What Do Companies Owe Their Communities?

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Hal Weitzman: In August, 181 CEOs who sit on the US Business Roundtable issued a statement saying their companies didn’t just exist to return profits to shareholders, but also to treat stakeholders, such as employees and suppliers, fairly. They also said that companies should support the communities in which they operate. “We respect the people in our communities and protect the environment by embracing sustainable practices across our businesses,” said their statement.

But some of the same companies decide where to locate their facilities based on which states will give them the biggest tax breaks, which means they end up taking subsidies from regular taxpayers. So what responsibility do companies have to the communities and regions where they are located?

Welcome to The Big Question, the video series from Chicago Booth Review. I’m Hal Weitzman, and with me to discuss the issue is an expert panel.

Luigi Zingales is the Robert C. McCormack Distinguished Service Professor of Entrepreneurship and Finance and director of the George J. Stigler Center at Chicago Booth. Emily Heisley Stoeckel is chairman of the board of the Heico Companies, a privately held conglomerate, which owns a range of manufacturing, construction, and industrial-services businesses. And Daniel Anello is CEO of Kids First Chicago, an organization that works on improving access to high-quality public schools.

Panel, welcome to The Big Question. Luigi Zingales, I want to start with you because you wrote this blistering op-ed in the Washington Post that was highly skeptical of this Business Roundtable statement. You said, “It was at best a marketing ploy with no real bite, at worst a dangerous power grab.” But you have long advocated that companies should not just look to, you know, make profits, but should look more broadly at their purpose in society. So haven’t they sort of come on board with you?

Luigi Zingales: Not really, because what (Harvard’s) Oliver Hart and I are advocating is that companies should ask the shareholders what they wanna do. We do think that shareholders have other objectives besides making money, and making money is an important one, but most of us have other objectives. However, they end up paying the cost of these other objectives, so they must choose. And my impression from the Business Roundtable letter is that they were advocating for themselves the right to make this decision. And I don’t think that they have the authority and the credibility to do that, nor the information. So I think that they should ask the shareholders. And at least in the past, some of the companies that signed the petition did everything they could to block the shareholders from even expressing their opinions.

Hal Weitzman: Right, but I mean, so it sounds like it’s not necessarily the outcome you disagree with; it was the process that they got there.

Luigi Zingales: I think definitely the process, but I think that the process is important for the outcome because the risk is that the CEOs just take for themselves this extra power that would reduce their accountability. I think that one of the problems we have today is large companies are accountable to none. And once you eliminate even some accountability to the shareholders, then they become sort of a king in their own kingdom.

Hal Weitzman: Well, just to be clear, you think the whole exercise was sort of window dressing, but if they had involved the shareholders, would it not be window dressing? Would it be more substantial?

Luigi Zingales: Of course.

Hal Weitzman: OK, Emily, what’s kind of been your experience? You come from the corporate side. How did you react to this statement and this general idea that businesses should focus more on purpose and not just profit?

Emily Heisley Stoeckel: Well, I thought that it was a very interesting comment. I think that when large corporations were contributing to philanthropy, OK, to bring topics to the fore, they were leading the effort. Now, I question whether or not they’re truly leading the effort. And depending upon the reach of this company, how do they maintain any focus, so that any of their efforts actually have meaning and purpose behind it? I question whether or not, even if you had a shareholder vote, that could specify exactly which philanthropy they were interested in supporting.

Luigi Zingales: Sorry, I don’t think that philanthropy . . . I agree 100 percent with Milton Friedman: philanthropy should be done at the individual level, not at a corporate level. The question more tricky is: imagine pollution or imagine sales of assault rifles, like in the Walmart case. You cannot delegate this decision to the shareholders in the sense that if you decide to maximize profits by selling all the assault weapons, and then you give the money to the shareholders, the shareholders cannot undo what is done at a corporate level, OK?

So in that particular case, I’m sure that in your business—you run a private business— and I’m pretty sure that you maximize the utility of the family running the business, not necessarily the profits. There’s a difference between the two because you care about other things besides the profits, I imagine.

Hal Weitzman: And your case is an interesting one, isn’t it, Emily, because—

Emily Heisley Stoeckel: It is.

Hal Weitzman: You do have this . . . it’s a family business and it’s a private business, so you don’t have shareholders, but you do have important stakeholders, which is the family. So you’re not necessarily going for the biggest profits that you can; you’re going for something different. How do you balance those priorities?

Emily Heisley Stoeckel: You know, it is very interesting because we had to make a decision early on whether or not we were a family business, meaning family first, or a business, meaning we were interested in preserving the continuity and success of the underlying businesses. I actually believe I do have other constituents outside just strictly the shareholder. And given that many of our businesses are global, each of these businesses come from different cultures and have different priorities. I like to keep the message as simple as possible. The profits that they generate are reinvested back in to the operating companies. I do believe that through our foundation work that in order to have engaged employees, we support initiatives that they’ve identified within their own communities for us to support. But it isn’t driven individually across all these disperse—

Hal Weitzman: To be clear, the foundation is sort of an adjunct institution. ­­

Emily Heisley Stoeckel: Indeed, it is.

Hal Weitzman: It’s not central to the purpose of the business itself, is that right?

Emily Heisley Stoeckel: Right, that’s correct.

Hal Weitzman: Danny Anello, let me bring you in because you, obviously, on the other side, you’re working with corporations, trying to get them engaged in the community. Is it your sense that there has been a shift in terms of companies really reevaluating their purpose? Or do you sort of go with Luigi and think there’s a lot of window dressing going on?

Daniel Anello: So I, in reading your piece and just kind of listening to you share out, I definitely, I think that there’s a mix. I don’t think the answer’s actually right one way or the other. I think that, at the end of the day, in my engagement with corporations, particularly around the philanthropy side, because we run a not-for-profit and a lot of our donors are corporations that are contributing to the school system for their own self-interest, but that generosity, why they do it, varies dramatically. None of these organizations, in their leadership, there’s not a monolithic answer. And some of them are doing it because they really are intentional about trying to broaden their evaluation of what profit might mean. I’m sure you probably see this across the organizations that you’re looking at globally.

And then some, I do think it’s window dressing. I think there’s an intentionality there that is more about, “How do we kind of follow this movement?” Because I do think that there is a lot of bottom-up pressure that these CEOs and corporations are feeling in terms of how they’re contributing back.

I’m curious about Luigi and how you guys refer to shareholders because, you know, there’s “shareholders” in the definitional sense, but there’s also the people that live in the communities that we’re talking about that are impacted by positive and negative externalities that come out of these corporations.

Hal Weitzman: The sort of “shareholders/stakeholders”—

Daniel Anello: Yeah, so maybe call them the stakeholder, but, you know, what is their— what’s the obligation to them is really where, you know, what I worry about because that’s where I think you run into all kinds of challenges for communities when the corporation doesn’t care.

Luigi Zingales: No, but I think that very often Milton Friedman is misunderstood, because he never said that you shouldn’t care—

Hal Weitzman: And, Luigi, just to clarify, Milton Friedman was, of course, the person who first famously in an article in the New York Times, you’ll correct me—

Luigi Zingales: Yeah, the New York Times, yeah.

Hal Weitzman: Said that, you know, companies should only focus on profit over everything else—

Luigi Zingales: The only social responsibility of business is to make profits. But I think he would be completely in favor of, for example, donating money to your organization to get better workers. As you said, you internalize the externalities: You’re a local company. You want an educated workforce and you’re trying to get a better workforce. The only way in which you’re a successful company is you care about your customers, and we know, actually companies know even too well, that in order to get kind of the legislation they want, they have to be a good member of the community. So all this stuff, Milton Friedman will have no problem doing, as long as the ultimate purpose is to increase the profits.

And I think that most of the activities you are talking about go in that direction because being a good member of the community . . . So there are some companies in Minneapolis that they basically agreed to tax themselves to give some of the money to a local community in Minneapolis, to make it a more thriving community, to attract a better workforce. That is completely in the interest of a long-term sustainability of the company and the value of the shareholder. So that’s not the problem. The problem is when you do something that has no value whatsoever. And this “Stop selling assault rifles” is a money-losing proposition for Walmart and for Dick’s Sporting Goods. The CEO of Dick’s Sporting Goods, when they decided to stop selling, he said, “I don’t care about the financial implications.”

So it’s not a marketing ploy. It’s not a long-term bet on customers. It’s a principle thing, which I respect as long as the principle thing is decided by who pays the cost, which are the shareholders. Because I believe in the American principle of no taxation without representation. And once the CEO decided to basically tax the shareholders for their own bad projects, that’s taxation without representation.

Hal Weitzman: Are they making some kind of long-term, self-interested bet—

Luigi Zingales: They disguise it. (laughs)

Hal Weitzman: In the same way that tobacco, you know, you could’ve made a long-term, self-interested bet that said, “We’re not gonna . . .” Is it CVS that stopped selling tobacco products? In a way that’s reputation management, which also . . .

Luigi Zingales: That’s fine, and it’s just, if they are honest. Now, if they’re saying they do it just to—If they are honest and it’s really in the long-term interest—

Hal Weitzman: So they should say, “We love guns, but we love our reputation more, so . . .”

Luigi Zingales: No, no, no, I think that there are two possibilities: one is “I stopped selling guns because I think that’s bad for the business, honestly think they’re bad for the business.” That’s a perfectly legitimate thing. All they say, “Look, this is not good for the business that we stop selling.” The CEO of Dick’s Sporting Goods, when he did say that, he said, “Look, I know it’s not good for the business, but I don’t want my stores to do that.” And I think it’s a very highly principled decision if supported by the shareholders because they are the ultimate payers.

Hal Weitzman: So your point is that there should be more shareholder democracy.

Luigi Zingales: Absolutely.

Hal Weitzman: They should be the ones making these decisions, not—

Luigi Zingales: Because they pay the costs!

Hal Weitzman: Not the CEOs of the Business Roundtable. But I was wondering if there’s a bright line that we can draw because we could, in some sense, say that a lot of these CSR-type actives, corporate-social-responsibility-type activities, ultimately could benefit businesses and corporations. For example, let’s think about Daniel’s organization. If I’m helping schools, then, yes, I might be helping the workforce, but most of those kids are never gonna be in my workforce, but generally I might be helping the community. And that might be great, more customers or whatever.

Luigi Zingales: No, no, I understand that there are some externalities in helping his organization, but I think as a CEO of a company, I can see that the benefits are enough, that they’re worth it, in the sense that, I wanna attract a good workforce, and one way to attract is good schools. After all, University of Chicago has the Lab School. It’s the best retainer mechanism for faculty because it’s a good school, and faculty comes here because of the good school. Is it a way of wasting money from the point of view of the University of Chicago to have the Lab School? Absolutely not. It’s probably the best investment, the best bang for the buck.

Hal Weitzman: Right, this is kind of a—you were talking about sort of a benefit, that there’s a school that—

Luigi Zingales: Absolutely! And, by the way, because of the Lab School, Hyde Park has become a better community, and that has made the University of Chicago much more attractive. So I think that investment is a very good long-term, value-enhancing investment. It’s not just donating to Charity XYZ; it’s a serious investment in my view.

Hal Weitzman: And that’s what we started talking about at the beginning, the responsibility of companies to their local communities, which has all sorts of benefits. How do you think about that when you’re running a large corporation operating in lots of different locations?

Emily Heisley Stoeckel: Specifically about how to allocate—

Hal Weitzman: Well, about how you engage with local communities. How important having a local workforce is, for example.

Emily Heisley Stoeckel: Well, I think that it’s imperative. Many of our businesses are major employers in the communities where they’re headquartered or where their operations reside, and we’re very interested in having our employee base engaged. And engaged . . . they spend the majority of their time at work, and we want them to be proud of the fact that they’re associated with our businesses. So to the extent that we can do some sort of community outreach as a group, whether or not it’s supporting them with local charities to do Blessings in a Backpack, or investing in programs that do things like After School Matters. You know, they’re giving of their time and talent, and we support those initiatives. I think it’s a bit different than taking a specific topic that can be more, if you will, politically motivated and trying to influence that way than it is to empower our employee base to engage in their community as a vehicle to keep them engaged within our organization.

Hal Weitzman: Daniel, from your perspective, do you think that companies have some kind of responsibility? Let’s say . . . you’re in Chicago. Do Chicago companies have a responsibility to support public education?

Daniel Anello: Yeah, absolutely. I think in response to some of the things that Luigi was sharing, I think that the concept, and what Milton Friedman was aiming at, it makes sense when you think about some of it on a local context, if your employee base and your customer base is coming from your local context. But you factor in globalization and the flattening of business across the country, and there’s no obligation on the corporations’ part anymore to take care of the people in their backyard. I also think we think very short term when we think about the profits of these organizations, and that has a dramatic impact on how they think about what their responsibility is on the ground in these communities. So they’re not necessarily—unfortunately, I think they should be—but they’re not necessarily thinking about, “How do we make the education system better in our backyard?” Because I can go and hire three people for this job from somewhere else in the world. And the negative impact of that over the long run means that these communities die, and we have a vast kind of spreading in terms of wealth and economics between different people.

And I think that the ultimate outcome of that, we’ve seen time and time again throughout history, which is revolution, right, at some point? And part of this response I see from the CEOs is reflecting on the fact that there is this growing wealth gap, and they haven’t taken care of their backyards, and they’re not taking care of the individuals that they should be, and that’s problematic. And maybe if you’re thinking more long term, there’s an opportunity to do something different. I just don’t know if that’s gonna happen if we’re not evaluating companies with some, you said it in your piece, there has to be some rigor around how we assess company valuation that actually incents them to do real things versus just write a letter.

Luigi Zingales: But isn’t the first responsibility to the community to pay taxes? I think that part of . . . If you go down the list of those CEOs who signed that—

Daniel Anello: Am I a stakeholder or a shareholder if I pay taxes?

Luigi Zingales: No, no, I’m saying that, first of all, it’s a responsibility, Milton Friedman will agree with that, to play by the rules of the game. And the rules of the game is that you have to pay all your taxes, and these people tend to find all the tricks not to pay the taxes and they lobby very heavily to have their taxes dramatically reduced. So rather than going around and saying that they have to give a little bit of crumbs here and there, why don’t you say, “First pledge, we all pay our tax in full. We don’t use any sort of foreign subsidiary. Only trick to reduce our taxes, that’s kind of the first responsibility of business.”

Daniel Anello: So you’re saying the taxes then from businesses, if they’re localized, the government system will allow those taxes to ultimately flow . . .

Luigi Zingales: They should, yeah.

Daniel Anello: But then you have to think about how corporations have essentially been able to commandeer the political system. Right, you talked about a second ago—

Luigi Zingales: That’s exactly where I wanna go. I think that that’s, to me, the fundamental problem.

Daniel Anello: Because you were talking, and maybe we agree there, but, like, you were talking about how they’re accountable to their stakeholders or the people on the ground, but the issue with rifles getting taken off the shelf being a bad business decision, well not if you’re thinking about 80 to 90 precent of my customers think that this is a terrible idea to sell rifles. But if I’m thinking about the people who wanna make profits, who are my shareholders, then that’s a different—. So who are they accountable for or accountable to, I think is really important, and unfortunately then the connectivity to the political system and the way money moves into the political system means we’re making decisions for a very limited few. And sometimes the decision by the Dick’s Sporting Goods CEO is the right one.

Emily Heisley Stoeckel: And so, I’d like to follow up on Daniel’s comment because I think that it’s important for us not to forget whom we’re talking about. There are many companies that take a longer-term view, OK, and so, they do care about the communities where their employees live and work. And I think that when you talk about education and community and vibrancy, that is important because they have a lot of investment in that local community, and it’s not like they’re picking these things up and moving them on a whim. If you compare and contrast that to some of the examples that you’ve used, these people are, they’re not looking out into the future to determine whether or not these have long-lasting implications.

And so, in a certain respect, I think that, while I believe that businesses should be focused on their mission and purpose, I do believe that as a member of the community at large, that we have the responsibility to make sure that our people and the community that they’re from are, you know, cultivated. So I don’t think that you can look at it and say, big public companies and the decisions that they make are the same as companies that have existed for 50 or 100 years. Because they look at their opportunities and their responsibilities differently.

Hal Weitzman: And I don’t mean to make you the standard for corporate America, but I wanna ask what your response is or what your feelings are about this idea that Luigi put forward that companies kind of take with one hand by lowering their taxes as much as possible through all sorts of schemes and then give back a few crumbs with the other.

Emily Heisley Stoeckel: Well, you know, I think that it’s very interesting, and I do think that people take advantage of it, right? I mean there are individuals who hold technology offshore, and they hold their profits offshore through arrangements that are not available to the vast majority of businesses. But look at the major engine that drives the American economy. It’s not these incredibly huge businesses. What drives the American economy are small to medium-sized businesses, many of which are very entrepreneurial, and they play by the rules, and they rely on the vibrancy of the economies that they live and work in.

Hal Weitzman: Right, just because they can’t afford the accountants that the big—(Emily laughs) companies get either, and maybe that plays into it.

Emily Heisley Stoeckel: But I would suggest, you know also, that the stakeholder, the shareholder, has the opportunity to vote with their feet. You know what I mean?

Luigi Zingales: Not really, for two reasons. No. 1: if I invest in an index fund, I’m stuck, so I cannot walk away. And No. 2, even when I can walk away, I don’t fix the problem because I don’t withdraw the resources from the company. It’s not that I get my money back; I have to find another one who takes that responsibility. So if the issue is very idiosyncratic—I am Mormon and I don’t want a sinful stock, like even coffee, because I’m against it, I will find another who doesn’t care about that and would buy the stock. But if the issue is, for example, that the CEO is wasting money in his own pet projects, selling it to Hal is not gonna fix the problem because I pay the cost and he pays the cost, and we keep sort of transferring that. So we need to fix it in the corporate boardroom, not with our feet.

Hal Weitzman: Luigi, I wanted to go back to another thing about shareholders versus stakeholders. The term shareholders is very clear. The term stakeholders is not at all clear, yet we’re increasingly hearing that when we hear this conversation about purpose and corporate social responsibility. Is that a meaningful distinction, and what—

Luigi Zingales: Oh, it’s a very important distinction. In a sense, stakeholders is everybody who has a stake in the company. Now, what does it mean to have a stake in the company? If I am a customer, do I have a stake in the company? Probably, if I’m a long-term customer. If I’m an employee, certainly I have a stake in the company. If I live in the community, I’m a stakeholder probably.

So the term is very vast, and I think that saying that we should take care of the valued stakeholders is legitimate, and it’s good business. Saying that we should maximize or take care equally about everybody is, I think, a recipe for disaster because you’re gonna have too many masters and basically are accountable to none. Saying that you’re accountable to everybody means you’re accountable to none. So I think that that’s a fundamental problem, and while everybody’s impacted somehow by a company’s decision, generally shareholders are impacted the most. They are, what we say in finance, “residual claimants,” because they get paid after everybody else is paid. And so, it makes a lot of sense that important decisions, especially decisions on how to spend the money, are ultimately done by the people paying for that.

Hal Weitzman: OK, and Daniel, you said that you felt companies in Chicago, for example, do have a responsibility to improve the education system. Does that make you a stakeholder, and do companies think of you in that way?

Daniel Anello: So I would definitely be a stakeholder, but when I think of stakeholders, I think in the broad definition of who actually lives in the space where the corporation exists, and having a responsibility to those folks, as I talk about “the backyard.” So, yeah, I’m a stakeholder. I think you said the government, at some point, could be considered a stakeholder. If I don’t own any value in the stock of an organization, I’m a stakeholder if I’m impacted by positive or negative things that that company’s doing in my space. That’s how I think about it.

And so, if you are in Chicago, you have a—in my opinion, you have a responsibility to the stakeholders who live in Chicago, in that municipality, because you’re benefiting from whatever tax arrangement you have from the government here. Those individuals are paying taxes, so in some roundabout way, you could argue they’re shareholders as well. But, at the end of the day, these are the people that buy your products, benefit from the services that you have, and are investing in your products. And on the long term, depending on how negative the externalities are from your corporation that if you exist in the space and you don’t take care of it, you won’t have any customers left.

Hal Weitzman: Sure. But are you finding that companies are thinking of you as a stakeholder or as more of kind of a worthy cause? Let’s put it that way.

Daniel Anello: I think it’s mixed. I go back to Luigi’s point, like I think there’s some that, this is a worthy cause and it looks great from a PR standpoint, and then there’s others that are absolutely invested in making a difference and recognize the value of actually committing to their communities, and there’s folks that are in between. And I honestly think that that can change too depending on who the leaders are. I think that there’s a responsibility in that shift, and the consistency is not something that is always there, in terms of how corporations value the communities that they’re in.

Emily Heisley Stoeckel: But, I mean, as I look at your organization, I think that it’s hard to argue that investing in education and advocating for equal access and quality education isn’t something that everyone throughout any community shouldn’t value, right? If you totally just rely on taxes, what you’re basically saying is that you think that a governmental entity has a better ability to support those initiatives than to work together with advocacy, and I question that.

I wanted to get back a moment to whether or not people can vote, if you will, with their feet, because ultimately if people don’t agree, and they pull out of those investments, it’s gonna have an impact on the share price. And that’s gonna reflect on the executive team and the mission and their performance. I think that you see that through many of the funds that have focused on only green initiatives or only special interests. I think that it’s reflected in the returns that they generate, and investors would prefer to understand exactly what they’re investing in because then your interests are aligned. And then take the opportunity to give back to their community the way that they saw fit.

Luigi Zingales: Yeah, but think about an oil company that has to decide whether to burn the methane through flaring or not. And we know that that’s a huge waste, but capturing that gas is pretty expensive. So that’s an important environmental decision. Now, imagine I’m very environmentally conscious and so I decide to sell my stock because I don’t wanna own the stock of a company doing that. Now, possibility No. 1, I don’t have an impact in the stock price and nothing happens. Possibility No. 2, as you suggest, there are enough of us that the stock price actually goes down. Now, the moment the stock price goes down, it creates an opportunity for somebody who doesn’t care about the environment to buy on the cheap and make money!

So every movement of divesting from all stock is favoring the Koch brothers who come in, make more money, and actually run the company in the most environmentally unfriendly way possible! So this strategy of divesting and voting with your feet, to some extent, is counterproductive, is not productive.

Emily Heisley Stoeckel: Well, I think that you have laws and regulations that have tempered that type of activity, and it’s not like the only alternative is—

Luigi Zingales: Especially under Trump—

(They laugh)

Daniel Anello: So just to throw a wrinkle in, kind of, the thinking. When you think about the shareholders in this case, I mean, you think about the demographic and the owners of share of these companies, and then you think about the communities that some of them are in.

Take oil. The vast majority of the people that live in the community are not shareholders. And I’m just curious, as you’re thinking about the role of the corporation, obviously you know my opinion on it, but, like, where—Because, yes, if I sell my stock, that may not have an impact. Someone might . . . but, like, where do they get a voice in what’s happening in their backyard?

Luigi Zingales: Oh, actually they have a gigantic voice in the employees. They can leave, and that makes a difference. Google stopped some projects with the Pentagon because its employees did not wanna participate in that. The customers can withdraw, and companies are very sensitive. The moment you stop the boycotting . . . Somebody like Dolce & Gabbana made a very politically incorrect ad in China, destroyed sales in China. So customers are very sensitive and they have the power. Employees have the powers. The community has the power to block permission, etc.

Ironically, the weakest ones of all are the shareholders, because they don’t get represented. They cannot withdraw their money. They can vote with their feet but they pay the cost. They cannot withdraw their money. They cannot influence a corporation, except through their vote. And then the CEOs say, “No, no, we decide for you!” “Wait a minute, I wanna decide for myself. It’s my money. I wanna decide for myself!”

Daniel Anello: I would say that they’re the weakest, except for the political back channel, right? There’s ways to prevent the community, to your point, who can vote with their feet and do things to kind of put pressure on corporations, but sometimes those are suppressed by what policies are in place that kind of prevent lobbying against certain things or changing laws in the specific—

Luigi Zingales: Absolutely, I completely agree with you, but generally, the lobbying is decided by the CEO. The shareholders don’t even know—this is what is absurd for me—don’t even know where their money is given, and to whom and why.

Hal Weitzman: Well, on that note, unfortunately, our time is up. My thanks to our panel, Luigi Zingales, Emily Heisley Stoekel, and Daniel Anello. For more research, analysis, and commentary, visit us online at review.chicagobooth.edu and join us again next time for another The Big Question. Goodbye.

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