What's the social purpose of a company?

Oliver Hart says: “When doing good is making money, it’s simple - but doing good isn’t always the most lucrative decision, so what then?"

12 Oct 2018

With the rise of electric car sales, fair-trade products and ethical clothing lines, consumers are voting with their wallets for causes they care about. While the act of living selflessly is nothing new, are companies finally following suit?

Nobel Laureate Oliver Hart, known for his work as a contract theorist, has devoted his latest research to the world of corporate sustainable contributions. “When doing good is making money, it’s simple,” says Hart. But doing good isn’t always the most lucrative decision, so what then?

Hart uses the example of large grocery stores in the United States that sell semi-automatic weapons in their stores. Sure, it’s profitable, but does that mean they should do it, especially as we’ve seen an increase in shootings in recent years?

Many economists have argued yes, they should, as it’s not a company’s role to consider sociopolitical or environmental consequences. Milton Friedman, one of the most famous economists ever said quite bluntly that “companies shouldn’t spend their time worrying about these non-monetary things.” Hart sees this as not only a limited stance to take but also an inefficient thing to do from an economist’s point of view.

“If you make more money by selling more semi-automated weapons, you can hand it out as a dividend,” explains Hart. “And those shareholders who care about gun control can give to their favourite gun control organization to offset the extra weapons in public hands.”

It’s much simpler to live in a world where the bottom line is the thing.

– Hart

The problem is that individual contributions simply can’t come close to matching the impact of a Fortune 500 company. “The damage and the profits are inextricably linked,” he says. “Companies should recognize that.”

“It’s much simpler to live in a world where the bottom line is the thing,” Hart admits. “Make money. Everyone agrees on that.” But what Hart’s work suggests is that executives should consult their shareholders more instead of only focusing on profits under the justification that is their duty to shareholders.

“Actually, their duty is more complicated,” says Hart. “Doing the profitable thing may conflict with doing the socially responsible thing, and that’s where you have to try to understand shareholder preferences.”

We need to change the mindset of companies.

– Hart

Today’s massive, international companies are rivalling governments when it comes to power, which according to Hart puts even more significance on their attention to corporate social responsibility.

“When government is stuck, you look for other ways of dealing with the problem,” he says. “We need to change the mindset of companies.”

A company finding unanimously supported sustainable goals may seem like an unlikely scenario, but Hart doesn’t think this should be seen as deterrent. At the end of the day, he hopes that these ideas will at least make people in executive positions think differently not only about the responsibility they have towards their shareholders, but to society as a whole.

In a world where people are constantly faced with the challenge of figuring out what the right thing to do is, we can at least take comfort knowing our decisions do have the ability to make a positive impact. The only questions we have to ask ourselves is how and where.

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Oliver S. Hart

Nobel Laureate, 2016