The legal requirement to maximize profit eclipses the opportunity to be a force for good. To make this case convincingly it is necessary to define the terms.
Profit Maximization: Maximum profit is the greatest possible difference of total cost from total revenue. To achieve maximum profit, a corporation must not only maximize revenue, it must also minimize cost.
Force for Good: Being a force for good entails designating something specific and superlative – measurable progress toward solutions to well-defined social problems.
Brands: This essay will use the terms “brand” and “corporation” interchangeably and in both cases be referring to the sum total of a corporation’s activities and impact.
What limits a corporation's ability to be a force for good?
Not only is profit maximization required by law but creating good can be illegal. In 1914 Henry Ford stated that:
It is better for the nation, and far better for humanity, that between 20,000 and 30,000 should be contented and well fed than that a few millionaires should be made. (Thomas A. Edison, ”Henry Ford Explains Why He Gives Away $10,000,000,” The New York Times, Jan. 11, 1914)
However, in Dodge v. Ford Motor Company (1919), “The Court held that a business corporation is organized primarily for the profit of the stockholders, as opposed to the community or its employees.”
In a more recent (2010) but very similar case, eBay won a decision against Craigslist, where Craigslist was explicitly trying to codify and sustain its unique corporate culture. According to an article in Forbes, “Craig [Newmark] does not want eBay to change Craigslist’s mission and practices from a focus on creating public good to a focus on creating private wealth.” The court held that:
Directors of a for-profit Delaware corporation cannot deploy a [policy] to defend a business strategy that openly eschews stockholder wealth maximization – at least not consistent with the directors’ fiduciary duties under Delaware law.
A third example, Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., ruled in 1986 that a corporation’s board of directors is required to accept any purchase offer that would maximize shareholder value. Subsequently, in 2000, Ben and Jerry’s was forced to sell to Unilever. These cases and others set the explicit precedent that:
A corporation has a legal responsibility to maximize profit
If creating “good” has an associated cost that does not increase profit, then creating that good is actually illegal.
Profit maximization can create bad (the opposite of good)
In Our Continuing Struggle with the Idea that For-Profit Corporations Seek Profit, Leo E. Stine of the Wake Forest Law review provides two great examples of how profit maximizing corporations create bad. Both cases describe what economists call, negative externalities - situations where costs that are the result of a corporation’s actions are borne not by the corporation but instead by external stakeholders. The first is the 2010 BP oil spill in the Gulf of Mexico.
To me, it is to be expected that a corporation that stands to gain large profits from aggressive drilling activity would less than optimally consider the environmental risks and occupational hazards that novel drilling activity posed. BP, after all, stood to gain all the profits from its activities, while the risks to the environment would be borne largely by others.
The second example is the Great Recession of 2008, where “big finance” took advantage of a risk/reward scenario that that required it to take on relatively little risk compared to the borrowers who stood to lose their homes and more.
The borrowers, who share a good deal of responsibility, too, but whose need to take risks was perhaps easier to rationalize as moral – a house to live in and bills paid off versus the ability to buy an even cooler sports car – got a rawer deal. Rawest of all, though, was the deal for millions of hard-working people who were paying their bills until the calamity destroyed economic growth and resulted in double-digit, persistent unemployment. They continue to suffer as do many others who have retained their jobs but endured furloughs, benefit cuts and pay freezes, and seen their local taxes increase as services by budget-crunched governments diminish.
In the two examples above, bad was created as a result of profit maximization. It is obvious but worth stating explicitly that a corporation that is a force for good must not be a force for bad.
What is good?
For a company to be a force for good, it must be able to demonstrate three things:
Measurable progress toward well-defined solutions.
An understanding that the goal is for all stakeholders to benefit.
Openness and cooperation, especially in the face of competition
Profit and good are not both apples. Profit is concrete and has no requirement for context, while good is relative and is defined entirely by its context. Good is the opposite of bad. Bad magnifies problems; good advances solutions. The amount of good can be measured as the amount of progress toward solutions to social problems.
This paradigm should be very familiar to corporations especially in this era of lean startup and design thinking, where complex problem-solving is broken down into small bites, hypotheses are tested and pivots are made. The trick is to create good with the same intention and rigor as creating product. This is the idea behind an exciting new approach called shared value.
Companies could bring business and society back together if they redefined their purpose as creating “shared value”—generating economic value in a way that also produces value for society by addressing its challenges. A shared value approach reconnects company success with social progress. – Creating Shared Value. Mark Kramer and Michael Porter
In the Shared Value model, creating good increases profit. A great example of Shared Value is the Unilever goal to improve the quality of the livelihoods for 500,000 smallholder farmers in its supply chain by 2020. This is not esoteric good. This is real, resonant and measurable. In the context of the global problem of poverty, Unilever has identified how being part of the solution can also lead to its success as a corporation.
Because of this focus, Shared Value is an evolutionary advancement from its predecessor, corporate social responsibility (CSR). CSR can be done well and CSR has definitely created real good; however, due to the absence of a compelling measurement framework for aligned incentives across stakeholders, CSR can also easily be relegated to empty messaging, low impact or poorly aligned activities. The quintessential example of this is Chevron’s 1985 “People Do” ad campaign, which touted a specious corporate ethic of environmentalism and became the archetype for greenwashing.
In the Unilever example, the farmers clearly benefit through improved livelihoods, while Unilever benefits through a secure and resilient supply chain that, over time, will create a consistent and reliable profit for the corporation and its shareholders. The one focus – a secure and resilient supply chain – can create value that is shared by many stakeholders. To achieve this goal, Unilever likely will need to invest more in the short term while assuming that a greater value will be accrued when aggregated over time. The argument that this is indeed long-term profit maximization is both clear and compelling.
Nestle has made a dramatic change from being a corporate villain to becoming a charter member of the Shared Value movement. It has made tremendous strides with successes like its York factory announcing zero waste to landfill while saving the company £120,000. This is not only a win for Nestle but also for all of us who need corporations to include their external stakeholders in their success calculations.
Where shared value is possible, we have a win-win and should aggressively pursue and facilitate that option. However, the Achilles heel of Shared Value is located where no (or no more) shared value can be found. BP can create some good by cleaning up the mess in the Gulf of Mexico; however, net good is what really matters. Shared value does not answer what happens when there are competing interests. What happens when more value for one stakeholder means less value for another?
Openness and cooperation are good multipliers
The competition inherent in capitalism is unparalleled at catalyzing products that provide value at a bearable cost. Competition encourages corporations not just to excel but also to capture market share by outperforming competitors. In the best-case scenario, this leads to better products at lower prices. In the worst case, a profit-maximizing endgame can reduce the value provided to consumers by limiting the supply of innovation. A very high profile example of companies engaged in limiting their competitors access to innovation can be seen in the smartphone patent wars between Google, Apple and Samsung. More illustrative examples relative to limiting access to innovation that could advance solutions to important problems are found in the pharmaceutical and agriculture industries.
Pharmaceutical companies spend significant amounts of money to create life-saving drugs and need to sell those drugs at a price that will enable them to earn a profit. Interestingly, “the market” is clearly telling these companies that there's a limit to how much profit is fair and reasonable to earn. The Access to Medicine Index was created to assess and rank global pharmaceuticals against each other relative to their ability to make essential medicines accessible. A significant proportion of that rating is based on a company's handling of intellectual property. Does it make its drugs available for humanitarian use? Does it enable other companies to manufacture its medicine under a generic label in the world’s least-developed countries? Gilead Sciences is a great example of a company that is creating good by being “the leader among peers in terms of its pricing initiatives and patents and licensing approaches.”
In agriculture, there is a pending Supreme Court case over the issue of patents, self-replicating technologies and seed saving. Specifically, a farmer in Indiana – Vernon Bowman – had been practicing seed saving (he collected soybean seeds from his plants and used that seed to plant the next year’s crop). This is of course how agriculture has been practiced since, well, since there has been agriculture. However, companies like Monsanto (the plaintiff), have patents on the specific soybean seeds that he planted, and Monsanto requires a fee to plant a second generation of the seed even if that seed was propagated from a farmer’s plants. Clearly there are issues here about which reasonable people could disagree. What is a reasonable amount of control for Monsanto to exert to earn a just profit? What is a reasonable expectation for farmers and consumers relative to the food we eat and the natural environment from which it is derived? Though it is clearly legal for companies to maximize their profits by artificially limiting access to food, it is not possible for those same companies to follow such practices and be a force for good.
Poverty and inequality
From 1992 to 2007 the top 400 earners in the U.S. saw their income increase 392% and their average tax rate reduced by 37%. - Wikipedia
Not since the Gilded Age have we seen the levels of inequality we see today. According to The Economist, “inequality has reached a stage where it can be inefficient and bad for growth.” The Economist goes on to suggest solutions to reducing inequality that borrow from both the political left and the right. Most relevant to our discussion is this: “The priority should be a Rooseveltian attack on monopolies and vested interests, be they state-owned enterprises in China or big banks on Wall Street.”
The connection between profit maximization and economic inequality is unknown, and differing opinions exist. However, it is true that the macroeconomic phenomenon of inequality is limiting all corporations’ ability to maximize profit. Previously I discussed Unilever and its goal to increase the livelihoods of 500,000 smallholder farmers. This not only helps Unilever and the individual smallholder farmers, but it helps the often depressed local economies in which these farmers live. Given Unilever’s massive global reach, it could affect larger regional and national economies as well.
We saw in the Shared Value context how corporations can find win-win scenarios to create both profit and good. If we are able to act more as a community of humans all of whom are impacted by regional, national and global economies, then maybe we can find the win-win in building less fragile and more vibrant economies by increasing the economic participation of the poor. For the resons discussed at the beginning of this essay, this sort of broader and longer term economic goal is likely impossible to achieve in a profit maximization context.
Profitable corporations can be a force for good
No, it is not possible for brands to maximize profit and be a force for good. However, it is entirely possible to be a force for good and to be profitable.
First, we need to change the legal structure of the corporation. The good news is that this is well under way. There are several new legal structures with the specific purpose to make it legal to not maximize profits. Some examples include B Corps (662 corporations), Low-Profit Limited Liability Corporations (L3C) (715 Corporations) and Benefit Corporations (150 corporations in seven states).
Second, we need to build net-good businesses. What if corporations recognized the practical reality that poverty is bad for business? Nearly every multinational corporation has the poor employed at the source of their supply chain. Alleviating poverty increases productivity. This is fact. If corporations internalized this reality and adopted very practical tools like the Grameen Foundation’s Progress out of Poverty Index® (PPI®)then, the act of doing business would reduce poverty. Corporations like Apple Computer or Wal-Mart could address the recent news of abusive labor practices in their supply chains by adopting specific goals to improve the livelihoods of these workers? LaborLink (which integrates the PPI®) gives corporations visibility deep into their supply chains, enabling them to monitor not just working conditions and employee satisfaction but also to measure the improving livelihoods of the workers and, by extension, an increasingly resilient supply chain.
The requirement to maximize profit makes it illegal for a corporation to have a cost center that creates good. Additionally bitter competition and the reckless pursuit of profit have actively created bad. However, there is good news. The legal limitations have been circumvented with new corporate structures and Shared Value is giving corporations a way to increase the total amount of good they can create. And the most promising opportunities are before us. Just as Shared Value was an evolution of what came before, I am confident that we can learn to lift our eyes beyond individual corporate walls and understand that profit can be both a reward for work and a force for good.