What is Corporate Social Responsibility?

0:00:07.3 Trevor Burrus: Welcome to Free Thoughts. I’m Trevor Burrus.

0:00:09.3 Aaron Powell: And I’m Aaron Powell.

0:00:11.1 Trevor Burrus: Joining us today is Don Boudreaux, Professor of Economics at George Mason University. He also blogs at Cafe Hayek. Welcome to the show, Don. Finally, getting you on.

0:00:19.6 Don Boudreaux: I’m really happy to be here with you both. Yeah.

0:00:22.2 Trevor Burrus: Today we’re discussing corporate social responsibility, which is a term that is quite often used and little defined, and so in your talks and research on this, have you been able to find a consistent definition on what this could be?

0:00:38.0 Don Boudreaux: No, no, what it means is like so many of these terms that people on the left use, and increasingly actually people on the right, it means whatever the user wants it to mean, but if you have to cabin it a little bit, it is the notion that corporations should be run not exclusively for the benefit of the equity owners, the shareholders, but the management should take account also in its decisions, the welfare of so-​called stakeholders. Now, if to the extent that taking account of stakeholders is consistent with maximizing the wealth or well-​being of shareholders, well, there’s no difference between shareholder capitalism and stakeholder capitalism or corporate social responsibility.

0:01:29.3 Don Boudreaux: But of course, what the advocates of CSR, as it’s called, corporate social responsibility or stakeholder capitalism is an alternative term, what they have in mind, of course, and they’re correct in so far as this goes, they have in mind are activities that they want the management to undertake that promote the well-​being of some stakeholders at the expense of the shareholders, they want management to be empowered to, in a sense, in essence, violate their fiduciary duties to the shareholders in order to promote the well-​being or to act in ways that they believe will promote the well-​being of these non-​owning groups.

0:02:13.8 Trevor Burrus: So I assume that in so far as CSR is somewhat vague, the concept of a stakeholder, is that any more well-​defined?

0:02:22.1 Don Boudreaux: No, no, in fact, this is one of the big problems, Trevor, with the whole concept. It’s not well-​defined. One of the benefits of shareholder capitalism, it’s certainly not the only one, but one of the benefits is in the clarity of what corporate boards and management should do. There is a well-​identified group of people who own the corporation. Now, you know, corporate law, you get into… There’s distinctions between common shareholders and preferred stocks shareholders, but these are things that the law has handled and can handle very well. Stakeholders, in contrast, are whoever the activists want the corporation to look after. So one of the benefits of shareholder capitalism is that the identities of the people whose interest is to be attended to by the management is very clear. There’s, you’re either an owner or you’re not. Not so with being a stakeholder, you’re a stakeholder in some people’s eyes, you’re not in other people’s eyes.

0:03:28.4 Aaron Powell: What are the boundaries of this? Because basic moral principles tell us that just as individuals and no matter what role we’re in, we should take into account the interests of others, not cause them harm, if it’s preventable, not behave in ways that violate moral rules or are unvirtuous and so on. Does that, do those rules act as or those principles act as a backstop to the way that this fiduciary duty to shareholders, like would they, if they can do better by their shareholders by harming other people, should they do that? Or is there a kind of generalized also duty to behave as a virtuous person? And then, once you have, do what’s best for your shareholders?

0:04:14.0 Don Boudreaux: There is a background duty to behave as a law-​abiding person, for sure. The single most famous piece ever written in this literature is Milton Friedman’s September 1970 essay in the New York Times Magazine, and in that piece, Friedman is very clear that when he says maximize shareholder value, that means within the constraints of the broader common law, these are my terms, I’m not quoting Friedman, within the constraints of the broader common law and common decency. So obviously, if a corporate manager has an opportunity to increase shareholder profits by defrauding customers or defrauding suppliers, that’s out of bounds, and it violates the law, that ought not to be done, that is not encompassed within the meaning of maximizing shareholder value. What the debate is about is the extent to which managers are allowed to pursue values beyond those that are assigned to them as fiduciaries of the persons who put up resources in the form of equity in the corporation.

0:05:39.2 Don Boudreaux: So, just as you, Aaron Powell, as an individual, are allowed to spend your money as you see fit within the bounds of the law, you can’t spend your money to hire an assassin to shoot Trevor, you can’t steal from people, nor can you hire someone to do that, hire someone to steal for you or perform an illegal act, and so the, I think a lot of clarity is maintained when we recognize that the manager, including the board, the management, and the board relationship to the shareholders is one of agent to principals, and whatever is legal for the principals to do, they can assign that responsibility or duty to the agent, they don’t have to, but they can.

0:06:34.3 Trevor Burrus: It might be important to clarify corporate structures to some extent here, because I can’t remember who wrote this quote, that business is just playing with other people’s money, so that there’s something about that we have to conceptualize what a business is and what the shareholders are to understand the duties. So, can you get into that a little bit?

0:06:52.6 Don Boudreaux: So a corporation, of course, is a legally… It’s an entity recognized by the law, and the distinctive feature, the most important feature of it is that the owners have what’s called limited liability. It’s another debate whether or not limited liability is consistent with libertarian principles, classical liberalism, but that’s not the core of the debate here. And so Apple Inc in Cupertino, California, you can choose to be an owner of Apple Inc by buying a share of Apple, either a share that Apple sells directly or more likely from someone who is an existing shareholder and they transfer the ownership, their share of ownership to you. And you as an owner then get rights to vote according to how much you own and according to the voting rights of the shares that you own in shareholder meetings. In essence, you and other shareholders choose the board, and you can assign to the board whatever duties you want, you could tell Apple, you as a group, the shareholders collective, of course, could tell Apple, let’s stop making these computer things, and let’s actually start growing apples as in an orchard. That would be pretty dumb for the shareholders to do, but they could do that.

0:08:18.6 Don Boudreaux: They can also tell Apple, we don’t care about profits, we want you to work to alleviate world hunger, and if that’s what they did, well, then I would have no objection, I would not want to invest in that corporation, I wouldn’t want to put my pension… Any of my pension funds in it, but that’s perfectly within their right. And so the corporation is just a really fancy form of an ordinary business. People use their resources and their time in order to specialize in producing a good or service for sale to the general public, and the hope is that the revenue they receive from those sales is greater than the total cost of producing those things, and if that’s the case, and the corporation or the business makes profits and it continues to perform in that way, if their revenues fall short, of course, of the cost, then the corporation is, assuming it’s not subsidized, the corporation is obliged to find some other line of work, those resources be transferred to more efficient uses.

0:09:25.3 Aaron Powell: What do time horizons look like in this calculus? Because I can imagine, let’s say I’m running a corporation, I’m running Apple Computer. And I have read a bunch of libertarian economists, or I read Tyler Cowen’s Stubborn Attachments book about the benefits of economic growth, and I know that one way for me to increase my profits in the long term is to grow the pie for everyone, so people have more money to buy my phones with, and that means helping people out of poverty, helping people be more healthy, preserving the environment, because if climate catastrophe hits my bottom line, it’s going to be hurt and so on. And so I do a ton of effectively philanthropic and charitable and long-​term improve the state of humanity stuff with… Long-​term, I imagine my company is going to be around centuries from now, and I want it to do just as well then. Or on the other hand, is this more… The fiduciary duty is to increase the share price, return dividends or whatever, within the next year or six months. Is there a line?

0:10:36.4 Don Boudreaux: So let’s take the easy part first. One of the enduring fallacies is that modern corporations are driven by quarterly reports and quarterly stock performance, and so the fallacy is that all corporations care about is what’s happening in the next three months, and so anything to maximize profits over the next three months, that’s what corporations do. Now, if that were true, then what we’d see is a lot more of corporations liquidating a bunch of valuable assets so that their three-​month performance on the income statement would look fantastic, and it has a huge amount of income. Of course, it’d be off-​set by the sales of assets. One of the beautiful things about financial markets, especially stock markets, the equity market, is that the prices of shares reflects the market’s assessment of how well a company is being managed over the course of the time horizon that matters to investors. So in Tyler’s book that you mentioned, Stubborn Attachments, which is an excellent book, he makes the case that even the distant future, the long, distant future, centuries from now, ought to be valued just as highly as we value the present or as we value the near future.

0:12:16.5 Don Boudreaux: I happen not to agree with that, at least not completely, but I think it’s a fact that the vast majority of investors don’t have time horizons that are that long, and so no one’s going to invest in a company that can even be proven by God to be taking steps that will result in net benefits to shareholders only centuries down the road, because that company is taking too long of a time horizon, investors will not want to own it, and so the share price will fall and that falling share price will reflect the fact that the managers are not doing what shareholders would prefer them to do. That said, shareholders, of course, have… Or the vast majority of them, of course, care much more than about what’s happening three months down down the road, they care about a fairly long-​term, extended future. And therefore, even the shareholders who today want their shares to be priced at the highest possible price, they’ll want the corporation to take appropriate account of the future, because if the corporation does take appropriate account of the future, then that action will be manifested in the form of a share price higher than otherwise.

0:13:51.9 Don Boudreaux: If the corporate managers in fact take too short term a view of the future, then that will cause share prices to fall today, so this actually is very beautiful… It’s not perfect, of course, no markets are perfect, but this is very beautiful a result in equity markets, in financial markets that the price of assets today reflects the expected net present value of all the future stream of resources given people’s… What economists call time preference, given how much people prefer today over tomorrow. And so, my late colleague, Walter Williams, used this very simple example, but I think it’s appropriate, even though it’s very simple, he said he’s seen a lot of people who were getting ready to sell their homes and they’d go out and they’d spend… They’d spend hundreds of dollars, maybe thousands of dollars, planting trees in the yard for a home that they knew they would be out, they would sell within a matter of weeks or months. Why were they doing that?

0:15:05.2 Don Boudreaux: Well, because obviously, the planting the trees in the yard, even though the actual value they produce is, the vast bulk of it’s going to be in the distant future, long after the current owners have departed, that action today raises the value of the house today and therefore the appropriately long-​term perspective taken today by the owner results in the owner today enjoying the value of that appropriately long-​termed perspective.

0:15:39.1 Trevor Burrus: Now, of course, the idea of profit is very important to the corporation and to this discussion, and that’s a bad word in many circles, seeming like an increasingly bad word, and the idea that profit accurately or at least in some sort of dead reckoning is a good measure of contribution to society is extremely controversial, but on some level that’s… You believe that, correct?

0:16:05.9 Don Boudreaux: I certainly do believe that. Now, profit earned in a market economy, one can quibble and one can say, the term profit should legitimately be reserved only for the excess of revenue over costs in a market. I don’t want to be that pedantic about it, but I will say that to the extent that profits are earned in the market, to the extent that a firm profits by pleasing consumers, where consumers spend their money voluntarily without being coerced or obstructed, then the higher the profit, the greater… That signals that that corporation is satisfying, successfully satisfying a particularly urgent set of human desires. So I like high profits, that means that that company… I applaud a company that earns high profit. That means that a company has identified an opportunity to satisfy urgent wants that have not until those profits were earned been satisfied.

0:17:13.4 Don Boudreaux: Now, most people, the reason, I think the reason they don’t understand that is that they view profits as some sort of surplus. I mean, this is kind of a Marxist view, so the profits come at the expense of workers or the profits in some other view come at the expense of consumers. Well, they clearly don’t come at the expense of consumers, ’cause consumers are voluntarily spending their… Again, assuming it’s in a market, they’re voluntarily spending their money on those products. They don’t come from workers in a market, but as workers are voluntarily choosing to work at that company. And so high profits, to me, signal alert, especially helpful entrepreneurship. On top of that, in addition to being a signal of successful pro-​social past behavior, the profits signal also to entrepreneurs in the future about where they should redirect resources. If there aren’t many profits to be earned in selling one kind of product compared to the profits that are being earned selling some other kind of product, the profit motive drives those entrepreneurs to shift resources out of where they earn lower profits and to shift them into production opportunities for where they earn higher profits, so the profits are very much like prices.

0:18:36.4 Don Boudreaux: In one sense they’re just a different sort of bundle of prices, profits are… I forget how Tyler Cowen and Alex Tabarrok exactly put it in their textbooks, they ought to say… They say it was to protect the prices. I’ll put it with respect to profits, profits are a signal wrapped in an incentive or an incentive wrapped in a signal, but they do play both roles, and so what the corporate social responsibility proponents believe… And I think many of them are sincere. I believe they’re misguided, but they’re sincere, they believe that profits… Because they believe that profits are illegitimate or at least come at the expense of some other groups, then by mandating, using law, legislation, by mandating that corporations pay attention to stakeholders as opposed to shareholders, firms will then be compelled to abandon or reduce the amount of profit-​seeking that they engage in, and hence corporate assets will, to the extent that CSR is successful, corporate assets will be diverted away from profit-​seeking, which is in the eyes of these people at best zero sum, and toward helping, genuinely helping other members of the community.

0:20:05.1 Don Boudreaux: Of course, in my view that’s exactly backwards. To the extent that CSR succeeds in having corporations divert resources from where those resources would in fact instead be used in a profit-​seeking manner, a shareholder wealth-​maximizing manner, those resources are diverted from where they… From where we can be pretty sure they will promote… They will genuinely promote improved human well-​being by producing a product at a sufficiently low cost to make it worthwhile and into areas where at best we have no good measure whether or not the use of resources in those ways will be beneficial or not.

0:20:50.0 Aaron Powell: This makes it sounds like it’s an all or nothing thing as far as the legitimacy of profits goes, but is it potentially more gray than that? So we just recently learned about the NGO group, which is legally selling spyware to governments, including authoritarian governments, that they’re then using to, again, legally in their jurisdictions spy on activists and journalists, which is often leading to assassinations or other things which are not themselves necessarily legal, but what NGO group is maximizing its shareholder value by selling this software that is harming a lot of people and doesn’t seem to have much pro-​social use, or cigarette companies selling a product that, yes, it’s satisfying people’s interests at the time, but those people, a lot of them like had they had opportunity to choose otherwise would not have started smoking in the first place, or would have preferred not smoking to developing lung cancer, but… But made a decision that they don’t feel, that felt good, at the time.

0:22:01.0 Aaron Powell: It seems like there’s a lot of ways that you can turn a profit that aren’t illegal, but certainly aren’t pro-​social, that have either long-​term consequences for your customers or have negative externalities for people who weren’t part of that exchange and are, I guess, filling wants that it would be better for the world if they weren’t met in the first place.

0:22:30.6 Don Boudreaux: Two things. One, and the most fundamental here, is that the entire argument, of course, is premised on the notion that consumer demands, or at least the ones that are allowed to be legally expressed, are legitimate demands. So a corporation that goes into the assassination business, okay, that’s off the table. A corporation that goes into the business of selling sugary drinks, tobacco products, experiences in gambling casinos. If adults were allowed to buy those things and if adults buy those things, then at least as an economist, I sit back and say, well, I don’t understand why they do it, I certainly wouldn’t do it myself, but they’re doing it voluntarily, and so I have to concede that that’s legitimate, it’s not my place to stand in judgment of the way these people choose to spend their own money.

0:23:35.0 Don Boudreaux: But where do you go along with the sort of radical economist subjective utility assessment or not, the second point to make is that, to the extent, Aaron, that what you point out is a real problem, and I don’t deny that obviously at some level, it’s a real issue, it’s not the issue that the corporate social responsibility crowd is much concerned with. The corporate social responsibility crowd would… You could imagine one of them saying, Oh, look, Philip Morris, I think it’s his name again, or maybe Altria, oh, look, big tobacco company, cigarettes harm people, so we want you to stop selling cigarettes. It’s possible, but it’s also possible, in fact, I think more likely, the way the actual details of these corporate social responsibilities proposals play out, it’s more likely, say with Philip Morris workers now represented on the board by law, the workers say, We want as many jobs as possible producing your cigarettes, and so we don’t want Philip Morris reducing the amount of tobacco products it sells, even if there’s a movement away in the general public from wanting to buy tobacco products.

0:24:57.7 Don Boudreaux: We want you to continue to produce those tobacco products and sell them at an inordinately low price so that they get bought, so that our workers continue to have jobs in cigarette factories. And so the problem that you identify isn’t really central to the corporate social responsibility debate, it’s a question of… That’s a problem of… So to what extent should we defer to the judgments of consumers in how they spend their money, or to what extent should we be paternalistic and override those, and however you answer that question, that answer itself doesn’t imply an answer to whether or not you should support corporate social responsibility, there would be other ways perhaps to… If you answered the question in the affirmative, yes, or in the negative, no, we should not defer to always to consumers, there would probably be other ways, better ways, to address that problem than by saying, okay, the way to address this, we’re going to have corporate social responsibility govern the board, there’s no obvious neat way in my mind that corporate social responsibility will address that problem effectively, if at all.

0:26:19.2 Trevor Burrus: Now, in terms of externalities, though, it seems this one’s a little bit more difficult when we take revealed preferences theory, which I’m with you on that, but let’s take the argument that oil is artificially cheap because of externalities that are not priced into the price of oil, because of both pollution, standard old-​style pollution and greenhouse gas emissions, and we can also take another side of this, which is that oil, American oil companies are somewhat subsidized by the US military to some extent, and other actions that we have done to protect… So the profits that are reaped by oil companies are too high in this estimation, so if you are an oil executive and you agree with this assessment, but you can’t impose taxes on yourself and regulations on yourself, then is it okay to do corporate social responsibility in order to kind of do a best guess to mitigate the harms that economists would agree are harms because they’re externalities that are not priced into the consumer price?

0:27:21.0 Don Boudreaux: I think that’s a little bit of a difficult question, as I see it, and maybe some listeners will be surprised that I find it a little bit of a difficult question. The pat answer is, No, that corporate man… Here’s the answer, I think, that Friedman would give. That corporate manager, if he or she sincerely believes that, given the structure of taxes, and given the structure of tort law and property law and corporate law, that the output of the oil company is too high and is creating too much in the way of danger to the general public, if that person really believed that, that person should not hold himself or herself out as a fiduciary, excuse me, as an agent for the principals who own the oil company. There’s something fraudulent about that, given the existing… Law is never perfect, so given the existing imperfect structure of the law, the principals, the shareholders should have the legal right and ethical right to choose whoever they wish to be their managers, and if they choose to have a manager who acts on that margin, who acts to combat global warming, well, that’s fine. No problem on that. No problem with it there.

0:28:50.2 Don Boudreaux: But if they want to have maximum profits, then that manager probably should… Not probably, that manager in this answer should not be in that position. And I’m not sure I reject that. On the other hand, there is this gray area, Aaron’s earlier question touched on this a bit, there was just a great area of to what extent should people be guided by their ethical sensibilities when acting even as agents for others, given that the law’s constraints are never perfectly tight, there’s always some wiggle room, there’s always some room to move slightly in one direction and in another direction.

0:29:49.3 Don Boudreaux: And so if I’m this manager who has the beliefs that you posit, if I’m that manager, on the one hand, I would feel as if I am violating my fiduciary duties to my principals, so on the other hand, I might find some sort of justification for it. I think, as I articulate this, I think probably managers have no business being unfaithful agents to their… I think that’s the best principle to go by, let the manager try to change the world in some other way, rather than fraudulently dealing with his principals’ funds. But I think, I think it is a difficult… I think it is a difficult question.

0:30:43.0 Don Boudreaux: The more general thing, Trevor, if you believe that carbon emissions are an externality, as, of course, many people do believe that they are an externality, then the appropriate response would be, or at least an appropriate response would be to have the government impose a carbon tax as many people talk about or put restrictions and it’s not up to the company itself to play by rules different than are the rules played by other firms in its industry.

0:31:23.2 Aaron Powell: Let’s say that I am… I am the board of directors for a company, and the shareholders have told me to maximize profit, or I can infer that that’s what they would like me to do, but then they tell me through shareholder voting or some other mechanism, the shareholders want me to do things that look more like corporate social responsibility kind of things, and either because they just want me to or because they think that doing that will maximize profit, but I’m pretty sure it’s not going to. So maybe they’ve gotten caught up in some fad of like we’re going to get rid of this material because I read on the news that it’s dangerous, but I know it’s not dangerous, and that getting rid of it is going to be costly. What am I supposed to do in that situation?

0:32:14.9 Don Boudreaux: So the situation that you describe here is one in which the principal shareholders give a specific directive to the agents, you know, do this particular thing or don’t do that particular thing, and I think if the principals in fact do that, then the corporate managers have to abide by it, whether or not it promotes… It doing so raises the market value of the equity shares over time, and we have to presume that these principals know what they’re doing. And now, they may be mistake in believing that prohibiting the corporation from producing cigarettes will in fact, they may think that reduce… That stopping Philip Morris from producing cigarettes is actually going to result in a higher share price, that may be mistaken, but let’s use that as an example.

0:33:18.3 Don Boudreaux: If the shareholders of Philip Morris say we want you to stop producing cigarettes, and we use some machine to get into their minds as God would get into their minds and we discover that they actually believe this is going to maximize their wealth over time, and it turns out that it doesn’t. Well, that’s not the management’s fault, the management’s just doing as it’s directed. I mean, I think, it’s almost like a trump card, the bottom line, one bottom line is always shareholders are principals, excuse me, yeah, shareholders are the principals and the management are the agents, and within the bounds of law, the principals have the right to delegate to the agents whatever powers and directives that they choose. I don’t think there would be a… I think just in the process of competition for equity funds, it would be the rare, I don’t think there’d be a lot of shareholders who are willing to put, who knowingly reduce the value of their investments in order to pursue, quote unquote, social goals.

0:34:33.0 Don Boudreaux: There may be some, but we have other institutions for doing that, they’re called non-​profits, or there’s lobbying government. And so shareholders like that, I encourage you to give to the Cato Institute, give to the Mercatus Center or George Mason University Economics Department or whatever is your preferred outlet rather than trying to do it through an institution that’s not really set up well to do that. Let’s return to something we said… We were talking about earlier on, one of the beauties of the shareholder wealth maximization system is that the directives are very, very clear, and that is take actions that result in the price of the shares being as high, take legal actions that result in the price of the shares being as high as possible.

0:35:27.4 Don Boudreaux: And anybody who knows anything about the legal system knows that there’s a huge value in having legal rules that are clear and easy, relatively easy, to reveal whether or not they have been followed, followed or not, the… One of the many problems with stakeholder capitalism is again, first of all, we don’t know just who the stakeholders are, it can be almost anyone, and then… Because in almost all cases, the stakeholders’ interests are not going to be measured in money, unlike the shareholders’ interests, which are measured in money, it’s a pretty objective scale of values, $1, $2, $3, because the stakeholders’ interests are typically not measured in money, it’s very difficult to determine how well the management charged with pursuing these stakeholder interests are doing.

0:36:35.4 Don Boudreaux: And one great irony here is that management under stakeholder capitalism often gets a kind of freedom that the management would not have, does not have under shareholder capitalism; under shareholder capitalism, if the managers fail to maximize shareholder value, they get booted. If they do it too egregiously, they face legal action. Under stakeholder capitalism, because again, the identity of the stakeholders is so ambiguous, the metrics of performance are so ambiguous, that allows management to get away with saying, oh, we took this particular action or that particular action to help our stakeholders and sure, it drove down the value of our shares, but that’s part of the bargain, right, with stakeholder capitalism. And so trust us that the stakeholders like what we’re doing, or will like what they’re doing when the full consequences of our activities play out, and there’s very little way to police this.

0:37:48.1 Don Boudreaux: And so to the extent that… And the irony that I mentioned earlier, is that a lot of proponents of stakeholder capitalism, at least early on, many of them were worried that corporate managers should be leashed, corporate managers have too much discretion, it was this whole separation of ownership from control literature starting back in the ’30s. And to the extent that the… There aren’t many, there aren’t many, to the extent that there are proponents of stakeholder capitalism today who are also worried about corporate managers having too much discretion. That’s a fundamental inconsistency. Stakeholder capitalism without doubt will give to sitting corporate managers much more discretion to use the resources at their disposal as they see fit, rather than according to how the principals want those resources to be used, or how even the proponents of corporate social responsibility want those resources to be used.

0:38:57.4 Trevor Burrus: So stakeholders are ephemeral and hard to find, that’s obviously true. It could be anyone, almost, but the kind of discussion we’ve been having about shareholders and corporations, it looks more like the kind of It’s a Wonderful Life shareholder situation where you have a piece of paper or you go down and you meet with the 25 shareholders and they vote about what the business is going to do, as opposed to what’s actually going on in the stock market today, which the vast majority of shares are held in 401Ks and institutional investors who are voting by proxy, not really paying attention to what the corporation is doing, it’s kind of been whittled down into just a few highly interested people as your index fund just trades shares without you even knowing it. Doesn’t that change the nature of shareholder capitalism?

0:39:43.3 Don Boudreaux: So I’m sitting in a building now, sitting in a room now that’s just a few hundred yards from the George Mason University Law School, and the first great dean of the George Mason University Law School in its modern era is the late Henry Manne, M-A-N-N-E. And one of Henry Manne’s most important contributions to economics and law is an article he wrote in 1965 entitled Mergers in the Market for Corporate Control. And that article made a very simple argument… That article makes a very simple argument, and that is, if current managers are underperforming, either intentionally, they’re lazy or they’re just incompetent, then the price of those shares will fall because the profits of corporations earning falls, it becomes less attractive for people to buy those shares, so those share prices fall.

0:40:43.1 Don Boudreaux: At some point, what we now call corporate raiders, I don’t think this term was around when Manne first wrote his article, what we now call corporate raiders, and there are other people who play this kind of role as well, they look greedily at those falling share prices and they say, wow, that corporation must be managed pretty poorly. I can make a mint, so let me go in and buy up enough of those low-​priced shares in order to get a controlling interest, it doesn’t have to be 50%, given the complexities of corporate law, in most cases. Let me go buy up at those low prices these corporate shares and I’m going to put in management that will actually perform better, and if they succeed, then of course, they own all these shares, they put in better management, the share prices go back up because now it becomes a more attractive investment.

0:41:30.5 Don Boudreaux: And so this market for corporate control, as Henry Manne called it, works pretty well to protect the interests of the small shareholder who, as you suggest, as you say correctly, Trevor, if I own 10 shares of Apple, I can show up at an Apple shareholder meeting. Now, Tim Cook’s not going to pay any attention to me. I’m not much better than the person who walks into an Apple store and buys an iPhone, but I don’t have to have Tim Cook’s attention. I have this very thick global market now for corporate assets, that if those assets are under-​utilized, there are enough alert people out there with enough expertise and abilities and incentive to buy and sell those assets in ways that reflect, as well as can be reflected, the best estimate of the performance of the current owners of those assets, and so the small shareholder is protected in that way.

0:42:37.2 Aaron Powell: Companies, large corporations aren’t just the products that they produce, but increasingly are brands in and of themselves, and people choose to support or not support brands for… I mean, obviously for the reasons that they like or dislike their products, but it feels like increasingly for other reasons as well. We’ve seen different brands become pieces in the culture war, people may like Chick-​fil-​A’s chicken sandwiches, but they decide not to shop there because of the values that the corporation or its leadership holds and so on. Does that mean that we can see… I mean, even from this fiduciary duty standpoint, that there simply is a demand for CSR, that as a corporation, if I put out… We had Pride Month recently, and every corporation was posting on Twitter rainbow flags and saying things in support of LGBT rights.

0:43:43.0 Aaron Powell: We had a lot of corporations saying they were supporting the Black Lives Matter movement or giving money to various related causes, and that this was… I’m sure that a lot of the people doing it, a lot of the people in charge of these companies actually believed in the value of those causes, but there was also an advertising and marketing angle to all of this, that you want to be seen as the company that does this sort of stuff as opposed to the evil company that doesn’t. Does that mean that we’re having this conversation about CSR, it may be that embracing CSR just is within the fiduciary duty, it is a way to get more customers on board as customers become more socially conscious?

0:44:22.0 Don Boudreaux: Oh, sure, although I wouldn’t call it embracing… Well, maybe embracing CSR, but I wouldn’t call it embracing. It’s often synonym, stakeholder capitalism. So yes, certainly as we become a wealthier society, as we have become, at least up until 2020, as we become a wealthier society, people’s demand for amenities goes up relative to their demand for physical goods and services. There’s nothing wrong with that, it’s perfectly acceptable and understandable and to be expected. And so if one of the things that they demand is that their blue jean… The company, the from which they buy blue jeans take certain actions or conveys certain values, follow certain values, hires certain workers, then these demands will be expressed in the market, they’ll be expressed both in the form of consumers and how they spend their money on outputs and expressed also in the form of… In two other forms in the form of suppliers, some workers might be more willing to work for companies that they regard as socially responsible, and also they will be manifested in the asset markets, investors will be willing to have some of their funds be devoted to the pursuit of these causes.

0:45:52.8 Don Boudreaux: And so the market is a… Provides a good mechanism. I wouldn’t say it’s ideal. I don’t think anything’s ideal in this real world of ours, but the market provides as good a mechanism as there is, probably a better mechanism than is available in any other way, for allowing individuals to express their demands for what’s called corporate social responsibility and to do so with the nuances and degrees that they want. Investors that have no interest in corporate social responsibility, the market will… There’ll be corporations for them to invest in. Investors who do have a demand for it, there’ll be corporations for them to invest in, customers can choose to likewise, to choose to spend their money here and there, depending upon their perceptions of how much or how little corporations engage in these things.

0:46:50.2 Don Boudreaux: And so the market, I think you’re right, there is a demand for it, and I don’t sit in judgment of that demand, and that to the extent that the market notices that demand, and it does, the market has every ability to satisfy that demand, so to that extent, there’s no need for the kinds of actions that the advocates of stakeholder capitalism, we don’t need government to mandate that boards have… Be composed of certain types of people and that corporate managers pursue certain types of goals. I don’t see any reason why these various alternative desires can’t be met in the market, with the market and with choosing in a very nuanced way, just how they’re met and who does, who… Which particular individuals does which particular task of meeting these demands.

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0:48:11.0 Aaron Powell: Thank you for listening. If you enjoy Free Thoughts, make sure to rate and review us in Apple Podcasts or in your favorite podcast app. Free Thoughts is produced by Landry Ayres. If you’d like to learn more about libertarianism, visit us on the web at www​.lib​er​tar​i​an​ism​.org.