The debate over responsible business practices and shareholder wealth maximization is neither new nor settled. Almost half a century ago, Milton Friedman – the father of economic freedom - asked whether manager of a firm has a responsibility to “act in some way that is not in the interest of his employers”.
Friedman goes on to ask if managers should “make expenditures on reducing pollution beyond the amount that is in the best interest of the corporation or is required by law in order to contribute to the social objective of improving the environment”.
Global discourse surrounding corporate social responsibility has undergone quite a transformation since 1980s when the ‘greed is good’ creed still dominated economic thought. Corporations and their slogans of ‘trickle down’ are on the backfoot after global financial crisis and have been replaced by mantras such as ‘triple bottom-line’ and ‘People, Profit & Planet’. Yet, shareholder’s primacy may be down but is not fully out.
Just last year, Friedman’s thought experiment came face to face with a real-life test when a drug company CEO noted that it was a “moral requirement to sell the product at the highest price”, while defending a decision to increase price of a life-saving medicine by 400 percent.
A day long moot in Islamabad organized on Global Ethics Day by PBC’s Centre for Excellence in Responsible Business in partnership with ACCA and British Deputy High Commission attempted to answer these questions in Pakistan’s context.
It was no surprise that participants responded in perfect unison that ‘profits could not be pursued at the expense of everything else’, but the discussion eventually took a lively turn when the question of ‘child labour’ reared its head in the context of responsible business practices.
Few stressed that matter needs appreciation for nuance and unique complexities of the society, as child labour in many instances may be a matter of choice, culture, and contribute to the immediate welfare of the family. But Aamir Ibrahim, CEO Jazz Pakistan, pointed out that claiming cultural differences when faced with such questions was taking a myopic view for short-term benefit.
In his view, at a time when multi-nationals conduct social responsibility audit of their global supply chains and their vendors, engaging in socially questionable practices in effect undermines long term shareholder wealth.
Dr. Ishrat Husain also echoed this view in his keynote address. He declared that both governance and social capital were the new “factors of production”. By compromising on integrity and ethics in the short-run, firms end up increasing transaction costs for themselves.
He noted how a big-four audit firm got itself disbarred from commercial banks audit due to malpractice in connivance with a bank during his tenure as SBP governor. The outcome, however, was not only penalty for the bank and the audit firm in question, but also increased scrutiny for its entire client portfolio and more regulation for the banking industry.
Questions were also raised on performance of self-regulating bodies such as ICAP and PMDC, which in their history, never had a member disbarred due to malpractice, according to Dr. Husain. The outcome may be too much regulation that hurts ‘ease of doing business’, but deservingly so, considering self-regulation fails to deliver.
But it was Dr. Husain’s earlier point that deserves most merit in the domestic context. A preponderance of family-run and closely held big businesses in the country means that agency costs arising from the firewall between management and ultimate owners are minimal. This means that Friedman’s fear of managers spending someone else’s money for general social interest also diminishes.
Because the role of manager and majority shareholders is often clubbed together in family-run businesses, actions taken in general welfare should concurrently also be in personal interest of owners of the firm, in so far as the interest of shareholder and society are aligned. That in effect is a question of whether the business owner has stakes in the community and society it operates in, and despite the noise surrounding offshore wealth, the answer to that question is by and large still yes in the domestic context.
Take the question of deteriorating air quality of central Punjab due to smog. It may appear that the rich are generally insulated for most ills facing society, but both Syed Babar Ali and Mian Mansha breath in the same smog air as the less fortunate of Lahore.
And if the sobering pictures from gathering of who’s who of Pakistan’s big corporates in Rawalpindi are any guide, the fiscal mess created every five years due to low tax mobilization in the country is equally a problem for the Seth as it is for those who end up losing jobs due to economic contraction. The impact may be different, but the pain is very much felt.
For so long as businesses are stakeholders in the continued development of society – even if for purely economic reasons – their long-term interest lies in building social capital. The maxim of maximizing self-interest should only appear at odds with social welfare to those who are not here to stay.
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