Saturday, November 18, 2017
Opinion

Good behavior, good profit

RECOMMENDED READING


Although the phrase is now somewhat out of fashion, the issue of corporate responsibility is at the heart of many of the debates on economic policies around the world. Should corporations simply maximize profits and let the invisible hand do its wonders, or do they have some obligation to be good corporate citizens as well? • As with many politicized debates, this one has been captured by two extreme positions, neither of which are, to my mind, particularly sensible.

At one extreme are "pro-responsibility" advocates. This camp is often pro-free-lunch, too. They think that companies have a responsibility to pay their workers higher wages, offer better benefits, yet still keep prices down. Good luck with that.

At the other extreme, is the "pro-profit" gang. These folks think that a company's only responsibilities are to their shareholders. The pro-profit group worships at the shrine of Milton Friedman, the both deified and vilified former professor at the University of Chicago. Friedman called the concept of corporate responsibility a "fundamentally subversive doctrine."

"In a free society," he said, "there is one and only one social responsibility of business — to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud."

Unfortunately, the important qualifiers at the end that statement are often forgotten. Friedman urges companies to "stay within the rules of the game" and avoid "deception or fraud." So I would like to push back a little on those who claim to be following Friedman's tenets and offer my own alternative, middle-of-the-road view.

Consider this example: A young bank employee, Chris, comes up with a clever way to increase profit. It is a refinement of an existing policy that when a customer makes a purchase that exceeds the account balance on his or her debit card, the bank allows that purchase to go through, "as a courtesy," but charges the customer a $35 penalty for making that purchase, and the same amount again for additional purchases until the account is back in the black.

Chris' idea is that when a bunch of charges come in on the same day, say when a customer is shopping at the mall, and these charges will together put the customer over the limit, the bank will process the biggest purchase first, thus immediately putting the customer over the limit, and enabling it to charge a $35 fee for that sandwich at the fast-food joint and another for the latte at the cafe, and so forth. This policy won't be disclosed to customers.

Here is my question: If Chris' idea is legal and profitable, is that a sufficient reason for the bank to adopt it? More generally, is any way of making money acceptable as long as it is both profitable and legal?

There is an interesting irony here. Those who would favor this narrow definition of corporate responsibility are typically very skeptical of governments. Yet, in their view, it is the government that decides the limits of what a company should do.

If an activity is legal, no matter how unsavory or unscrupulous it might be, then corporations aren't merely allowed to pursue it, it is their corporate responsibility to do so.

So where do I come down on corporate responsibility? Life is a matter of trade-offs. Strategies that enrich shareholders at the expense of customers, employees, neighbors or the environment require scrutiny.

So here is some advice for companies. First, before taking some action, consider whether you would be willing to publicly announce the policy to your customers. If not, don't do it.

Next, instead of encouraging employees to find new ways to make fees harder to find and more difficult to understand, concentrate on finding ways to deliver a high quality product at a competitive price and compete by developing a reputation for fair dealing.

Yes, at least in the short run you may lose some customers to competitors whose prices seem cheaper, but in the long run you may be able to make a profit with loyal customers who are confident that their pockets aren't being picked whenever they let down their guard.

If most companies in an industry fail to take this advice, they shouldn't be surprised if they later receive greater regulatory scrutiny. The Dodd-Frank law came about in part as a response to practices such as the one I described earlier.

As a matter of logic, if the only standard you are willing to live by is the letter of the law, then you should expect that the letter of the law will become increasingly specific.

Richard H. Thaler is a professor of behavioral science and economics at the University of Chicago Booth School of Business and a contributor to Business Class. He is the co-author, with Cass R. Sunstein, of "Nudge." © 2012 Bloomberg News

Comments

Editorial: Good for Tampa council member Frank Reddick to appeal for community help to solve Seminole Heights killings

As the sole black member of the Tampa City Council, Frank Reddick was moved Thursday to make a special appeal for help in solving four recent murders in the racially mixed neighborhood of Southeast Seminole Heights. "I’m pleading to my brothers. You ...
Updated: 7 hours ago
Editorial: It’s time to renew community’s commitment to Tampa Theatre

Editorial: It’s time to renew community’s commitment to Tampa Theatre

New attention to downtown Tampa as a place to live, work and play is transforming the area at a dizzying pace. Credit goes to recent projects, both public and private, such as the Tampa River Walk, new residential towers, a University of South Florid...
Published: 11/17/17
Editorial: Rays opening offer on stadium sounds too low

Editorial: Rays opening offer on stadium sounds too low

The Rays definitely like Ybor City, and Ybor City seems to like the Rays. So what could possibly come between this match made in baseball stadium heaven? Hundreds (and hundreds and hundreds) of millions of dollars. Rays owner Stu Sternberg told Times...
Updated: 7 hours ago
Editorial: Wage hike for contractors’ labor misguided

Editorial: Wage hike for contractors’ labor misguided

St. Petersburg City Council members are poised to raise the minimum wage for contractors who do business with the city, a well-intended but misguided ordinance that should be reconsidered. The hourly minimum wage undoubtedly needs to rise — for every...
Published: 11/16/17

Editorial: Make workplaces welcoming, not just free of harassment

A federal trial began last week in the sex discrimination case that a former firefighter lodged against the city of Tampa. Tanja Vidovic describes a locker-room culture at Tampa Fire Rescue that created a two-tier system — one for men, another for wo...
Updated: 8 hours ago
Editorial: Firing a critic of his handling of the sewer crisis is a bad early step in Kriseman’s new term

Editorial: Firing a critic of his handling of the sewer crisis is a bad early step in Kriseman’s new term

Barely a week after St. Petersburg Mayor Rick Kriseman promised to unite the city following a bitter and divisive campaign, his administration has fired an employee who dared to criticize him. It seems Kriseman’s own mantra of "moving St. Pete forwar...
Published: 11/15/17
Updated: 11/16/17
Editorial: USF’s billion-dollar moment

Editorial: USF’s billion-dollar moment

The University of South Florida recently surpassed its $1 billion fundraising goal, continuing a current trend of exceeding expectations. At 61 years old — barely middle age among higher education institutions — USF has grown up quickly. It now boast...
Updated: 7 hours ago
Editorial: Vets should not have to wait years for benefits

Editorial: Vets should not have to wait years for benefits

American military members hurt in service to their country should not have to wait a lifetime for the benefits they deserve. But that’s a reality of the disability process at the U.S. Department of Veterans Affairs, which hasn’t made payi...
Published: 11/14/17

Editorial: Deputies’ rescue reflects best in law enforcement

The bravery two Hillsborough County sheriff’s deputies showed a week ago is a credit to them and reflects the professionalism of the office.Deputies Benjamin Thompson and Trent Migues responded at dusk Nov. 11 after 82-year-old Leona Evans of Webster...
Published: 11/13/17
Updated: 11/17/17

Another voice: An untrustworthy deal with Russia

President Donald Trump’s latest defense of Russian leader Vladimir Putin included — along with a bow to his denials of meddling in the U.S. election — an appeal to pragmatism. "Having a good relationship with Russia is a good thing, not a bad thing,"...
Published: 11/13/17
Updated: 11/14/17