But while consumers are definitely interested in Belu’s product, potential investors are not. Why does Belu struggle to get funding?

On one hand, Belu’s goal is to help the environment and NOT maximize profit. This implies that Belu may not necessarily have the best interest of investors in mind. But on the other hand, Belu’s CEO  is adamant about keeping the “we must maximize profit” statement out of its mission.  The result is that Belu is grossly undercapitalized, which puts pressure on the company with respect to its environmental goal.  Belu’s potential (to both sell bottled water and fulfill its social missions) could definitely improve with funding. But, if Belu cannot find a venture capitalist willing to be just as “green,” it may forgo sustainable growth of an excellent business.

This article by Adam Smith is relevant to our classroom assumption that all firms exist so as to maximize profit. It also produces two immediate implications. For one, does Belu’s refusal to maximize profit mean that profit is “bad” for society and the environment? Conversely, given that investment is needed for sustainable growth, is its non-profit objective “bad” for business?

The classical economist Adam Smith (the author of “The Wealth of Nations” and not this article!) argues that the notion that profit is “bad” for society is a misconception:

“It is not out of the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from the regard to their own interest.”

The misconception is that profits are “bad” because they are driven by selfish firms. Smith’s quote suggests that maximization of profit is merely part of the invisible hand process. Since firms earn profit where needs exist, profit serves as a signal of where resources are most highly valued. In other words, by pursuing self-interest, firms meet the needs of society. However, one could also argue that maximization of profit no longer becomes part of the natural interaction of firms in society when firms use unethical methods to obtain profit and/or cause damage to the labor market (environment, etc) in order to decrease costs.

Certainly, most would agree that Belu’s non-profit objective is NOT bad for its business – simply observe Belu’s large number of sales and its ability to deliver water to parts of the world that lack access to it. Based on Belu’s objective as a firm, that is measureable success. However, what if the lack of funding (because of Belu’s refusal to maximize profit) means that Belu must ultimately give up this success?

Consider the additional real-world example of the common clash between a firm’s business goal and social implications. In 2006, the “Responsible Business Corporation Act” was introduced in Honolulu. Its goal was to reduce the negative social and environmental impacts of business behavior using tax incentives, and was based on the argument that businesses have a social responsibility to consider the best interests of the community. Under this legislature, corporations that agree to include a specific percentage of employees and members of the community on their boards of directors (in order to better represent community interests) would receive a tax break.  Critics of the legislature argued that the ONLY responsibility of corporations is to maximize its profits and pay its fair-share of taxes; the government should be responsible for addressing other social concerns.

What do you think?

Posted by Prof. C-S

Resources:

Smith, Adam. “Bottled Up: For the social-entrepreneur CEO of Belu, pursuing a profit might be easier if he pursues a profit too.” Time Magazine, August 2009.

Brandt, Tom. “Socially/Environmentally “Responsible” Business Incentives Not Bad Idea, Just New.” Honolulu Star-Bulletin, April 2006.

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