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Professor and researcher at the Instituto TecnolĂłgico AutĂłnomo de MĂ©xico reflects on the importance of doing the right thing
This article is part of the series, the Salzburg Questions for Corporate Governance by the Salzburg Corporate Governance Forum
Managers, board members, and shareholders tend to focus their efforts on responding to business objectives and expectations, maximizing benefits for their firms in the short term. Executive compensations, salaries, and bonuses are associated with the bottom line: if the organizations are profitable, owners will be satisfied, and workers will be adequately compensated. On the other hand, poor company performance threatens their income and continuance in the firm. Under such conditions, some executives may try to achieve business goals at any cost.
The complex contexts in which the businesses evolve offer continual challenges: stronger rivalry among competitors, higher expectations from their clients, and strict laws are some of the barriers companies face on the way to achieving their goals. In this aggressive environment, it is easy to adopt hostile strategies, questionable practices, and unfriendly behaviors that allow competing against the enemy and staying alive at war.
One paradigm used in this business context is the zero-sum game, meaning that if one person gains an advantage, someone else involved must suffer an equivalent disadvantage. From this perspective, decision-makers would try to sell at the highest possible prices, force the suppliers to offer their products at the lowest price, pay low salaries to the employers, and avoid any purchases, investments, or donations that would reduce the profits of the firm. Being generous to others or allocating resources to non-productive goals could be perceived as inefficient. These decisions, however, might be extremely valuable for others—for instance, vulnerable groups—and in the long run might be profitable for an organization, due to the recognition of these generous acts by stakeholders and society.
Hart and Zingales, from Harvard, and Chicago University respectively, challenge the traditional profit-maximizing approach, arguing that shareholder welfare is not the same as market value. Hart and Zingales assume that shareholder concerns extend beyond money to ethical and social concerns. Executives and board members, thus, would act against the owners´ interests if they push too hard to maximize profits, ignoring the shareholder welfare that is associated with social causes. In this case, even if they achieve short term economic goals, they are not serving shareholder interests effectively.
JUST CAPITAL, a non-profit organization founded in 2013, was created to build a more just marketplace. The recent report “Just Business, Better Margins” (June 2019) demonstrates (as did previous reports) that the JUST 100 American firms, the most socially responsible and ethical organizations, outperform their industrial competitors in stock market performance and profitability measured by ROE by as much as six percentage points.
Moreover, findings in the 2019 JUST report identified variables that affect margins, like worker benefits and environmental efficiency. Therefore, investment in worker compensation and environmental care might support profitability and equity market valuation. At the same time, the Deloitte Millennial Survey (2017) and other studies confirm that businesses that are involved in social issues and good causes offer more meaning to employees, which leads employees to exhibit greater levels of commitment and productivity, two antecedents for financial performance.
As a conclusion for this short article, to maximize the welfare of shareholders, the organization should do the right thing. By doing so, the firm can be not only more profitable in the long run but also socially responsible.
Imanol Belausteguigoitia Rius is a professor and researcher at the Instituto Tecnológico Autónomo de México, where he founded and directs the Family Business Development Center. In the past, he has served as the facilitator of the course “Families in Business: From Generation to Generation” offered by Harvard Business School and has taught courses on family business, entrepreneurship and governance. Imanol has been a regular contributor on the radio through his radio program, “Reflections on Family Firms,” since 1999. In addition to numerous other publications, he wrote the best-selling book, Family Businesses: Dynamics, Equilibrium, and Consolidation. Imanol completed his postdoctoral studies at Babson College, USA, and his doctoral studies at National Autonomous University of Mexico in Mexico City.
The Salzburg Questions for Corporate Governance is an online discussion series introduced and led by Fellows of the Salzburg Global Corporate Governance Forum. The articles and comments represent opinions of the authors and commenters and do not necessarily represent the views of their corporations or institutions, nor of Salzburg Global Seminar. Readers are welcome to address any questions about this series to Forum Director, Charles E. Ehrlich: cehrlich@salzburgglobal.org To receive a notification of when the next article is published, follow Salzburg Global Seminar on LinkedIn or sign up for email notifications here: www.salzburgglobal.org/go/corpgov/newsletter