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When economists think about corporate ethics, they must remember the purpose of a corporation, according to clinical professor of economics Michael Gibbs. “Milton Friedman said in a famous 1970 New York Times op-ed piece that the social responsibility of a corporation is to maximize profits,” he said, but corporate boards and top management might consider balancing that tenet with other economic issues. “These are classic issues in economics that we usually call externalities,” Gibbs said. “For example, a company that pollutes is imposing some costs on someone else and maximizing its own profits. Normally, a corporation would ignore that. But an argument can be made for taking into account some considerations other than profits in that particular circumstance.”
Gibbs was among experts who discussed corporate social responsibility at an October 25 conference at Gleacher Center. Hosted by the GSB, Harvard School of Public Health, and the Ethics and Compliance Officer Association, the event focused on the financial impact of ethics and compliance programs for corporations.
Gibbs pointed out that many of a company’s economic transactions are based on relationships among business partners and employees. “Because those relationships are complex and unpredictable, they are governed to a large extent by trust,” he said. “Therefore, there is an economic value to having a good reputation. If they are implemented correctly, corporate ethics programs can improve a company’s reputation with its business partners, its employees, and even its future employees.”
Ethics compliance officers often presume that ethics programs improve the bottom line of an organization, Gibbs said. “That’s not always true,” he said. “Sometimes these programs are going to be costly to shareholders. It still might be the right thing to do, but it is naive to presume they will always improve the bottom line, although in some cases there is good reason to think they might.”
Some corporate answers to problems raised by issues of corporate social responsibility are questionable, Gibbs said. “Maybe they are driven by management pursuing its own interests instead of the interests of shareholders,” he said. “For example, when Goldman Sachs donated 600,000 acres of land in Tierra del Fuego to the Wildlife Conservation Society of New York, I saw no justification for that. That’s just improper governance that’s a little bit like a CEO taking too much compensation for himself. He just took it in the form of ‘I’m on the board of the Conservation Society; let me pursue my own interest at the expense of shareholders.’ Similarly, boards and executives should be very wary of general corporate charity programs. These are spending the shareholder’s funds. Unless there are enough public relations benefits ( which is probably not the case most of the time), that is an inappropriate use of someone else’s money.”
—Phil Rockrohr