Tag Archives: Business

Does private/social melding work?

B Corporation logo, trademark B-Labs

“The social responsibility of business,” Milton Friedman once wrote “is to increase profits.”

That was in 1970. Since then a massive movement has grown up around the rather vague notion of CSR, or Corporate Social Responsibility. Promoting the triple bottom line – people, the planet and profit – they seek to strongly consider the side effects of all the different operations and then act accordingly – from helping fight global warming to expanding employee health benefits.

Soon some corporations may attempt a “third way”: neither explicitly non-profit nor solely concentrated on bucking up the (single) bottom line. To manage this somewhat dicey balance a new term has arisen: a B Corporation, or Benefit Corporation, which includes in its bylaws specific legal responsibilities not only to its shareholders but also to “stakeholders” – those that the organization affects, if only tangentially. Their status as a B Corporation is reconsidered annually by a recognized third party; if they fail to live up to their by-law obligations they lost the status.

Maryland has become the first state to pass this category into law; in possible contradiction  to Friedman’s own words, Andrew Kassoy, one of the promoters of B Corporations, said: “”Milton Friedman would have loved this, for the first time, we have a market-based solution supporting investors and entrepreneurs who want to make money and make a difference.”  Now in part he is right – this is partially a market solution because by using the basics of tort law they’ve made sure part of the voluntary contract used in starting the corporation includes this social commitment.

Two caveats, however:

1. B Lab specifically promotes the legislation because it can make sure that even under new ownership this commitment remains.

2.  Perhaps mor importantly, there have started to be some tax breaks packaged with incorporating as a a B Corp. These tax breaks are admittedly extremely minor, but that’s no guarantee that they will remain so and it certainly gives the lie to the claim of a Friedman-like market solution.

But to most people who aren’t hardline libertarians, the most important question is, does this ideal of responsibility actually yield a better world than traditional corporations? I for one think that this is hardly the “first time [we have] a market-based solution supporting [those] who want to make money and make a difference.” Would we really be better off if Google shifted resources from computing to fight oil spills? If Phizer dropped its main devotion to creating pharmaceuticals and threw itself into investing in the local community? Both of these companies have done extraordinary good while doing extraordinarily well; they both do have CSR components but that cannot, and I believe should not, be their essential concentration – or even a particularly large one.

While CSR has been found to have positive, neutral and negative effects on profits, there’s no doubt that many companies think that it helps their bottom line to help out society – or, at least, to appear to. Ultimately corporations that are not B Corporations have legal duties only to their shareholders (and to abide by the law), and so as their actual incentives don’t really align with doing a lot of conscious good, it should not surprise us that CSR often doesn’t do much at all. Whether somewhat vague promises built into their by-laws can help B Corporations avoid this incentive trap is an open question.


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Non-Profit Restaurants: Exciting Innovation or CEO Ego-trip?

Slices of French Bread
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Via Charity Navigator, a USA Today story:

Imagine walking into a Panera Bread and picking out anything you wanted to eat or drink — then, at the end of the line, instead of handing your money to a cashier, you faced a donation box…. A sign at the entrance says: “Take what you need, leave your fair share.” Customers who can’t pay are asked to donate their time. The cafe opened Sunday and will operate seven days a week from 7 a.m. to 4 p.m.

Basically, the you pay what you want and the proceeds go to charity. Charity Navigator and some quoted experts in the story seem excited by this notion. But this seems like a major breakdown of specialization. Why should a restaurant try to be a soup kitchen and nonprofit? Does it really have the relevant expertise to organize people donating time and money, not to mention actually making back the money it takes to rent, staff and supply the store? An increase of “20% on opening day [of being a non-profit] vs. the previous Sunday [when it was still a for-profit]” is not such a shockingly high jump in revenue. Of course, I do wish them well.  Just take this with a grain of salt…

And what would be the preferred scheme? Less exciting, but more realistic: specialize! Sell tons of French food in a normal restaurant and then, if you want, give the profits to charity. If preferred, have a selection of charities to donate to. Frankly, I suspect that former Panera Bread’s former CEO is eager to swoop down on from on-business-success-high and sprinkle the shower of brilliant innovation onto the nonprofit world. But somehow a soup-kitchen/pay-what-you-want/charity/French chain cafe combo seems less than realistic.

Also: Freakonomics collects a gaggle of pay-what-you-want schemes.

Another also: USA Today has a blog about weird non-profit schemes

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Bribery and the Tragedy of the Commons… or Rent Seeking as a Problem of the Anti-Commons

Red Square, Moscow, Russia
Image via Wikipedia

We’ve talked before about the problems of corruption, and of nonprofit innovative solutions to the problem – specifically, an Indian group’s spreading of a Zero denomination Rupee to be handed to bribe-asking officials. Recently, corporations are trying to do their part, pledging to boycott bribery:

Dozens of international firms doing business in Russia have pledged not to offer bribes, in a move aimed at fighting corruption collectively. The accord, signed at an official ceremony in Moscow, was initiated by the companies, not the Kremlin, said the Russian-German Chamber of Commerce.

According to the article, about $300 billion is extracted every year in bribes. Of course, this doesn’t count all the inefficiencies introduced into the system by firms being chosen over competitors for reason of bribe rather than superiority.

Now, this does seem to be a nice little pact, and we can all snap some pictures and shake hands and go home. But as far as I can see through a number of news stories there’s nothing enforceable or transparent about this pact; it’s just some words. In fact, the head of Transparency International in Russia admitted:

any company working in Russia could find itself in a situation when it did not want to give bribes but was forced to do so if it wanted to carry on doing business. The agreement would not solve situations such as these, she said.

I believe the main problem of bribery and incentives is one of the commons. The tragedy of the commons is a well known economic problem. Essentially, when a rent producing commodity, such as a lake or the air, is unowned there is little incentive to preserve it because all actors know that their effect is small and their incentives to gain the short term big. This leads to overfishing, air pollution etc. Typically this can be solved by adding property rights; if someone owns the lake they’ll fish at a constant and conservative rate in order to maintain the long term population of fish. Giving property rights works: observe the massive success of the cap and trade system in stopping acid rain.

How does this relate to bribery? Consider corporations as partakers of the government; they are fisherman in the lake of government. As each of them interacts with government, many of them lose money as a result of bribery. But because of the small effect it has on each of them individually – though its effect may be large in the aggregate – it isn’t worth it for them to create enforceable, binding pacts against it. And in fact, some of them gain from the system, as HP seems to have when it essentially bribed itself into a contract. Because there isn’t any ownership of the long run management of the government, rent-seeking firms can manipulate it to their advantage and others have to simply pay to play. Their stake in the game isn’t valuable enough to risk bucking the system.

Alternatively, one could see this as a problem of the anti-commons. These are instances of the opposite problem: over-ownership. As Michael Heller discusses in his new book, when a property is too subdivided it can cause massive gridlock in a system. For example, if a new type of rice is created mixing a couple genes, it may be impossible to bring to market because each of those genes may be separately patented. Apparently, in the creation of online banking over 10,000 patents were involved. Ownership can spur innovation, but over-ownership cuts it down.

This would relate to bribery so: if there were a very small number of firms who were tied tightly into the bribery scheme, it might make sense for all them to collude and boycott bribery. However, as the number of firms explodes it makes sense for those firms with current contracts gained through bribes to avoid binding pacts against bribery because on an individual level it helps those firms using it to maintain their positions. However, in the aggregate this rent-seeking simply harms the economy.

Of course, there is a pact. But due to its lack of transparency or enforceability, it’s hard to see how its rules won’t be bent.

Still: both these explanations, I think, cannot be right. There can’t be too much and too little ownership. So which is it?

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