THE ROLE OF A CORPORATION, PART 2

By Gary Silverman, CFP®

Last week we looked at the idea two hundred of the nation’s leading CEOs had: that it is time to eliminate the notion that a business is only in the business to make money for its owners (shareholders). Instead, the idea goes, businesses owe allegiance to the greater good of society, the people who work directly or indirectly with the company, and any consumer who might be affected by the corporation’s actions. 
It sounds rather noble. In my opinion, it also sounds suspicious. But let’s assume those corporate leaders truly want to help the world. We’ll turn our attention to profit.

Profit is simply the money left over from the sales of a company after all the expenses are met. In the olden times (a couple of months ago) the answer was that the profit goes either to the shareholders in the form of dividends or is invested back into the business to make it more valuable in the future (and perhaps have even more profits to pay even more dividends).

 
Here’s where we run into the first little problem. There are a few competing factions involved in even coming up with a profit for the owners. For if there is a profit available to be paid out to those owners, couldn’t the money have been used for more pay and benefits for the employees of the firm? Or to the smaller companies who supply the firm with materials? Or to the communities the firm operates in to “give back?” Or to charities that help society as a whole? Or even to taxes to help support the roads and other infrastructure the firm uses? Aren’t there a whole lotta folks and causes that are more “deserving” of this windfall than the company’s owners?

More and more, the answer is becoming “yes!” It sounds like a basic message of socialism: companies should be run by and for their workers and the largest of those should be controlled by a benevolent government which itself is worker-controlled. In other words,  the end logic of this argument is that if there is a problem with profit going to owners, just get rid of the owners.

Don’t worry, I’m not going to start a capitalist – socialist war here. I just wanted to point out that the logical extreme to business having as its mandate a greater social good is to distribute its profits to everyone except the owners. And this idea is becoming more and more prevalent in the minds of our younger folks.

Trust me though, as altruistic as the CEO bunch seemed, my little discussion above was not on their minds. After all, it’s hard to take profits away from the owners and not, at the same time, take the ridiculous paychecks away from most of these same CEOs. And how can they justify a mansion when so many of their workers can barely afford rent, let alone save up enough to buy a house?

So while the reasons for the recent turn-about from the nation’s business leaders may be suspect, next week we will look at the fact that they have a point. And that this point has been true since the first businessperson hung out a shingle.

Gary Silverman, CFP® is the founder of Personal Money Planning, LLC, a Wichita Falls retirement planning and investment management firm and author of Real World Investing.