Companies exist only to trade-nothing else

Article by John Blundell in The Business

GENERAL Electric, almost the textbook model of a successful corporation, and the company whose shares are most widely owned and traded on the planet, seems to have suffered an alarming spasm of nonsense.

It could just be a blip in an otherwise glorious history of market performance or it could token brain death among GE's directors. The company has just issued a 75-page document outlining its corporate social responsibility or CSR as it is known.

This is much more than the amiable PR flannel so beloved of annual reports. GE is declaring it has diverse duties to groups other than its shareholders, "beyond compliance" is their telling phrase. Of course, all companies have to conform to the law and to the lesser laws we call regulations. GE proposes to do more. It is undertaking to apply its own Kyoto criteria to minimise emissions... not to trade them but to be "good corporate citizens".

Am I being too literal? Does it matter if corporations start yearning for candy-floss expressions of civic virtue? I believe it does. Companies have evolved as legal personalities expressly to maximise profits for their owners. The joint stock company, with limited liability, has been an institutional dynamo. It is reasonable to argue mankind, or its capitalist patches, have lifted themselves out of generations of poverty through the phenomenon of defined ownerships that companies represent.

Once big corporations think their priorities are a fuzzy mixture of ecology, benevolence, philanthropy and transfer payments, they are near dissolution.

This is not to argue against every sort of good works. Rather it is to ask "who is doing what with whose assets?" I cannot have a whisper of criticism if Bill Gates chooses to spend his personal wealth on tackling Aids or enhancing education in Africa. I applaud every charitable act. Yet what Gates does with his own resources is utterly different from what he does with Microsoft's assets. This is not a petty quibble. Companies are mysterious creatures which, as Professor Ronald Coase has shown, reduce transaction costs within themselves and serve as centres of knowledge or competence.

The analogy is not perfect but if you regard different corporations as different organs within the economic body then they all have separate functions. A General Electric can be good at diverse functions - perhaps as a liver or pancreas. It cannot also be a white corpuscle or a ganglion. The familiar notion of the Division of Labour includes the implicit division of purpose.

It is easy to be too solemn about this. There are several prominent examples of where an opera house or a philharmonic orchestra is subsidised by a local corporation. In truth, it is an act of personal vanity or patronage by the chairman or chief executive... or often his spouse but the relative sums are modest and it can be described as part of the PR or marketing budget with the hospitality opportunities reserved seats may confer. I am not arguing for zero philanthropy. Indeed, my own organisation, the Institute of Economic Affairs, depends upon donations from firms alive to the case for competitive capitalism. What alarms me is the wholesale capture of big public institutions to create priorities other than profit maximisation.

The Joseph Rowntree Foundation is a good example of a virtuous entity created out of the wealth of a chocolate entrepreneur. It does not mean all Rowntree profits were captured and diverted.

Recent examples that match GE's new Citizenship Report can be found from across different continents and nations - Bayer, BT, BASF, ABB, Ford, General Motors and McDonald's. Why is this collective confusion occurring? One augment is a sense of pain about recent corporate scandals. A smokescreen of benevolences serves as a sort of scandal insurance, it is argued. Yet it is worth registering Enron was always at the top of any league tables of corporate social responsibility. A certain austerity in such matters implies a company is thinking about its profits and therefore its dividends.

The great guru of the free market system Professor Milton Friedman taught me a word I had not hitherto encountered - Eleemosynary. It is a splendid if obscure word. He is all for altruistic giving - eleemosynary actions - but by individuals from their own resources not by creaming off other people's assets and conning shareholders. This can all seem rather shrivelled-souled. I'm not trying to emulate Ebenezer Scrooge. Remember, in A Christmas Carol, Scrooge redeemed to humanity gave generously of his own... not of anyone else's assets.

The great system of the free market depends not on benevolence but upon enlightened self-interest. I admire the ingenuity of charities and interest groups that subvert the more gullible directors of PLCs but the latter must learn to be more sanguine - even brutal perhaps. PLCs exist only to trade and to trade for profit. They are not there to be any more than that.

The distinguished industrialist, the late Lord Hanson once explained how he chose his next target for a takeover. He said it was easy. "We just look at which firms are active in the Confederation of British Industry (CBI). We know they are not on the ball." For CBI today he might well substitute CSR.

My hope has to be their friends take General Electric's directors aside and tell them they have no duty fretting about their "citizenship" duties. They will serve us all best by seeking out profits. This is what firms are for.

John Blundell is director general of the Institute of Economic Affairs.

If you are interested in business issues you might like to read
The Role of Business in the Modern World where David Henderson examines the role and conduct of business today, against the background of changes over the last sixty years.