This article originally appeared in the Hub.
By Jerome Gessaroli, August 2, 2024
The “visible hand” of government is increasingly inserting itself into private companies and dictating how they should run their businesses. The newest example is Senate Bill S-285, which would require companies to focus on social and environmental benefits. The potential costs to progress and prosperity could be significant.
Fans of redefining corporate mandates undervalue the ways in which profit-driven companies already benefit society. First of all, these companies organize resources efficiently, produce desired goods and services, create employment, and pay taxes.
Their economic impact reaches even further. The technological innovations and improved living standards we enjoy today stem by and large from market-driven entrepreneurship and innovation. Successful companies improve our daily lives through products and services such as energy-efficient appliances and life-saving medical technologies.
Over and above all of these societal benefits, many profit-driven companies also contribute even more directly to their local communities.
For example, Teck Resources, a mining company, contributed $300,000 to a new childcare centre in Elkford, British Columbia, addressing a critical community need by supporting working families. Similarly, Canfor, a forest products company, gave over $1 million to youth sports associations in its communities, promoting health and fitness, teamwork, and community pride.
Bill S-285 aims to effectively extend these types of social benefits as a statutory obligation. It redefines the purpose of a corporation as “benefit[ing] the wider society and the environment in a manner proportionate to its size and the nature of its operations.” Although what that means precisely in practice is a bit unclear, one could envision it having broader implications.
For example, if a company decides not to automate a production facility in order to preserve jobs, it could face higher production costs than its competitors, leading to lost sales and profits. This would not only hurt shareholder wealth, but also inhibit future expansion and new hiring.
In the longer term, such well-intentioned decisions could leave the company vulnerable, potentially forcing drastic cuts to catch up with more efficient competitors and causing even more job losses than the initially considered automation.
The alignment of profit-driven motives with widely held ethical principles is also worth noting.
From many religious perspectives, profit-driven companies are potential forces for good. Their pursuit of wealth, managed responsibly, can greatly benefit society.
Companies, in this view, have a fiduciary duty to manage wealth wisely, generating profits while contributing to societal well-being. Ethical business practices are crucial, with companies seen as stewards of resources that should benefit both shareholders and the wider community.
From this perspective, responsible profit-seeking can fulfill a broader social role without any need for legislative mandates.
Some critics may argue that current instances of corporate social responsibility—like the examples cited above—may just be a calculated move to improve public image or secure tax breaks.
And yes, sometimes it is. But does that cancel out the positive impact? A new childcare centre is no less valuable to working parents because it was funded from a company’s community investment budget rather than through pure altruism.
Despite these clear, widespread benefits, some critics feel that a corporation’s very purpose needs to be redefined.
Bill S-285’s requirement that companies to benefit society and the environment, without directly acknowledging their fundamental role in creating shareholder wealth, is a fundamental flaw. While this may seem reasonable to some on the surface, it could undermine the very engine that drives progress and prosperity.
The bill’s proponents miss the crucial point sketched out above: a company’s primary goal of pursuing profit, as long as existing laws and regulations are followed, already serves the interests of multiple stakeholders.
Mandating a shift away from a primary focus on profitability risks damaging the mechanism that drives innovation and competition. It would also further undermine Canada’s already lagging productivity, evident from declining investment in machinery and equipment since 2015. Forcing companies to divert resources to government-mandated social initiatives is not the way to catch up.
This is not to say that all corporations are beyond reproach. We do need appropriate regulations and informed citizens to keep them in check. However, it is important to realize that the relationship between businesses and society is already very much a positive-sum game.
As we debate the role of corporations, we need to move past the oversimplified idea of an inherent conflict between profits and people. Instead, recognizing the positive ways in which profit-driven companies already contribute to our society is crucial. We should not risk killing the goose that lays the golden eggs through misguided attempts to reshape corporate goals.
Jerome Gessaroli is a senior fellow at the Macdonald-Laurier Institute and leads the Sound Economic Policy Project at the British Columbia Institute of Technology.
