Responsibility makes profit sense — expert

Today, capitalism is by and large corporate capitalism. If we want to think about how to reset it, we need to rethink about the way corporations are run

Holding big business accountable is key to resetting global capitalism, an entrepreneur and finance professor said.

“Today, capitalism is by and large corporate capitalism. If we want to think about how to reset it, we need to rethink about the way corporations are run,” University of Chicago Booth School of Business’ Stigler Center Faculty Fellow and Professor Luigi Zingales said.

Zingales added the way corporations are run nowadays is based on Milton Friedman’s 1970 doctrine that espouses the idea that “the social responsibility of business is to increase its profits.”

The Friedman Separation Theorem operates on the assumption, among others, that “individuals care only about monetary payoff” and that “there are no externalities” brought about by these corporations.

Profit not sole motive

According to Zingales, the notion that individuals only care about monetary returns is “false.” He noted that “large foundations have goals other than mere profit maximization.”

“Every time there is synergy between social activities and profit-making activities, then the Friedman Separation Theorem does not hold.”

“If it is cheaper not to pollute than to pollute and clean up, then it is more efficient for companies to adopt social objectives such as protecting the environment than to simply maximize profits, distribute profits to shareholders, and let them do what they want socially with their money,” Zingales explained.

Meanwhile, on the assumption that there are no externalities, Zingales said “we know that there are large externalities (e.g., pollution).” However, he noted that, at present, where large corporations can be cross-border in nature, “it is much more difficult for shareholders of this type to internalize the externalities that they generate in the community.”

Fiduciary duty

For small corporations, which Zingales said, have “no market power,” are “completely subject to regulation,” and have no ability to change the status quo, they should maximize shareholders’ welfare instead, not their value or financial return.

On the other hand, very large corporations which “enjoy some market power” and have significant influence “should be held accountable, not just to their direct stakeholders, customers, and employees” but to the society at large, Zingales pointed out.

To do this, he said a “fiduciary duty towards society” should be imposed on large companies.

PHOTOGRAPH COURTESY OF BUREAU OF CUSTOMS Tighter AMLC, Customs cooperation Bureau of Customs and the Anti-Money Laundering Council recently organized a 3-day training on Target Intelligence Packaging. As part of the Memorandum of Agreement signed by Commissioner Rey Leonardo B. Guerrero (right) and AMLC Executive Director Mel George B. Racela, joint trainings will be undertaken to ensure the inter-operability of both agencies.