On the Appropriate Social Responsibilities of Successful Entrepreneurs

On Encouragement of Diverse Ideas and Approaches: The Role of Private Support

Let me turn again to the issue of spending from private wealth accumulations and the social obligations this issue may be taken to entail. Under the current laws and social pressures, there is little or no obligation for socially beneficial expenditure (i.e., philanthropic outlays) from private wealth accumulations. Yet, as well all know, it has a long history. In the Middle Ages, for example, wealthy kings and nobles provided funding for the construction of cathedrals that were deemed to benefit the souls of poorer inhabitants, as well as their own. We tend to think that this sort of spending reached a peak under the rule of the Medici in Florence, the Renaissance popes—some of whom incidentally (but hardly accidentally) came from that family, and other wealthy and powerful Italians and Spaniards of that era. The ceiling of the Sistine Chapel and the Michelangelo sculptures that continue to amaze arguably are all products of this philanthropy.

Such private giving has continued, perhaps peaking toward the end of the 19th century in the United States, when institutions such as the public library system and the Metropolitan Opera were financed in this way (by the entrepreneurs who were dubbed the “robber barons”). Later, the modern dance movement was able to progress with the aid of Rothschild funding, and experimental theater was brought to life via funding from the Ford Foundation. In addition, the extraordinary U.S. university system surely was built, in good part, by support from such sources. Today effective programs of disease control are given life by the support of the Bill and Melinda Gates Foundation—just one example of continuing philanthropic efforts.

Here, it is important to emphasize that none of this is intended as criticism of support of such causes by the public sector that has, in recent periods, been the primary source of such funds in most of Europe. On the contrary, much is to be said for such funding. Rather, my reservations are about financial support derived largely or exclusively from any single source, whether public or private. Indeed, experience indicates that regardless of the integrity and good intentions of such a source, the funds it provides are apt to be directed disproportionately, or even entirely, to those activities that are favored by the predilections of the funding agency. It has been reported, for example, that in some European countries, the sole-source funding agencies for the arts favor classical drama, while elsewhere, new plays exploring new directions are emphatically preferred, with funding resources distributed accordingly (and with little support given to activities that are not in accord with these preferences). The intentions are not questionable, but the result, evidently, is constraint of creativity and the handicapping of diversity. I maintain that the rise of New York City as a primary cultural center in the second half of the 20th century is, to a considerable extent, ascribable to the variety of funding sources, representing a wide array of preferences, to which fund-raisers of that era could turn for financial assistance.

Here, yet another point must be clarified. This discussion absolutely is not intended to advocate a further increase in economic inequality, nor should it be interpreted as a defense of current levels of inequality. As asserted in Bernard Shaw’s Major Barbara, I hold that poverty is indeed the greatest crime. But so long as some members of society continue to amass great islands of wealth and, consequently, great inequality remains an unstoppable reality, we should take full advantage of any attendant benefits that the situation may provide. These include a multiplicity of sources, with different goals and criteria, for the funding of essential and socially beneficial activities. This can be achieved in ways other than recourse to private philanthropy, but so long as the private funding option remains, surely full utilization of this source is desirable.

Indeed, private financial support has become all the more urgent, given the unhappy recent experience of public funding throughout much of the world, as governments grapple with debt and deficits. The Great Recession that the advent of the 21st century introduced has demonstrated the vulnerability of financial support for many socially beneficial activities to calls for containment of government deficits and public debts. Support for higher education has been cut back in various countries, and expenditures on health care have been questioned, with particular attention drawn to the sector’s disturbingly high rate of cost increases. As a result, private sources of funding are now playing an increasingly crucial role in financing of such activities. ¹

The subsequent move in Europe toward multiple sources of funding should be regarded as the best avenue available for exit from an unfortunate situation. But, in addition, this change brings with it one great virtue: the facilitation of diversity—and perhaps even heterodoxy—in arenas that previously subsisted on support from the public sector alone.

I cannot resist ending this section with a personal anecdote that seems apropos. Many years ago, I was invited, along with Nancy Hanks, that unsurpassed chairwoman of the National Endowment for the Arts—America’s arts funding agency, to address its Austrian counterpart about differences between their practices and ours. The night before the meeting we were presented with tickets to the great Vienna State Opera, where Die Meistersinger von Nuremberg was to be performed that night. Sitting there at the performance, it immediately became clear what I had to say to our Austrian hosts the next day. ²

In my talk, I pointed out that the libretto of that opera, which is built around a medieval song contest in which the contestants perform original works, was simply a literary translation of the ideas I was advocating (more on these below). In the libretto, the hero of the opera, the young knight Walther, offers a song whose structure deviates from the traditional pattern. The contest’s judge, Beckmesser, at once demands that Walther’s offering be disqualified because it does not follow the accepted form. In the end, the intervention of shoemaker Hans Sachs, who makes an impassioned speech in favor of innovation and diversity in song, saves the day.

The evident moral is that diversity and evolution in the arts and in other fields that contribute to the general welfare are promoted and perhaps even made possible by the availability of that proverbial “second judge” or a second funding agency that is prepared to judge contributions differently. Accordingly, I urged my Austrian hosts to consider relying upon multiple funding sources or, at the very least, considering multiple, different viewpoints when determining how to allocate public funds.

On Corporate Support for “Good Causes” Selected by Management

I have long argued against the contention that business corporations bear a social responsibility to provide funding for good causes. Universities, hospitals, and cultural enterprises, such as museums and orchestras, have grown increasingly dependent on such resources. This often is considered a very good thing, understandably applauded by the hard-working fund-raisers for these organizations, which constantly find themselves threatened by debilitating financial shortages. Indeed, it would seem that only the mean-spirited could take issue with such philanthropic acts that keep our national cultures alive and healthy. Certainly, the pressures that underlie this view of the world are worthy of our sympathy.

However, one recent event has sharply changed many people’s views of this matter. In 2010, the U.S. Supreme Court ruled that corporations are entitled to all the constitutional protections of human rights guaranteed to all citizens, under the U.S. Constitution. This decision has widely been interpreted as not entirely disinterested support for particular political candidates and their legislative programs. The clear result is that calls for “corporate responsibility,” in the form of unconstrained corporate giving, now entail potentially important issues related to politics and campaign finance.

In itself, unconstrained personal philanthropy undertaken from legitimately obtained personal financial resources is far from objectionable. However, the conferred right of corporate management to use other people’s money (i.e., that of their investors) without explicit authorization to support the causes favored by management is more than a bit problematic. This is true not only for corporate political donations but also for corporate giving to recipients of philanthropy—however worthy their causes may be.

There is, however, one noteworthy exception. If the support promotes the legitimate interests of the corporate donor, even indirectly, then that donation surely is appropriate. For instance, if a company’s future depends heavily on the availability of postgraduates trained in computer science or some other subject, then it is surely a matter of socially beneficial self-interest for that firm to provide funding for such educational programs and students. The same is true for a firm whose activities are carried out in a community that struggles to attract well-educated employees. In that case, funding cultural activities that will help to make the community a more desirable place to live will legitimately benefit the business and, as such, seems clearly appropriate.

In practice, most nonpolitical corporate philanthropic support is targeted to the promotion of company goals. Indeed, it may even benefit a company to support causes that are more esoteric, from the company’s viewpoint—such as, chamber music, if the firm then can gain business by advertising its generosity. More than one opera company in the United States, for instance, has received corporate funding that clearly seems to have been given for such public relations purposes. Surely, this is a legitimate activity consistent with management’s responsibilities to its stockholders.

On the More Appropriate Social Responsibilities of Business

It may seem that the conclusions of the preceding section are intended to relieve firms of all social responsibility, but that is emphatically not so. The activities of business firms, driven relentlessly by the pressures of the market mechanism, cause a wide variety of damages to the welfare of society. They pollute the atmosphere and the waterways, provide misleading information to customers, offer products that damage consumers’ health, and engage in anticompetitive behavior, among many other harmful activities. Clearly, entrepreneurs who are responsible for such misbehavior should be obligated to do something to rectify their wrongs.

Here, too, my views are somewhat heterodox, as I believe that the decision to undertake such countermeasures should never be left to the voluntary choice of entrepreneur-managers. Rather, the responsibility should be imposed upon them by law or by government agencies that have the means to enforce the adoption of such countermeasures. But before explaining why I advocate this approach, a short digression is necessary to avoid some misunderstanding of my views.

I have long argued that entrepreneurs are not a perfectly homogeneous group. Rather, as in any other activity, entrepreneurs span the spectrum of humanity in their attributes, including matters entailing virtue or vice. Here, it is most important to note the range of differences among entrepreneurs regarding promotion of the general welfare. For instance, I have known prominent business people who were deeply devoted to the public interest—for example, spending generously of their free time to work in underserved communities, helping the younger inhabitants of these communities to find and take advantage of promising future opportunities. Of course, not all of their peers have similar objectives. This hints at the key problem, which is not so much that there are at least a few entrepreneurs who conduct their business with little concern for the welfare of the community. Rather, the larger problem is the likelihood that the competitive mechanism will force the hand of even the most ethical entrepreneur-managers to follow the examples of such scoundrels.

Here again, an apropos anecdote comes to mind. I once had lunch with a member of top management at a firm that was responsible for substantial emissions of pollutants into nearby waterways. As I remember it, he said to me:

My daughter gives me hell at breakfast every morning and denounces me as a despoiler of the environment. She isn’t wrong. But what can I do about it? If we put in the expensive plant and equipment and undertake the operating costs required for real pollution control my company will be in trouble. Our competitors are located on the same river and are doing the same thing. If I take on the pollution control and they do not, they will be able to beat our prices and drive us out of business, and the river will remain polluted. But my daughter simply refuses to see this.

I listened and agreed that such unilateral attempt at virtue would merely be self-destructive, with no resulting improvement in the river’s condition. Instead, I urged him to contact every congressman or appropriate members of the environmental protection agency and urge them, in turn, to adopt rules that would require both his firm and its rivals to take remedial measures. Only with such regulatory assistance could the executive do the right thing for both his firm and the environment, without endangering the health of his company.

Concluding Comment: Adapting the “Rules of the Game”

Because entrepreneurs come in all shapes and sizes and span the range of morality, preaching to them about their obligations to the general welfare is virtually certain to be pointless. Some are likely to be moved by such appeals—that is, their good intentions may be stirred, but so long as competition forces every firm in the market to avoid “wasteful costs” (i.e., costs that are not offset by the resulting profits), voluntary steps are likely to be confined to measures that promote public relations but do little to remove any social damage caused by a firm’s activities. In the meantime, entrepreneurs’ questionable activities—from environmental damage to deliberately deceptive investment advice—are likely to continue virtually unchecked.

Given this reality, what can be done? The all-too-obvious answer entails understanding what Professor Joel Mokyr (Northwestern University) has dubbed the “Willie Sutton game.” Recall (Baumol, 2004) that Willie Sutton was a notorious bank robber in the United States, who is best remembered for his response to a reporter (after he was captured by the authorities) who had posed the question: “Mr. Sutton, why do you rob banks?” Without missing a single beat, Sutton answered: “Because that’s where the money is” (p. 10).

Entrepreneurs, as a group, also seek to go where the money is, so the solution that suggests itself is adaptation of the “rules of the game” so that entrepreneurs confidently conclude that the most effective way for them to do well is by doing good. The U.S. patent system has long served this purpose. A redesigned tax system that uses imposts to make socially damaging activities expensive while reducing the financial burden on virtuous behavior would be another obvious instrument for this purpose. This approach also has been adopted in various other ways, notably in the institution of a system of purchasable licenses for emissions of pollutants, with a market for those rights guiding the prices of the licenses. The idea is to enforce the social responsibilities of entrepreneurs and other members of the business community not through preaching, but rather, by making it financially disadvantageous for them to act against the general welfare.