What is the role of a corporation in society?

Throughout history, humanity has pondered plenty of complex questions, from “Why does rain fall?” to “Are we here for a reason, and if so what is it?” Some questions, like the former, humanity has answered by studying the universe, but others are more subjective.

Why do humans so often choose to stand in safety on shores of black and white instead of learning to swim the seas of grey? Why do we seem to frequently diminish a nuanced question to an artificial binary?

One such question more pertinent today than ever is, “What is the role of a corporation in society?” which has largely been reduced to “Should corporations act solely as profit-seeking entities, or seek to benefit society?” I believe this presents a false dichotomy. In reality, organizations can grow profits while simultaneously decreasing their detriment or increasing their benefit to society. In this article, I explore how and why we’re asking this question in the first place, and provide examples of how companies have managed to bridge the illusory gap between profit growth and societal benefit.

First of all, how have people sought to answer this question in the past? Milton Friedman was an esteemed American economist who promulgated what today is commonly understood as the “Stockholder Theory.” In 1970, he published an article in The New York Times titled “The Social Responsibility of Business is to Increase Profits.” His answer to the question was that the full extent of a business’s responsibility to society is to grow profits while following all laws and regulations. He accuses anyone who thinks otherwise to any extent of “pure and unadulterated socialism”. He maintains that it is the government’s responsibility to tax the population and allocate said taxes to address social concerns, and that corporate executives working towards social concerns are in effect imposing a tax on the shareholders to whom they owe a fiduciary duty. He argues that the government is made up of elected officials who adhere to checks and balances which ensure the actions they take align with the interests of the population (1).

Interestingly, he does not liken an executive taking a bonus (which could instead be distributed as dividends to shareholders, allocated towards capital expenditures, or retained as cash to maintain liquidity) to a breach of fiduciary duty. The only “misallocation” of funds he deems to breach fiduciary duty are those where the funds are put towards the common good. I understand why he felt the need to speak out so absolutely against these ideas of “social responsibility” and the “common good” at the time. Friedman published his paper during the time of the Cold War when the spread of socialism was widely viewed as an urgent threat to free society. Because of this, many people lived in fear of these ideologies, and thus any alternate perspectives were demonized.

I am by no means a proponent of socialism—my problem is with how he went about communicating his ideas, and some false assumptions he made. He states that the government will always act in the best interest of the public but we can observe this is not always true. As an example, a country’s government may provide bailouts to certain (typically larger) companies in times of economic strife, while leaving other (typically smaller) companies to fail. He argues that executives making decisions in accordance with perceived societal good is a breach of fiduciary duty, but fails to mention the many real ways fiduciary duty may be breached under our current system (i.e. large bonuses, golden parachutes, etc.). Finally, he implies that the pursuit of social welfare and profit growth are mutually exclusive, which is unequivocally false. Overall, Friedman’s 1970 article greatly influenced our understanding of the role of corporations in society today, and left a necessary middle ground out of the discussion.

Now let’s look at how some companies have innovated and transformed to meet profit and social benefit goals simultaneously. In 2021, The Halifax Marriott Harbourfront Hotel installed an AI-driven HVAC system, which factors in a multitude of information while interfacing to reduce a building’s energy consumption resulting in annual electricity and natural gas savings of 20 per cent and 18 per cent respectively (2).

Similarly, through actions such as installing efficient water fixtures, stormwater management, and water recycling systems, Hilton has reduced its water consumption for managed hotels by 33.4 per cent from 2008 to 2022 (3). Both undertakings resulted in direct cost reduction (and by proxy profit increase) for the companies while reducing their negative impact on the environment.

In the hospitality industry, employee turnover poses a significant challenge for companies. As an example, replacing a front-of-house employee can cost a hotel up to 500x-600x their hourly wage—a $20 hourly wage equates to approximately $10,000-$12,000 in turnover (4). Implementing measures that allow employees to directly pursue both their career and personal goals, be more adequately compensated, and feel more appreciated are straightforward ways companies can reduce turnover. As an example, Hilton’s adoption assistance program provides a $10,000 grant to employees seeking to adopt children (5). This amount of money is presumably easily manageable by Hilton but makes a significant change in the life of an employee. Moreover, if this grant makes an employee stay with the company longer, this avoidance of turnover cost will save the company money.

Research demonstrates that throughout history, there is a great variety of initiatives companies can take to simultaneously drive profits and social good.

Instead of characterizing difficult discussions as two-sided, we should always look for a rational middle ground. Failure to do so often leaves the optimal solution out of reach. Perhaps if the question, “What is the role of a corporation in society?” was commonly discussed in this manner, more businesses would take real actions to benefit the world instead of enacting ostentatious policies, throwing around buzzwords in annual reports, or doing nothing at all.

Sources:

1. https://www.nytimes.com/1970/09/13/archives/a-friedman-doctrine-the-social-responsibility-of-business-is-to.html
2. https://serve360.marriott.com/wp-content/uploads/2022/10/Marriott-2022-Serve-360-ESG-Report-accessible_F.pdf
3. https://esg.hilton.com/wp-content/uploads/sites/4/2023/04/Hilton-2022-Environmental-Social-and-Governance-Report.pdf
4. https://ecommons.cornell.edu/server/api/core/bitstreams/239ec8ff-0dac-4142-945c-0c28be3e523e/content
5. https://jobs.hilton.com/us/en/blogarticle/celebrating-national-adoption-day#:~:text=In%20addition%2C%20the%20cost%20to,were%20going%20to%20be%20parents