Apr

23

I have been considering whether there is any evidence that socially responsible businesses are better investments than profit maximizing ones. Most of the research points out that it is hard to define profit maximization because short term and long term maximum paths might differ. The concept of risk and return is also relevant with higher return often decreasing the chances of surviving. The duty of a company and its directors to its shareholders, and their incentive to do better for themselves and their shareholders by increasing earnings also plays a part. The concept of dead weight cost is also relevant which is minimized when marginal cost equals marginal revenue and the pricing is such that the demand curve intersects the supply curve at the profit maximizing price. I found this article on going for fourth downs refreshing and provocative in this area.

Rocky Humbert writes: 

I think this is an important subject to consider and the current academic literature does a comparatively poor job. For starters, there is no satisfactory definition nor rubrics of "socially responsible businesses." The monikers of "sustainability" and "green" and "sensitive to communities" are difficult to quantify to say the least. And frustrating to understand in many cases. A chemical plant that dumps its toxic waste into the backyard (while poisoning its workers and neighbors) is?? clearly maximizing short term profits at the expense of long term profits. And it's clearly socially irresponsible. And it will eventually fail. In contrast, my office landlord just installed infrared soap and hand towel dispensers in the bathrooms (presumably to be green), but will they have a good ROE on this? I have no idea. Will they attract new tenants because this is a "green" building? If the rent is the same, I suspect yes because some # of customers get incremental utility from transacting with socially responsible businesses. In contrast, no one (reasonably) gets incremental utility from transacting with socially irresponsible businesses.

The "duty of a company and its directors to its shareholders" is a decidedly American concept. The reality is that torts and taxes and regulation mean that the actual implementation of this duty may in fact include social responsibility. Things have changed over the past 100 years (for better or for worse). So — the answer to the chair's question must be: if the cost of being socially responsible is small, then socially responsible businesses MUST BE better investments. If the cost of being socially responsible is large, then it's less clear — and there is the free-rider problem.

Rishi Singh writes: 

I had the benefit of hearing the current owners of the Empire State building give a talk on going green and increasing revenue a few years back. Their synopsis was that going green for the sake of going green was too expensive for the marginal benefit (e.g. solar panels). Instead, by gutting office space, adding insulation, different windows, and light sensors to turn off lights, they improved the quality of the offices and significantly reduced utility costs at a reasonable cost. By adding these features they could charge higher rent while also improving their green footprint and returning to profitability. An example of market forces awarding the cheapest implementation of reduced energy usage.

Susan Niederhoffer writes:

Some thoughts:

1. His point about short term vs. long term is very important … because long term you see/pay for your short term decisions. Conscious Capitalism companies are long term focused. We have used as proxy for good companies, 100 best companies to work for, or some other third party list.

2. Your heading reveals a trade-off mentality, that it's either or. That's not what we've found. It's possible to keep looking for solutions that make ALL stakeholders better off (and most CC companies include the earth as a stakeholder to avoid those nasty externalities). Even if it costs in the short run, doing the right thing will pay off over time. Patagonia is a good example.

3. CSR is often the crony capitalist trying to tack on a beneficial marketing strategy to get on the green bandwagon (his landlord). You have to dig deeper to sort out which companies really mean it.

4. Transparency is getting harder to avoid. Companies that delay finding out about the negative impact they have in their supply chains and fixing them will pay when their customers discover and put it on twitter. Brand loyalty is hard to buy.

5. You will have fun debating these with John at Junto. Keep up the research…but better read the book too.

Russ Sears comments: 

The problem also is there are many "socially responsible" businesses that are not to be believed. The customer wants to do business with a business that is on the loyal side of the prisoners dilemma. It signals that they value repeat business, and this one transaction will not be be maximized at the customer's expense. In other words, a properly designed social response shows that the business considers itself to be in an infinite set of transactions. It will take less now so that the great great grand kids can make up for the small cut they give back to society. Like Zacheus the tax collector, if they miscalculated and took more than their share, they will return it 4 X what they took.

The problem however, is that often a social responsible business is really doing a slay of hands. Like Capone gifts to the Opera, or LiveStrong gift to healthy living.

Also sincerity is terrible difficult to measure, but it's something many individuals think they are better at than they are. Like ants, they are to be trusted because they give off the scent that they are from the same "tribe".


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