Archive for July, 2009

THE CURIOUS EVOLUTION OF “PROFITABILITY-ONLY” AS A CORPORATE GOAL

Saturday, July 25th, 2009

As a historical matter, from 1860-1930, the state laws that authorized people to conduct business as a “corporation” actually prohibited such businesses from considering matters other than the legality and profitability of their corporation’s enterprises. Then corporations were small and had few shareholders. The popular operational economic principles found in the United States at the time of the economic collapse of 2008 included this idea. Short-term material profit was the operational standard of success for most corporations and many other organizations, when the executives did their periodic   profit and loss examinations. We emphasize “short-term.” The corporate ritual of a quarterly performance review of everyone from managers to CEOs reinforced the short term view. Those employees with below average earning results for the company in the quarter under review might be fired. There were also short term attempts to cause a rise in a stock’s prices. Another factor promoting short-term interest at the popular level was the retail distribution and ownership of equities among ordinary Americans, culturally manifest in the growth in the 1990s of “24 Hour Financial News” in outlets such as CNBC and Bloomberg.
The focus on short-term profitability became an extreme form of the early injunction to consider only the legality and profitability of an enterprise. But the restriction to profitability in fact was no longer appropriate for the evolving large multi-state or multi-national conglomerates with thousands of shareholders that we know today. Gradually, after the U.S. depression of the 1930s and World War II, the profitability-only doctrine softened. The watershed 1953 case was A.P. Smith Manufacturing Co. vs. Barlow. The New Jersey Supreme Court upheld a gift from the company to Princeton University, arguing that shareholders would benefit because it would bring goodwill to the company. In a 1979 study of eighty-two major U.S. corporations, about half treated social responsibility as one of their goals. [See Y.K. Shelby, “A New Look at Corporate Goals, in California Management Review 1979, vol.16 (2) 71-79.] By the beginning of the twenty-first century, the profit maximization norm had been somewhat relaxed, and, as certain changes in corporate governance took place, the serious discussion of long term social benefits began to occur.  Today, many corporate leaders believe that social goals enhance profitability in the long run. Those in charge of marketing and branding believe so. The short-term perspective plays into our human weakness of will or motivational preference for short term benefits of profitability that may end up being harmful, rather than long term results that are more difficult to calculate.

To the degree that a corporation [delete is] isolates itself from the community containing its offices or factories, it may get away with ignoring the long term outlook that usually includes impact on a community or community social benefit. In the summer of 2002, the board of the Hershey Trust that had a controlling interest in Hershey Foods acted on a decision about which the community in Pennsylvania, where Hershey Foods is based, was not consulted. The board had decided to sell the entire company to Wrigley. This was contrary to the founding wishes of Milton S. Hershey, for his wealth to be used “for a purpose of enduring good.” Among other things besides jobs, the community depended on the company for funding a school for the disadvantaged, and for the maintenance of the spa, hotel and gardens that brought many tourists to the town. The reaction of the community was so negative and widely publicized, that the board repudiated its own plan. In the end, for many who follow news about the corporate world, the case, reported in The Triple Bottom Line by Andrew W. Savitz and Karl Weber (2006, pp. 3-19) revealed how cooperation between community and company, including a concern with long term social benefits, can create a win-win situation for all. Indeed, this outcome for cooperation among human mammals could have been predicted. (One only needs to look at reports such as those of Franz de Waal, a primatologist and evolutionary psychologist.  He has shown how cooperation works for chimpanzees.)