The Social Value of Business

Spring 2021 • Regulation
By Kenneth W. Costello

What are the purposes of private firms, and what are their roles in society? Those questions relate to a current, trendy topic: corporate social responsibility (CSR), also known as “stakeholder capitalism.”

The latter term is redundant. In free markets, successful companies must accommodate the interests of those who have some stake in them: customers, investors, and employees. That, in fact, is one of capitalism’s most admirable aspects, which many politicians, nongovernmental organizations, and the general public seem to overlook.

The principle that companies achieve social welfare objectives when they pursue profit‐​maximizing objectives has been recognized for two‐​and‐​a‐​half centuries. Adam Smith connected the two by way of his invisible hand: “It is not from the benevolence of the butcher, the brewer, or the baker that we can expect our dinner, but from their regard to their self‐​interest.” That insight is now under attack from different quarters.

Various interests are pressuring firm managers to pay more attention to the so‐​called “social consequences” of firm actions. They allege that companies’ decisions should address social problems like below‐​poverty‐​line wages, exploitation of consumers, the condition of local communities, excessive profits, unfounded compensation for CEOs, damaging pollution and other negative externalities, and lack of diversity and inclusion in the workplace. Over the past several years, the idea has gained traction that companies have responsibilities to the broader society beyond their duties to shareholders.

In reading the Wall Street Journal and other publications over the past several months, one readily sees how investors and consumers in particular are pressuring firms to lighten their carbon footprints. Some companies have committed to spending hundreds of millions, and even billions, of dollars to address climate change. One company, Amazon, expects to spend $10 billion on an initiative called the Bezos Earth Fund.

Why be responsible?/ As a critical milestone, in 2019 the Business Roundtable (an association of chief executives of the country’s largest companies) took a dramatic left turn by supporting the view that companies primarily should serve myriad stakeholders rather than just their shareholders. Subsequently, the CEOs and other managers of a growing number of companies have announced plans to spend shareholders’ money to address broader social problems, thereby demoting shareholder interests to being just one of many sets of interests the firms must address. This is CSR in practice.

While CSR may seem appealing, it has both latent and transparent costs. The major ones are a short‐​term focus on politically related matters, less CEO accountability, and more inefficient resource use as a result of a weakened profit motive. The oddity is that while companies spend substantial sums of money to block legislation and regulations that would force them to expand their missions to address social problems, why should we expect them to voluntarily mitigate those problems under a CSR regime?

It makes more sense to believe that companies will have disincentives to address social problems on their own if they lobby government against a social welfare agenda — for example, by opposing higher taxes to support the poor, pro‐​labor legislation, or stricter environmental regulations. By agreeing to adopt a social agenda but executing it unenergetically, managers may feel that they can forestall injurious (from their perspective) governmental actions and improve their public images.

There are numerous problems with CSR. They include:

  • Firms have weak incentives to promote CSR objectives.
  • Management would be less accountable for weak financial performance.
  • Firms are ill‐​qualified to make decisions on how to advance social goals.
  • Conflicting objectives will force management to prioritize and weigh different social objectives.
  • Regulations and contracts already protect non‐​shareholder stakeholders.

It would be hard for companies to balance the conflicting interests of myriad stakeholders. Another problem is that while multiple “stakeholder” groups have been identified, no one person is representative of any of them. Individual investors, for instance, are heterogenous, meaning that some may favor CSR actions, or some subset of those actions, while others would oppose them.

The same is true of employees. Some are childless and would consider a CSR initiative like family leave to be worthless. Others would rather earn higher wages than have access to on‐​site daycare. CSR’s advocates seem to presume that individual “stakeholder” groups are monolithic. Assigning weights, therefore, can be so overwhelming, convoluted, and counterproductive that companies are distracted from their core purpose of profiting from selling goods and services that society wants.

Managers and politics/ Instructive here is the phrase “accountability to everyone means accountability to no one.” CSR can insulate management from accountability and managerial slack, like inflating costs. CSR obscures poor financial performance: a firm can claim to be “socially responsible” even when losing money and continuing to raise funds from socially conscious investors. Under a CSR regime, management can do almost anything and claim to be creating some “social” value. Imposing multiple objectives and performance criteria on a company weakens managerial accountability, thereby aggravating the principal‐​agent problem that presently exists between shareholders and managers.

Should society not separate the actors who undertake money‐​making activities from broad‐​based social activities? One must ask: What expertise or capabilities do company managers have in addressing social problems that should fall under the auspices of government? Wouldn’t it be better for individual shareholders to dispose of dividends in the ways they see fit rather than requiring them to cede responsibility to others who might prefer to support the local opera over the local foodbank?

A real‐​world challenge for CSR, then, is how managers and boards of directors would balance the interests of different stakeholders, which essentially boils down to politics. One must ask: How is management made accountable for their decisions? How is a firm making those decisions superior to the government making them? Are a firm’s actual CSR actions superior to other options for addressing social problems?

When politics drive CSR actions, the outcome is less likely to improve society’s welfare than to appease those in charge politically. Numerous examples exist where governmental actions in all areas of society deviate far from the theoretical ideal. The public choice literature confirms the divergence between the “blackboard” and actual outcomes. Such divergence typically results from information deficiencies, institutional realities, and the government’s incentive to serve its self‐​interest and appease special interests rather than the public good. Government‐​driven CSR falls into a space where welfare‐​reducing consequences are highly likely.

Markets and welfare/ My main argument here is that the best source of achieving CSR objectives is market driven. Market participants already reveal their preferences for environmentally friendly products by buying them, investing in companies that supply them, and offering their labor services — sometimes for wages that are less than they could earn elsewhere. We have seen investors choose firms that best mimic their social values; investors can vote by buying or selling company stock rather than letting managers and boards impose their own preferences on them.

In a competitive marketplace, consumers, workers, and firms acting in their own self‐​interests advance society’s interests. If consumers are willing to pay premiums for cleaner air or “fair‐​trade” coffee, profit‐​seeking businesses will deliver those goods — and they have.

If market participants value non‐​economic goals, companies that combine the profit motive with environmental and other concerns can thrive even in a competitive environment; they could even become more financially sustainable. For this reason, shareholders should retain primacy, but they also should have the right to advocate for different objectives if they so prefer, rather than have management impose those objectives upon them.

Voluntary market participation really epitomizes Coasian bargaining, where sellers and buyers cooperate in consummating mutually beneficial transactions. How could one dispute that that isn’t in society’s interest?

One is left asking whether voluntary actions such as those by the Business Roundtable are nothing more than a public relations ploy with minimal or negative value to society. Voluntarism driven by management whims or political pressure, rather than by market forces, may merely be window dressing, representing token efforts (“greenwash”) to avoid regulation or other governmental actions.

In summary, firms should continue to maximize shareholder value as long as they abide by the rules and respond to market demands. As George Stigler remarked aptly 50 years ago:

Let our businessmen return to making shoes and locomotives and toothpaste. Let us not seek to transform the greatest economy in all history into a third‐​class welfare agency. Let the reformers address their schemes, whether noble or ignoble, to the real source of power, the public [sector], and to the real administrators of that power in our society, the leaders of the political system.


  • “C.E.O.s Are Qualified to Make Profits, Not Lead Society,” by N. Gregory Mankiw. New York Times, July 24, 2020.
  • “Market Forces Already Address ESG Issues and the Issues Raised by Stakeholder Capitalism,” by Eugene F. Fama. In Milton Friedman 50 Years Later, edited by Luigi Zingales et al.; Stigler Center at University of Chicago Booth School of Business, 2020.
  • “Modern Man and His Corporation,” by George J. Stigler. Selected Papers No. 39, Graduate School of Business, University of Chicago, 1970.
  • “The Enduring Wisdom of Milton Friedman,” by Steven N. Kaplan. In Milton Friedman 50 Years Later, edited by Luigi Zingales et al.; Stigler Center at University of Chicago Booth School of Business, 2020.
  • “The Illusory Promise of Stakeholder Governance,” by Lucian A. Bebchuk and Roberto Tallarita. Cornell Law Review, forthcoming.

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About the Author
Kenneth W. Costello

Regulatory Economist and Independent Consultant