Every now and then, a few people on my side of the ideological fence falls into the same trap as the anti-corporate lefties. They buy into to false dichotomy: Either Corporations are making money, or they are serving society. Never both. Perhaps there can be some sort of trade-off, doing one at the expense of the other here and there.
Surprisingly, Jay Tea fell into that trap. I was shocked. He knows better. If you read the last sentence of his post, he clearly demonstrates that he knows better.
Here's what I wrote to Jay in the comments thread:
Jay,The first commenter got it exactly right. Maximizing shareholder value is about more than just a short-sighted exercise in number crunching. (Cut a few costs here, raise a few revenues there and your cash flows go up... Along with the related NPV and share price.)
What drives value? Long term cash flows. Where do those cash flows come from? Revenues minus expenditures. Where do those revenues come from? Customers, mostly. Give customers a reason to choose your company, then your revenues go way up. Similarly, if you give them a reason to remain loyal, your marketing expenses go way down.
I am 100% in favor of the wealth-maximization doctrine. Literally 100%. It is a fallacy shared by many on the left (and some on the right) that wealth maximization somehow conflicts with ethics, morals, compassion, and just generally being a good neighbor.
Reputation has value. Real value. Often, the value of a firm's reputation exceeds the nominal value of all of the assets on its books.
Take Arthur Andersen, for example. When I worked there in the 90's, the firm's reputation was stellar. The firm had almost no assets. Office furniture, some computers, a few small bank accounts, but that's it. No factories, no stores, no inventories, no hordes of cash.. It made billions in revenues based on its reputation.
When its reputation was tarnished, the firm collapsed. Management's short-sighted attempt to avoid the cost of a lawsuit killed the entire firm.
Conversely, CVS is willing to spend a few bucks to establish a reputation as a true neighborhood pharmacy. It cares. It helps communities. It is a partner.
The company will likely be rewarded. This was an excellent business decision. If the CEO and Board of directors were a bunch of soulless puppy-kickers, they would have made this same decision based entirely on dollars and cents.
Now this was just a superficial overview. Experts in branding, marketing, leadership, and corporate governance could give you a much more sophisticated view of how to maximize ROI on investments in reputation. To be sure, corporate philanthropy is not always (and not even very often) a wise investment. However, there are times when a company's can get a lot of bang for the buck by doing the right good deeds.
It boils down to reputation. A company needs to build and maintain a reputation as a trusted business partner. If practical, a company should try to become the preferred business partner for its potential customers. That means being a good neighbor and pitching in here and there. (It doesn't mean becoming a sucker and letting special interests call the shots.)
When it comes to the value of corporate reputation, Alan Greenspan is a far better advocate than I. Look here:
While acknowledging the ability of competition to promote growth, many such observers, nonetheless, remain concerned that economic actors, to achieve that growth, are required to behave in a manner governed by the law of the jungle.
In contrast to these skeptical views, the ethical merits of market-driven outcomes are argued with increasing vigor by many others, especially in the United States: The crux of the argument is that because unencumbered markets reflect the value preferences of consumers, the resulting price signals direct a nation's savings into those capital assets that maximize the production of goods and services most valued by consumers. Largely unfettered markets create a consumer-led society. In such an economy, the value of reputation, capitalized as good will in the market value of companies, competitively encourages perseverance in pursuing the objectives of quality and excellence.
In a nutshell, corporations do what the people want. Why? Because serving the people is the patch to riches. Screwing people over is a way to tarnish your reputation and lose customers.
In another speech Greenspan explains how no amount of regulation can replace the importance of reputation:
Over the past half-century, societies have chosen to embrace the protections of myriad government financial regulations and implied certifications of integrity as a supplement to, if not a substitute for, business reputation. Most observers believe that the world is better off as a consequence of these governmental protections. Accordingly, the market value of trust, so prominent in the 1800s, seemed by the 1990s to have become less necessary.
But recent corporate scandals in the United States and elsewhere have clearly shown that the plethora of laws and regulations of the past century have not eliminated the less-savory side of human behavior. We should not be surprised then to see a re-emergence of the value placed by markets on trust and personal reputation in business practice.
Basically, the value of "trust" is much higher than whatever amounts would be saved by cutting the wrong corners and screwing people over.
Admittedly, Greenspan's speeches focus on integrity, not benevolence. When he speaks of a firm's reputation, he means the confidence people have in the firm's word. The company will do what it says. It will live up to its end of the deals it makes. It will stand behind its products. Customers, suppliers, lenders, and investors know that the company is not out to cheat them.
A reputation for honesty is a good start. But company's reputation can go so much further than that. Consider whether the following scenario is good business:
Company A goes into a blighted community to build new offices. It could just put a building in place and call it a day. Instead, it works with the locals and spends a few million bucks on parks, schools, transportation, and security. The company develops a public atrium, and displays free movies for the general public on some nice nights.
Is this a good investment?
The correct answer is "maybe".
For the answer to be yes, the value of that investment needs to exceed the cost. That value can manifest itself in many ways. First, the company may have an easier time hiring good people in that office. Second, the company may have a much easier time working with the local government. Third, the local citizens may spread excellent PR about the company via word-of-mouth. Fourth, the company's efforts may be made known to people across the globe, attracting lots of new revenues from customers who approve of these business practices. Fifth, the company may be able to obtain preferential treatment from suppliers and potential partners who want to share the credit.
However, there are no guarantees. The investment in the community could be wasted. The parks could become a haven for crackheads. The school contributions could be wasted on counterproductive initiatives. The transportation dollars could be squandered on expensive trolleys and shuttles that are useless to all working people. All of these millions could be for naught. The shareholders' money would be flushed down the toilet.
Back to Jay Tea's post... CVS has decided to stick it out in the South. Good for them. Hopefully, this move was good business as well as good corporate citizenship. At the very least, I hope it was a business decision with a positive NPV based on a calculated risk.
But if the CEO and the Board were simply spending shareholder money on Katrina relief efforts willy nilly... Shame on them. We rely on our for-profit sector to allocate capital efficiently so shareholders have the maximum amount of resources to use as they see fit. If CVS squandered shareholder resources, they should be punished. Period.