People or profit: How does the Greens’ corporation plan stack up?

It is turning out to be a very peculiar election. Last week the Greens wholeheartedly embraced the notion of personal choice – and in the realm of corporate law no less.

The new Greens innovation policy, launched on Friday, is for the most part the standard set of spending boondoggles, new bureaucrats and empty jargon that constitutes deep thinking about innovation these days.

But buried in the policy document is a proposal to create a new class of corporation in the Corporations Act: the “benefit corporation”, which, as the Greens describe it, will “consider the collective good, generate public benefit and generate profit.”

This is not a bad idea – but not for reasons the Greens might think. With this policy, the Greens may have subverted a few decades’ worth of left-wing agitation about corporate social responsibility, the idea that firms need social licenses to operate, the stakeholder model of capitalism, and the campaign for ethical divestment.

We’ll come to all that in a moment.
The idea of a benefit corporation is simple. The Greens argue Australian companies are too focused on profit. The Corporations Act says company directors have a duty to act in the best interests of the company as a whole, which has long been interpreted to mean that they should act in the best interests of the shareholders who own the company.

In a benefit corporation, by contrast, directors are required to take other goals into account alongside profit – typically social and environmental goals.

Right now, directors’ duties are vague enough to allow them to pursue virtually any sort of philanthropic, corporate social responsibility agenda they desire.

Since 2010, some 31 American states have started to offer the benefit corporation with a standard model. This is almost certainly the model the Greens are thinking about. To ensure transparency – it’s easy for shareholders to see when firms are maximising financial value, but not so easy to see when they are maximising social value – firms sign up to third party standards which measure their work against agreed criteria.

But the idea that company directors are narrowly interested in profit is a myth. Yes, it is true that Milton Friedman once famously said that the sole social responsibility of business is to increase its profits. But good luck finding an Australian company director that agrees with Friedman. A 2006 survey of company directors found that nearly 95 per cent believed that they had a duty to take account of the interests of stakeholders other than shareholders. An astonishing one in five did not consider shareholders to be among their top three priorities.

The simple fact is that, right now, directors’ duties are vague enough to allow them to pursue virtually any sort of philanthropic, corporate social responsibility agenda they desire, just as long as it can loosely be justified as a public relations measure. This is why we get firms jumping on board political campaigns like Recognise.

Directors are human. It is unsurprising that they would like their friends and families to see them doing good as much as doing well. But it’s not their money they are playing with.

One basic problem facing any organisation is how to ensure that the people who run it do so in the interests of the people who own it. The duty to maximise shareholder value is an institutional mechanism to try to get shareholder and management interests to align.

This is why the benefit corporation is such a powerful idea. Not because corporations are only interested in profit, as many progressives claim, but because they’re not only interested enough.

In effect, the Greens policy would offer for-profit companies a choice: do they want narrow shareholder-focused, profit-first directors duties, or do they want to pursue broader social and environment goals?

Firms interested in the latter could convert to benefit corporations – to pursue ethical investment strategies, to donate to fashionable social and political causes, to talk about community and social licenses and the environment.

But those that remain would have a much clarified mission. Promote shareholder value. Ignore all the other stuff.

Shareholders too would have a choice – higher returns from profit maximising companies or potentially lower returns from benefit corporations.

This is, indeed, the basis of left-leaning critiques of the benefit corporation model, in that it strengthens the profit maximising goal among firms that do not convert.

Of course, to make the benefit corporation meaningful, the Greens should be advocating stronger shareholder rights to ensure that normal companies actually focus on increasing shareholder value.

For decades the corporate form has been a target of anti-capitalist sentiment. Corporations have been depicted as “psychopaths” for pursuing profit on behalf of shareholders.

Basic liberal theory tells us if society disagrees on an issue we should create institutions that allow people to make choices for themselves, according to their own values. How wonderful to see the Greens embrace that principle when it comes to corporate social responsibility.