BEVERLY HILLS – Yesterday, I moderated a panel at the Milken Global Conference featuring founders of companies with social missions. One panelist was John Mackey, the co-founder and co-CEO of Whole Foods Market.
Mackey made a bold claim: “Business is inherently socially responsible.” You can see his argument here, starting at 9:50:
“Business is creating value for its customers, right?” Mackey said. “It’s creating jobs, providing benefits, helping people, giving them opportunities to learn and grow in the workplace, trading with suppliers – and that money ripples through the economy that way and creates more prosperity. They’re creating value for their investors, they pay major taxes, they are philanthropic. I mean, business doesn’t have to atone for being a business.”
Whole Foods operates under a list of eight core values that describe how the company aims to serve various stakeholders. Only one of the eight core values is directly about shareholders – “we create wealth through profits and growth” – but Mackey argued the company’s stated goals for serving customers, employees, the environment and other parties are mutually reinforcing with its goal of making profits for its owners.
I think Mackey is right that businesses are responsible for much of what’s good in life. Businesses are voluntary associations of customers, employees, investors and suppliers, and it’s true that getting them all to work together generally depends on finding ways to make every stakeholder better off for being involved in the business.
But I wouldn’t go so far as to say business is “inherently socially responsible.”
There are a lot of ways businesses can and do make profits for their shareholders by being socially irresponsible. Here are some common ways:
- Imposing negative effects on non-stakeholder parties, for example by polluting. Preying on consumer irrationality, for example by promoting addictive substances and gambling. Taking advantage of inefficient markets where quality is difficult to evaluate in order to provide bad value to the customer (especially common in health care and education). Lobbying for special government privileges to exclude competitors. Taking risks that will be borne by the government in a severe crisis (a major problem in finance.)
Businesses exist to make profits. Sometimes they do this by finding mutually beneficial activities to pursue with employees and customers; sometimes, they do it through the approaches listed above. One way is not inherently more desirable to investors than another, which is why it’s important to make rules that push businesses toward the socially responsible options.
Then there is the issue of the distribution of the benefits among the stakeholders. In general, every voluntarily participating party is made better off by business growth, but how those benefits get shared depends on public policy and economic conditions.
Over the last few decades, worker power in wage negotiations has declined, partly due to the reduction of union membership and partly because of frequent slack in the labor market. Wages rise quickly when businesses must compete for a small number of available workers; for most of the last 30 years, unemployed workers have been too plentiful to push wages up as fast as the economy is growing.
This has meant that, when businesses have caused the economy to grow, workers have not shared as fully in the gains as they used to.
This is perhaps the best example of why business is not inherently socially responsible: businesses delivering for their workers is not inherent, it’s conditional on businesses being placed in situations where they must deliver for workers in order to make profits.
I mostly agree with Mackey: Two cheers for businesses, which deliver all sorts of things we want and make our lives better. But let’s also make sure they operate within a policy and economic framework that makes them good for everyone, and that ensures the benefits of growth are shared equitably with employees.