Larry Fink, CEO of one of the largest investment management firms in the world, BlackRock, has sent a letter to all S&P 500 CEOs, urging them to pursue not just profits but a social purpose as well. In other words, he is asking his fellow CEOs to pursue “Corporate Social Responsibility” (CSR) which is widely considered not just a moral ideal but a duty. He elaborates in his letter:
“Companies must ask themselves: What role do we play in the community? How are we managing our impact on the environment? Are we working to create a diverse workforce? Are we adapting to technological change? Are we providing the retraining and opportunities that our employees and our business will need to adjust to an increasingly automated world? Are we using behavioral finance and other tools to prepare workers for retirement, so that they invest in a way that that will help them achieve their goals?”
But should companies concern themselves with such questions? I argue no—because doing so would harm human flourishing, and is therefore immoral. The proper, moral role of companies in society is to produce and trade material values—goods and services from food, housing, automobiles to insurance policies and investment management services—from which we all benefit tremendously. (Imagine having to produce the material values on which your life depends by yourself. Most of us couldn’t do it). Producing and trading material values, companies create value for their shareholders, by maximizing long-term profitability.
Companies placing other—“social”—considerations alongside long-term profit maximization would harm human flourishing. Larry Fink seems to think that it is possible to do both. But as we know from logic (and as economist Michael C. Jensen argues in his article Value Maximization, Stakeholder Theory, and Corporate Objective Function), it is possible to maximize only in one dimension. Trying to balance “social” goals with companies’ proper function of creating and trading material values will undermine the latter.
Pursuing, say, diverse workforce for the sake of diversity (or using behavioral finance to “nudge” employees to prepare for retirement), or some other role in the community than production and trade, would mean sacrificing profits—and therefore human prosperity, an important element of flourishing. Pursuing long-term profitability, in contrast, means maximizing human prosperity and therefore, people’s ability to flourish.
Long-term profit maximization subsumes, naturally, adjusting to technological change and keeping employee training aligned with that and protecting property against pollution. Despite Fink’s arguments, these are not “social” purposes separate from the pursuit of profits.
Long-term profit maximization enhances the prosperity of the shareholders, the owners, of a company. Their wealth increases when the value of the company’s shares goes up. Whether shareholders keep their investment in the company or take it elsewhere, their investment enables growth of business. This means job opportunities for more employees, more innovation in the form of new products, services, and technologies, or lower costs of production—and lower prices for customers. In other words, a win-win situation for all.
Another CEO who clearly grasps the moral purpose of business firms, is T.J. Rodgers, the founder of Cypress Semiconductor. In a well-known 1996 response to a shareholder activist nun’s letter in which she argued for more diversity in the Cypress’ Board, T.J. Rodgers vehemently defended companies’ moral right to pursue profit-maximization as their primary goal—as doing otherwise would “harm people.”
He says in his letter: “But the political pressure to be what is euphemistically called a ‘responsible corporation’ today is so great that it literally threatens the well being of every American,” and goes on to explain why and how. I highly recommend reading his letter as an excellent contrast to the “high-sounding, but false, standards of right and wrong” that Larry Fink espouses in his letter.
To re-discover the moral purpose of business, for maximizing human flourishing, CEOs—and the rest of us—should listen to T.J. Rodgers and ignore Larry Fink’s arguments.
