Dear All, it my pleasure to publish this guest post by my friend and FTI colleague, Dipinder Sekhon on why businesses would do well to focus on generating profits (ethically) and enhancing shareholder value rather than spending money on charitable causes (emphasis added).
*** Profit is Charity by Dipinder Sekhon ***
Profit – legally and ethically generated – is one of the best measures of social value-add.
Clients buy services and products only when they can extract value from them. Example, if a company sells asoap for Rs 10 (when it costs it Rs 8 say), the customer buys it only because s/he can extract more than Rs 10 ofvalue from it (say Rs 12). Hence while the company generates profit in the transaction, the customer also gains. Acompany’s profits therefore are a measure of the cumulative value it injects into the society. If the soap makingcompany is earning crores of rupees in profits, it is doing so by adding value to millions of people.
A business need not do any traditional ‘Corporate Social Responsibility’ (CSR) activity for contributing to the society. In fact traditional CSR – like donating to schools or hospitals – may not be a very economically efficient or effective way of impacting developmental outcomes. As long as a business keeps generating higher and higherprofits ethically and legally, it will be making greater and greater social contributions by injecting value to its customers, and helping them inject value into their own lives or into the lives and businesses of their customerswho are next in the chain.
Donating to a school or a needy child or family produces immediate visible outcomes. Therefore, these are typically more satisfying personally, and may be necessary for keeping one motivated towards social welfare. However, these may not be the most effective and efficient ways for achieving desired outcomes. For example,the same effort, time and money contributed towards governance reforms in education may help create more schools (reference #1) and raise more people out of poverty.
Perfect markets require information symmetry between buyers and sellers, and absence of monopolies etc. Long term complex developmental outcomes – like reduction of corruption, governance reforms, environmental sustainability etc – whose benefits are spread across several people and are difficult to quantify may not find easy market based solutions.
Even though these things will be economically beneficial for many individuals andbusinesses, it may be difficult for these objectives to raise business investments (reference #2) due to complexity of information involved, long term diffused results, collective action problem etc. Such efforts therefore may still largely dependon traditional charitable and philanthropic support. Individuals (rather than business organisations) should consider philanthropic donations (out of their personal bank balance, rather than their organisations’ profits) towards solving such social problems which do not find market solutions.
Please watch the following video interview by Nobel Laureate Prof. F. A. Hayek’s for more on these lines.
- Pl refer to this seminal paper – Reinikka, R., & Svensson, J. (2004). Local Capture: Evidence from a Central Government transfer Program in Uganda. The Quarterly Journal of Economics , 119 (2), 679-705.
- There are some interesting attempts though. Check this out: http://www.ted.com/talks/shaffi_mather_a_new_way_to_fight_corruption.html
P.S. Also read another FTI colleague and friend, Sanjeev’s views on charity (part of his forthcoming book). Please bear in mind that these are “cut and paste extracts from across the entire book, and so these points, below, are not paragraphs that flow into each other”:
We are born to be fiercely independent; self-reliant. Thus, we are deeply offended by charity thrust upon us when we can fend for ourselves (no matter how feebly) with our own effort.
…Charity can, at best, give someone a fish for a day, but can’t teach the person to fish. It has to be ‘administered’ each day, whereas teaching how to fish is a durable cure. Unless a desperate emergency arises, charity must therefore be abjured.
…There has never been a time in history when private charity was sufficient to feed and educate all the poor. The liberal believes … that … everyone [be] provided with a reasonably level playing field (reasonable equality of opportunity). Any enhancements beyond this income based social minimum should be left to the fine tuning of private charity and social relationships (such as between parents and children). …it is inappropriate for a society to assume that all taxpayers will voluntarily pay taxes for the welfare of others. But on the other hand, we also know that private charity has never succeeded in sheltering everyone who may be in desperate need. In other words, although empathy is not good grounds for a social minimum, we look for a rational system that will not be entirely incompatible with our empathies. True, government provision of public goods and the social minimum (as part of social insurance) will necessarily displace some voluntary communitarian effort and charity.
In sum:1) Except for someone in deep distress, TEACH. Don’t “give”. 2) Have a state that runs a FRUGAL social insurance program (NOT a welfare state) to bring about a reasonable equality of opportunity. Therefore, unless you are involved in helping those who are starving or badly sick or handicapped and have no resources to help themselves, DO NOT give charity. Instead, teach – either for free or for profit (I recommend FOR PROFIT teaching, which is more sustainable and by which you can multiply your efforts a thousand-fold). Set up a primary school for the poor. Set up a branch of Adharshila where you educate the community in ideas about classical liberalism and economics.