Essay by Trevor Fornara, Editor in Chief
Photo: Petr Kratochvil
Corporations often boast new initiatives to reduce their pollution, plastic use, reliance on non-renewable energy, or whatever else is topical in the public discourse. These corporations try to sell these initiatives to the public as corporate social responsibility—companies taking it upon themselves to help their communities and society as a whole. However, the primary motive behind these actions is likely financial. Shifts in regulations and consumer behavior have made it easier for corporations to benefit financially from doing the “right thing.” The underlying issue here can be evaluated through the context of shareholder theory and stakeholder theory—whom do corporations aim to benefit? Changes in the way laws are written and how the public consumes have allowed corporations to adopt more environmental practices because there is financial incentive to do so; and, although there is no movement toward stakeholder theory or real corporate social responsibility, corporations are still making positive changes that have real effects on their communities and society.
The debate between shareholder theory and stakeholder theory is ongoing in the world of business. These two ideas pivot on whether or not corporations hold responsibility for anything besides increasing profit for themselves. Shareholder theory accepts the idea that a company’s primary goal is to generate profits for its owners: the shareholders (Friedman 1970). In a C Corporation, the shareholders buy into the company, receive voting rights, and often a dividend (Chron.com 2010). The shareholders do not have the time to run the corporation themselves, so they elect a board of directors who hire executives trained in running a corporation (Chron.com 2010). These executives are the decision-makers that are tasked with generating profit for the shareholders (Friedman 1970).
One of the issues with shareholder theory in practice is that the shareholders’ best interest is often taken to mean increased profit, when this may not always be the case. For example, if a corporation could maximize profits by legally disposing of waste into a nearby river, then shareholder theory in practice would likely advocate for that option. However, individual shareholders may be members of the community who are affected by the pollution. Shareholder theory would contend that they have every right to use their corporate dividend to clean up the river. This logic is flawed because it would probably cost the shareholders more money to clean up the river than to pay for proper waste disposal in the first place.
Stakeholder theory views this relationship much differently. While executives are working on behalf of shareholders, stakeholder theory adds that they must also work toward society’s betterment. This adds many more groups into the equation, including employees, customers, and the broader community. This concept is called corporate social responsibility, and it is the main point of contention between the two theories. In a 1970 article for The New York Times Magazine, economist Milton Friedman gave examples of what a corporate executive could do to help society and explained why he believed corporations should not be responsible for society’s well-being. For example, an executive could give jobs to the unemployed instead of better-qualified individuals working at other jobs to help fight poverty. This decision would be to the detriment of the company, as their employees are less trained (Friedman 1970). Friedman argued for shareholder theory because an executive acting on behalf of all stakeholders is spending money that is not theirs to spend. Friedman would say that, if the shareholders cared about fighting poverty, then they can do so with the dividend they receive from the corporation (1970). This is similar to the shareholders using their dividends to clean the river. This part of shareholder theory makes sense when talking about charitable acts. However, it fails when applied to more material examples, such as the polluted river. Friedman was being a bit dramatic when he claimed that corporate social responsibility makes the corporate executive into “simultaneously legislator, executive and jurist” (1970). An executive deciding against polluting a local river is not a tyrannical tax that robs the shareholder, employee, and customer of their money, as Friedman suggests. It is within the executive’s right to sacrifice some profit in the name of preserving the local environment because they have a responsibility as representatives of their corporation to look out for their stakeholders’ well-being.
There is no doubt that stakeholder theory makes for good public relations. We’ll make the assumption that customers like to support businesses that appear to support them back. Therefore, there is an incentive for companies to project an image of stakeholder theory to the public. It is often difficult to see the difference between a company acting in the name of profit and an honest attempt at helping their community. A common way that corporations project a good public image is through “sustainable practices.” This term is a political buzzword with very little meaning behind it. In 2020, renewable energy became cheaper than using fossil fuels (Evans 2020). It would be easy for a corporation to switch over to using renewable energy and boast to the public that they are “climate-conscious,” while the real decision-maker is the bottom line. It is becoming harder and harder to determine corporations’ true intentions regarding social responsibility.
Cap-and-trade is a climate policy that has been sweeping the globe over the past 20 years (Plumer and Popovich 2019). The legislation puts a cap on the total amount of carbon dioxide emitted into the atmosphere (Environmental Defense Fund). Emission permits are then distributed to corporations who may trade them amongst themselves. The profit to be made from selling climate permits is significant enough for corporations to limit their carbon emissions. The cap falls over time, which forces corporations to innovate, or invest in renewable options (Environmental Defense Fund). A direct tax on carbon emissions also works; this system was adopted by Canada in 2019 (Plumer and Popovich 2019).
The United States has yet to adopt a national cap-and-trade program or a direct carbon emissions tax, although many states have done so. Several states in the Northeast have put cap-and-trade systems in place for the energy industry (Plumer and Popovich 2019). The energy industries in these states make up about 18 percent of total emissions and the policy charges corporations about five dollars per metric ton of carbon dioxide (Plumer and Popovich 2019). These policies are weak compared to California’s, which covers 85 percent of the market and costs corporations 15 dollars per metric ton. Canada’s tax covers 47 percent of the market and also costs corporations 15 dollars per metric ton (these are the statistics for the nationally-imposed tax; some provinces have stricter policies that cover up to 90 percent of emissions and charge twice as much per metric ton) (Plumer and Popovich 2019). Anti-emissions policies can vary widely in method and scope, but they all have one thing in common: they provide a financial incentive for corporations to limit their carbon emissions.
When a company says they are taking a stand against climate change and are vowing to decrease emissions for the sake of the environment, how do we know if they are genuine in their reasons? As it becomes more profitable to go green, corporate promises will sound more disingenuous. Cap-and-trade does not promote stakeholder theory; it is an admission that the vast majority of corporations have only their shareholders’ profits in mind. From a political perspective, cap-and-trade is an “if you can’t beat them, join them” policy. Lawmakers are forced to play by the rules of shareholder theory to make harming the environment bad for business.
It is becoming increasingly difficult to ascertain the true intentions of corporations. This shift is likely due to a change in how policy is written and in consumer consciousness. Consumers are increasingly willing to pay more for products that they can feel good about buying. For example, the organic foods market has nearly doubled in the last 10 years (Nunes). Government policies and consumer pressure are working to make companies better their practices. Although corporations are using these opportunities to feign corporate social responsibility, at least they are actually reducing emissions, ethically sourcing products, using less harmful preservatives, et cetera. These financial incentives do not take the place of corporate social responsibility, but they are a good start toward corporations taking action for the greater good.
Stakeholder theory is the ideal way to run a society. The goal of a corporation should be to benefit its shareholders while simultaneously benefiting its community and society. Friedman (1970) argued that it was not the place of corporations to be benefiting society because that is the job of government, and any profit lost in doing so is unjust taxation on all parties involved. However, it is not the job of government to spend billions cleaning up messes caused by corporations caring only about their bottom line. Additionally, shareholder theory in practice usually assumes that the sole interest of shareholders is profit (Friedman 1970). This is problematic because corporate executives may try to maximize profit through means that are disagreeable to the shareholders, ignoring any of their non-fiscal interests. The current corporate system is undoubtedly shareholder-centric, and any change will have to come from within corporations themselves. Until that happens, lawmakers must write policy that works within this system. Cap-and-trade is a prime example of how policy can create financial incentives for corporations to act in ways that are favorable to society (Environmental Defense Fund). Financial incentives can also be made through shifts in how the public consumes. If people are willing to pay more for items that they feel good about purchasing (ethically sourced, organic, et cetera), companies will adapt their practices to fill that demand. Corporations pretend that these ethical changes display their corporate social responsibility even though they are often financial-based. This is to be expected, though, and at least the changes these corporations are making are real and have real effects. Today’s corporations often make unethical decisions, and they care little about social responsibility; but, it is reassuring to know that government has ways to channel corporate actions that will benefit society at-large.
Trevor Fornara is a senior from Mystic, Connecticut, majoring in philosophy, politics, and law. Trevor is a research fellow with the Undergraduate Research Center’s Summer Scholars and Artists Program, and works as a communications intern on the Leslie Danks Burke for State Senate campaign. He served as treasurer on the founding e-board of the Interdisciplinary Research Club last year, before leaving to focus on Happy Medium. During his first year at Binghamton, Trevor participated in the Source Project where he researched the affects of the university on the city’s housing market. Trevor also wrote for the Jewish Leader, a regional Jewish newspaper in CT, for 3 years.
Evans, Simone. 2020. “Solar Is Now ‘Cheapest Electricity in History’, Confirms IEA.” Carbon Brief, October 13. http://www.carbonbrief.org/solar-is-now-cheapest-electricity-in-history-confirms-iea.
Friedman, Milton. 1970. “The Social Responsibility Of Business Is to Increase Its Profits.” New York Times Magazine, September 13. https://www.nytimes.com/1970/09/13/archives/a-friedman-doctrine-the-social-responsibility-of-business-is-to.html.
“How Cap and Trade Works.” Environmental Defense Fund. www.edf.org/climate/how-cap-and-trade-works.
Nunes, Keith. 2020. “Organic Food Sales Reach $50 Billion in 2019.” Food Business News, June 10. http://www.foodbusinessnews.net/articles/16202-organic-food-sales-reach-50-billion-in-2019.
Plumer, Brad, and Nadja Popovich. 2019. “These Countries Have Prices on Carbon. Are They Working?” The New York Times, April 2. http://www.nytimes.com/interactive/2019/04/02/climate/pricing-carbon-emissions.html.
“What Does Incorporate a Business Mean?” 2010. Chron.com Small Business. https://smallbusiness.chron.com/c-corporation-work-4767.html.