What are firms trying to accomplish?

To massively simplify an ongoing debate in business ethics, there are two prominent kinds of answers to the question “What should a corporation do?” Some people say that corporations should maximize the long-term market value of the firm. Others favor a more pluralistic approach, saying that corporations should promote profit and other social values, such as the interests of stakeholders who are not employees, investors, or consumers. Proponents of this latter view sometimes defend Environmental, Social, and Governance Investing and B Corp Certification for corporations on these grounds. The “Balanced Scorecard” approach to management also reflects this pluralistic disposition.Footnote ¹

In this section, I draw on Michael Jensen’s influential work on this subject to defend a version of the first answer.Footnote ² Jensen makes a compelling case for firms to maximize their long-term market value. His argument is broadly consequentialist. Jensen’s case for firms promoting long-term market value begins by reframing the debate not as a disagreement about values per se, but as a disagreement about whether firms should have a single-valued objective or multiple objectives. He then argues that firms should have a single-valued objective because any alternative “politicizes the corporation, and leaves its managers empowered to exercise their own preferences in spending the firm’s resources.”Footnote ³

Jensen then makes the case that for-profit firms should adopt the single-valued objective of maximizing the long-term market value of the firm. He argues that this approach is more likely to maximize social value than a more pluralistic approach to corporate governance would, even if the more pluralistic approach includes social values other than profit maximization. Jensen’s case for maximizing the long-term market value of the firm is reminiscent of Adam Smith’s famous remark that “by pursuing his own interest [man] frequently promotes that of the society more effectually than when he really intends to promote it.”Footnote ⁴ This approach also echoes Milton Friedman’s defense of the claim that the social responsibility of business is to increase profits.Footnote ⁵

Like those who developed this argument before him, Jensen’s case for profit maximization appeals to the premise that profit-maximizing firms are more likely than alternative approaches to allocate goods in a socially efficient way. Profit is a sign that firms are promoting social welfare because of the welfare gains from trade. Firms profit only when other people value the good or service that the firm produces to a level that exceeds the firm’s investment in producing it. Jensen is not arguing that this system is necessarily the best way to promote social welfare, but that “no other scorecard … will score the game as well as this one.”Footnote ⁶ The key advantage of focusing on profit maximization is that it provides a single metric, albeit an imperfect one, for members of firms to evaluate whether they are adding value to the world.

In contrast, when firms pursue profit alongside other values, they must make trade-offs between the welfare-enhancing power of markets and some other ostensibly welfare-enhancing considerations. However, without the price mechanism, corporate decision-makers cannot make these trade-offs when different constituencies express support for different ostensibly welfare-enhancing initiatives. Additionally, when focused on multiple values, corporate decision-makers are less likely to remain competitive against profit-maximizing firms and, therefore, less likely to promote social welfare through trade. In these cases, it is more difficult for shareholders, employees, or consumers to hold corporate decision-makers accountable for their performance and stewardship of a firm’s resources if they are simultaneously tasked with promoting multiple values. Jensen also cites Friedrich Hayek as arguing against a pluralistic approach on the grounds that it makes room for firms to pursue their short-run partisan values or in-group interests, in contrast to the impartiality of a profit-maximizing approach.Footnote ⁷

At this point, it is important to clarify a few things that proponents of profit maximization are not defending. Proponents of profit maximization do not argue that members of firms should focus narrowly on short-term profits and share prices. Rather, Jensen writes that members of firms should play the long game. Firms sometimes forgo short-term profits to invest in more profitable long-term projects. Shareholders trading in financial markets may not always recognize the wisdom of these decisions, so members of a firm should be prepared to make the case for a longer time-horizon. Jensen also emphasizes that the case for profit maximization appeals to the value a profit-maximizing firm provides to all stakeholders: “[w]e cannot maximize the long-term market value of an organization if we ignore or mistreat any important constituency.”Footnote ⁸

Proponents of profit-maximizing firms, such as Jensen and I, are not Pollyannaish about for-profit firms’ social benefits. In some cases, public officials may intervene to prevent monopolies in profit-maximizing industries or to prevent profit-maximizing firms from imposing harmful externalities on others. The case for profit maximization presupposes that background political conditions uphold workers’ and employers’ economic freedom and protect everyone’s entitlements against interference. For example, public officials should enforce a legal system that criminalizes assault and fraud, holds people liable for torts, upholds contracts, protects property rights, and preserves common resources. In turn, many of these legal rules are justified, at least in part, by virtue of the good consequences and other moral virtues that are associated with enabling firms to focus on profit maximization.Footnote ⁹

Additionally, when Jensen writes that “managers should make all decisions so as to increase the total long-run market value of the firm,”Footnote ¹⁰ he is not arguing (as some commentators suggest) that they are morally required to do so in the way that proponents of a more deontological approach to ethics use the language of requirement. Jensen’s approach is broadly consequentialist, so he does not specify the conditions under which it would be appropriate to blame or sanction a corporate leader. Rather, Jensen uses “should” to mean that it would axiologically be better if corporate leaders were to focus on increasing total long-run market value.

Relatedly, none of the proponents of the profit-maximizing approach argues that corporate leaders should be legally required to maximize profits (except in contexts where they may have contractual duties to do so). The question under consideration is “What should a corporation do?” not “What should public officials legally require a corporation to do?” Just as individuals should have a legal right to refrain from efficiently allocating their talents and resources with an eye to promoting overall welfare, so too should firms. But just as it is good for people to make decisions that promote overall welfare, so too for firms. The case for efficient profit maximization for firms is even stronger than for individual consequentialist decision-making, though, because firms cannot experience emotions, love, pain, or well-being in their own right. Nor are firms embodied, psychologically unified agents. For these reasons, the typical justifications for prioritizing agent-centered prerogatives over general welfare considerations do not apply to firms.

The case for profit maximization also does not require that all groups should maximize profit. Friedman writes, “A group of persons might establish a corporation for an eleemosynary purpose—for example, a hospital or school. The manager of such a corporation will not have money profit as his objective but the rendering of certain services.”Footnote ¹¹ However, even when profit is not an organization’s objective, Jensen’s case for organizations pursuing a single, measurable objective stands, so that eleemosynary organizations claiming to promote the social good must justify their choice to forgo profit in response to the welfarist case for profit maximization.

Jensen’s consequentialist case for a profit-maximizing approach has several important implications for members of corporations. First, it favors management strategies that evaluate employees based on their contribution to long-term market value. It also favors governance structures that insulate corporate leaders from shareholder control, at least in contexts where shareholders are likely to be shortsighted. Additionally, this case for profit-maximization instructs corporate leaders to trust that they have the best chance of benefiting members of their community when they create goods or services that people value.

There are theoretical reasons to think that these consequentialist arguments for profit maximization succeed.Footnote ¹² There is also some empirical support for this view.Footnote ¹³ But business ethicists have criticized this view on the grounds this analysis is overly focused on the moral importance of efficiency, at the expense of other values. In the remainder of this essay, I will consider these arguments.

Profit maximization and respect for contributors

Waheed Hussain argues against a profit-maximizing approach on the grounds that it overlooks other morally important values.Footnote ¹⁴ He writes: “[Jensen’s] impartial concern for everyone’s welfare is not only demanding, but also at odds with how we understand our lives, particularly with respect to human relationships.”Footnote ¹⁵ Additionally, Hussain argues that Jensen’s framework undervalues the moral importance of economic freedom. On Hussain’s account, businesses exist within the private sphere, where people have very strong interests in doing things that do not promote some impartial conception of overall welfare.

Hussain gives several examples that aim to establish that the profit-maximizing firm is incompatible with an approach to business that respects the importance of personal sovereignty and economic freedom. First, he describes a small for-profit bank with a chief executive officer (CEO) who one day decides to promote minority home ownership in addition to making a reasonable (but not maximal) profit. Second, Hussain describes the Ben and Jerry’s ice cream company, which seeks to make a reasonable (but not maximal) profit while also providing employees with higher-than-market wages and benefits. Third, Hussain describes the Metropolitan Museum of Art, a nonprofit organization that, at one point, did not charge admission to see their art collection.

Hussain argues that, in each of these cases, the claim that each organization’s leaders are required to maximize profit rather than promote minority home ownership, high wages for employees, or public access to art “would clearly conflict with the basic liberal idea that individuals are free to pursue their own preferred objectives in market life.”Footnote ¹⁶ He also writes that just as physicians are not morally required to provide free medical care whenever such a practice would promote overall welfare, so too, corporate leaders are not morally required to maximize profit on the grounds that profit maximization is the impartially best system.Footnote ¹⁷ Hussain then compares Jensen’s view to the view that individuals are required to give their time and money to effective charitable causes, and rejects this view on the grounds that people have agent-relative prerogatives that permit spending resources on their own projects.Footnote ¹⁸

Like Hussain, I also do not share Jensen’s narrow focus on the moral value of efficiency. Yet Hussain’s critique of Jensen characterizes the view as more demanding than it is. As a consequentialist, Jensen is less interested in making the case that profit maximization is morally required. Rather, he is arguing that it is the best thing to do. For this reason, a proponent of Jensen’s position may grant that it might be a mistake to blame or sanction people for using their organization’s resources to promote minority homeownership, high wages for employees, or free access to art, just as it may be counterproductive to blame people for failing to promote overall welfare in other contexts. For similar reasons, a consequentialist proponent of profit maximization should not support a legal requirement that all organizations maximize profit, even though it would be better if they did.

Moreover, there are other compelling moral reasons to favor profit-maximizing business, even in the cases Hussain describes. Consider Hussain’s example of the for-profit bank that adopts the additional value of promoting minority homeownership. Hussain stipulates that “everyone agrees to the change.”Footnote ¹⁹ This simplifying assumption enables him to characterize the bank reform as an exercise of each firm member’s personal freedom. But it is unlikely that “everyone” affected by such a change would agree. If there were any holdouts at all, then cases like these would call up Friedman’s concern that the bank CEO is spending the money of his stockholders by reducing their returns, raising prices for customers either by reducing the returns on their accounts or by raising their interest rates, or lowering his employees’ wages for the sake of his idiosyncratic project of promoting minority homeownership. Alternatively, the CEO could personally secure loans for minority borrowers. The fact that he does not suggests that he only values minority homeownership when it is not personally costly to his own bottom line. The CEO may have a morally significant agent-relative prerogative to keep his money, but that does not entitle him to spend other people’s money to promote his other agent-relative prerogatives.

Similarly, there are also other moral reasons to dispute Hussain’s claim that the Ben and Jerry’s example is a challenge to the case for profit maximization. As Hussain describes the firm, everyone who invests in Ben and Jerry’s works for the company and buys their ice cream knows that the firm is devoted to making a high but not maximal profit. Jensen would argue that Ben and Jerry’s is failing to allocate the resources they command in the most efficient way and, therefore, failing to promote overall welfare as well as they could—that is, unless their socially responsible marketing is a way of driving profits, a possibility that I will address below.

This consequentialist response to the Ben and Jerry’s case is related to an egalitarian argument that the firm’s wage structure fails to promote the well-being of more disadvantaged workers. Hussain characterizes the company as paying higher-than-market wages and benefits at a level that is not required to attract the most productive ice cream workers. I am skeptical, but let’s grant that Ben and Jerry’s could pay less for labor and be just as productive, but they choose not to. If we grant this claim, Ben and Jerry’s is likely hiring workers who are more productive than the typical ice cream company worker, assuming they still hire the most qualified workers. This policy thereby prevents less productive, more economically disadvantaged workers from accessing the ice-cream-manufacturing labor market and enables more productive workers to capture the excess pay. Disadvantaged workers then take other low-wage jobs in a labor market that is slightly less competitive because Ben and Jerry’s is not hiring in it.

Perhaps the leaders of Ben and Jerry’s have an agent-relative prerogative that compels them to structure wages and benefits in ways that select against lower-skilled workers who could be just as productive as the higher-skilled workers who do not achieve their full productive capacity and receive generous benefits. But even if it is permissible for Ben and Jerry’s to structure wages in this way, it would be better, for egalitarian reasons, if they just focused on promoting the long-term market value of the firm.

Another moral reason for profit maximization is that alternative hybrid approaches, which hold that firms should promote several values simultaneously, also make employees vulnerable to workplace domination.Footnote ²⁰ As an illustration of how a more pluralistic approach to corporate governance can enable workplace domination, consider Hussain’s examples of the small bank or Ben and Jerry’s ice cream. Say that the CEO of the bank now evaluates bankers in terms of their ability to promote profit and lend to minority borrowers. By adding a second standard of evaluation without specifying how the two values trade off against each other, the CEO has empowered himself to negatively evaluate workers who focus on profit, minority homeownership, or any combination of the two.

Say that Ben and Jerry’s values profit as well as a list of twenty progressive causes. This management philosophy, which is similar to the “balanced scorecard” approach to management, empowers managers to weigh competing values arbitrarily and unaccountably when evaluating employees. This approach to management is counterproductive, as Jensen argues, because “it will generally lead to confusion, conflict, inefficiency, and lack of focus.” Because employees do not know how to make trade-offs between the different values, they are constantly vulnerable to threats of administrative sanction or termination from employment. Even worse, because managers can cite some failures on any relevant evaluative dimensions, employees lack the security of knowing whether and when they may be dismissed.

Profit maximization and respect for consumers

Firms that focus on promoting their long-term market value promote consumers’ overall well-being better than do firms that choose to forgo opportunities to sell their goods and services to willing customers. A profit-maximizing approach is also more respectful of consumers. I defend these claims in this section by way of responding to Gregory Robson’s critique of Jensen. Robson argues that “even if firms are required to maximize their social welfare contributions, they are not necessarily required to maximize their profits,” because profit-maximizing efficiency is not always good for overall welfare.Footnote ²¹ While Robson is surely correct about this in some cases, I argue that a profit-maximizing orientation is better than alternative approaches regarding social welfare as well as other values that neither Robson nor Jensen consider.

Robson’s argument for the claim that firms should forgo profits in some cases appeals to the premise that consumers do not always make choices that promote their own interests or overall welfare. He describes three ways that this can happen. Consumers may make choices that are bad for their well-being, immoral choices, or choices that prevent them from having valuable experiences that do not involve purchasing a good or service. I will describe and respond to each of these arguments.

First, Robson argues that consumers can fail to promote their own well-being due to ignorance or weakness of will.Footnote ²² For example, when people buy cigarettes or food that makes them sick, they may be making a purchasing decision that is bad for them in the long run. Robson also says that consumers often have unreflective and imprudent preferences, such as a preference to open a store credit card at a high rate. Robson points out that consumers sometimes have adaptive preferences that sustain the conditions of their own oppression, such as women who accept low wages or some women’s preference to purchase and wear makeup.

Robson thus invokes a familiar consequentialist case for paternalism. Yet, as consequentialist critics of paternalism have noted since John Stuart Mill, paternalism often backfires.Footnote ²³ Robson is right to point out that consumers misled by a firm’s labeling or advertising cannot reliably make purchasing decisions that advance their interests. For both consequentialist and deontological reasons, firms have a duty to inform consumers about the risks and benefits of their products. But when consumers make purchasing decisions out of weakness of will, as when they purchase cigarettes or sickening foods, members of firms should not assume that they are in a better position to make short-term versus long-term trade-offs for their customers. It is also disrespectful for firms to limit consumers’ choices solely on these grounds because it expresses the judgment that consumers are not fit to make their own decisions about their health or finances.Footnote ²⁴

The same argument applies to consumers’ preferences for taking out high-interest credit cards. Even if customers report that they regret getting into debt, it could have been rational and beneficial for them to do so at the time, as they would have been worse off if they had not had the option.Footnote ²⁵ I am not saying that consumers always make purchasing decisions that improve their well-being. Rather, I am saying that consumers are comparatively better at promoting their own well-being than are members of a firm who paternalistically seek to limit their customers’ choices.

A similar issue arises regarding Robson’s argument that firms should sometimes forgo profits to avoid entrenching people’s adaptive preferences.Footnote ²⁶ All decision-makers who are in a position to help people act on their adaptive preferences encounter a dilemma. On one horn, if members of firms encourage people to choose options according to what they would prefer in more ideal circumstances, discounting their actual preferences, then they encourage people to make decisions that are not well-suited to their actual circumstances. This approach is risky because it requires that members of firms override people’s judgments about their own welfare in the hopes that limiting their capacity to act on adaptive preferences will beneficially change their circumstances. Robson seems to say that members of firms should decide in a way that falls on this horn.

On the other horn of the dilemma, if members of firms encourage people to make choices that are in accordance with what they prefer, then they potentially entrench the nonideal circumstances that generated those preferences. Often, these circumstances involve collective action problems. For example, even if women would ideally prefer not to wear makeup, in the actual world where there is a widespread expectation that women wear makeup, women prefer to meet this expectation to avoid discrimination or mistreatment. In the example Robson cites, women may accept lower wages because they are socialized in ways that prevent them from asking for more.

I favor responses to adaptive preferences that let people choose based on their revealed preferences, even if these responses encounter the second horn of the dilemma. In some contexts, profit-maximizing firms can have negative externalities, including creating collective action problems that give rise to adaptive preferences. Members of firms cannot reliably know whether their customers prefer makeup due to adaptive preferences or whether their interest in makeup is genuine. Women might even accept lower wages not out of adaptive preferences, but because, compared to men, they make different trade-offs between wages and other workplace benefits.Footnote ²⁷

This does not deny the possibility that collective action problems and other nonideal circumstances shape some people’s preferences. Rather, my claim is that members of firms are not well-placed to distinguish adaptive preferences from other preferences. Chris Freiman argues that critics of for-profit businesses who cite market failure as a pretext for regulation often overlook the potential for governmental failure in the same sectors.Footnote ²⁸ In this case, however, critics of for-profit businesses are overly optimistic about firms’ potential to solve social problems compared to public officials’ ability to do so. When public officials cannot effectively coordinate through the regulation of for-profit firms to remedy issues that some people characterize as collective action problems, the leaders of firms should not assume that they are in a better position to unilaterally address these perceived collective action problems.

Second, Robson argues that some consumers have preferences that set back nonwelfarist interests and harm society, even if these preferences are not bad for their well-being. He gives the example of racist consumers who have an interest in purchasing neo-Nazi paraphernalia. He characterizes Jensen’s view as saying that “firms are morally required to maximize their contributions to social welfare by capturing maximal profits [by selling neo-Nazi products].”Footnote ²⁹

As noted above, the language of permission and requirement is not reflective of Jensen’s analysis. But we can restate Robson’s point to say that proponents of a profit-maximizing approach would maintain that firms should sell neo-Nazi paraphernalia if it is profitable for them to do so. As an aside, I am skeptical that it would be profitable for most firms to make neo-Nazi stuff because most customers probably would prefer not to patronize businesses that cater to neo-Nazis, but let’s grant the case for the sake of argument. Robson is focused on the consequentialist case for profit-maximizing firms. Yet, in presenting this example, he does not consider that if there is a profitable market for neo-Nazi stuff, it is unlikely that any given for-profit firm will eliminate neo-Nazi products from the marketplace. If anything, each firm that refuses to participate in the market reduces competition in the neo-Nazi retail space, enabling unscrupulous neo-Nazi suppliers to charge higher prices. Robson cannot assume that it is better for social welfare if a small number of firms profit more by selling expensive neo-Nazi stuff than if a larger number of firms profit less by selling cheaper neo-Nazi stuff. The overall welfare calculation on this question is especially tricky because the same consequentialist reasons against government censorship of offensive speech are also reasons that weigh in favor of allowing people to purchase neo-Nazi stuff, even though products that promote neo-Nazism are also obviously socially destructive in many ways.

Third, Robson writes that the profit-maximizing approach cannot account for nonmonetary values, which also matter for overall social welfare, such as family and community. He illustrates this point by describing a profitable entertainment device, E, which is so entertaining that it causes many users to distance themselves from friends and family members. Robson claims that even if producing E is profitable, E would still undermine social welfare on balance. “Money can’t buy love,” Robson writes.Footnote ³⁰ Here, he implies that profit-maximizing businesses may contribute to a socially destructive undersupply of love. On this point, Robson also claims that “[m]any 24–7 stores presumably could increase social welfare by closing their doors at night. Their employees might then experience a welfare gain from having more time at home with their families at night that outweighed consumers’ presumed welfare loss from being unable to purchase items at night.”Footnote ³¹ Here again, Robson assumes a broadly consequentialist perspective when making the case against profit maximization for firms. However, Robson claims that it is possible that the welfare loss that overnight workers experience outweighs the welfare benefits consumers enjoy from having access to the store at night, even if it is profitable for the firm to remain open at night. However, Robson does not explain why the overnight worker does not benefit from working the late shift in exchange for the wage he receives. If working the overnight shift harms the worker at his current wage, he should either work elsewhere or demand a higher wage.

Still, Robson is clearly correct in writing that money cannot buy everything that matters and in pointing out that economic benefits do not always coincide with social benefits. Yet, while money cannot buy love, a system in which firms compete to provide people with goods and services that they value enables people to experience more of the things they love. Profit-maximizing firms do not create an undersupply of love; they compensate for it. People do not need labor markets and markets in goods to induce them to care for the people they already love. However, these markets can induce people to care for each other in cases where love is scarce. Smith writes: “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.”Footnote ³² Profit-maximizing firms can also compensate for an undersupply of love by providing substitutes for love to people who cannot form loving relationships outside the economic realm. Money cannot buy love, but people who cannot find love can use money to pay sex workers who will provide at least some of the benefits people enjoy in loving relationships.

This is not to say that efficient profit-maximizing firms always promote social welfare on balance. For example, while focusing on long-term profits might incentivize companies to contribute to economic growth, which has massive noneconomic value, for-profit companies may also implement policies that discourage fertility, which could be bad for social welfare in the long run. Take Robson’s example of the entertainment device E. It could be that some products have harmful social externalities in the same way that cars have harmful public health externalities when they produce air pollution. Yet here again, Jensen’s original insight is informative. A legitimate purpose of government is to mitigate the negative externalities of for-profit firms. For example, public officials can levy Pigouvian taxes, which require producers to pay additional taxes in proportion to the social costs of their production. These taxes would either compel companies to offset the harmful social effects of their behavior or they would give companies an incentive to innovate and find less socially harmful methods of production.Footnote ³³

Labor markets also price in some measure of social responsibility. If qualified workers choose not to work at the E company because they think it is socially destructive, the E company will need to pay a wage premium to get people to work there. Insofar as E’s focus on profit maximization undermines overall social welfare in a way that people can see, their socially destructive product would reduce their profitability by increasing labor costs. Employee and consumer sentiment can induce firms to improve their product in socially beneficial ways.

In this way, the market is democratic. Workers and consumers can decide to forgo wages or savings as a way of expressing their values. In contrast, there are two reasons firms should not similarly price in social values by forgoing profit. First, arguments about the value of integrity and justifications for acting on the basis of agent-centered prerogatives do not apply to firms, because firms are not psychologically distinctive people who have moral status in their own right. Second, if firms and individuals were to pursue social values by forgoing profit, this dynamic would counteract the democratic benefits of enabling people to forgo economic efficiency for the sake of their values. This is because forgoing profit in this context would involve double counting values that people promote at the expense of economic efficiency by compromising the welfare benefits of an efficient market both through individual economic choices and at the level of the firm.

Profit maximization and honesty

In the foregoing sections, I provided a further defense of profit-maximizing business, which supplements Jensen’s consequentialist case for firms promoting their long-term market value with additional moral arguments for the same conclusion. I now add two further arguments to the mix. In this section, I will argue that firms that explicitly aim to promote their long-term market value are more honest and transparent than firms that claim to advance multiple values. In the next section, I will argue that profit-maximizing firms are, perhaps surprisingly, also more egalitarian.

When firms aim to promote their long-term market value, investors can more transparently evaluate their performance in terms of what they said they would do. Interested parties can also rest assured that firms are not touting their institutional commitment to promoting the firm’s long-term value because it is socially desirable to do so. A commitment to profit maximization is clear and measurable enough that a firm’s employees can easily communicate and understand the standards by which they will be evaluated.

Begin with the claim that firms should focus on profits out of a duty to be honest to shareholders. Investors are entitled to know what the firm is trying to accomplish, just as any consumer is entitled to know (or at least not to be deceived about) what they are purchasing. In American corporate law, corporations are not required to maximize profits. The business judgment rule just protects corporate directors from liability when they act in good faith but fail to promote profits or share prices.Footnote ³⁴ Businesses, however, have a duty to disclose to their shareholders information relevant to their decision-making. The problem is that leaders who are committed to multiple values will struggle to communicate accurately what they are doing. As Stephen Bainbridge puts the point, “[i]f directors were allowed to deviate from shareholder wealth maximization, they would inevitably turn to indeterminate balancing standards, which provide no accountability. As a result, directors could be tempted to pursue their own self-interest.”Footnote ³⁵ Organizations could also satisfy their duty to disclose factors that inform their decision-making by citing another value. The problem arises when leaders adopt multiple values in their decision-making without specifying how they make trade-offs. In these cases, they are less likely to satisfy their duties of honesty and transparency to their shareholders.

For a similar reason, managers who evaluate employees based on their expected contribution to the firm’s long-term value can more honestly communicate expectations and evaluations. This management style is more transparent than that of balanced scorecard approaches, which enable supervisors unaccountably to privilege some employees over others without being required to justify their decision based on a clear metric. Employees should also know how their firm makes decisions when deciding where to work because taking a job entails opportunity costs. Yet companies that cannot clearly state their motivating values and how those values weigh against each other cannot effectively communicate this information to potential workers.

Of course, sometimes managers might cite a company’s nonprofit-oriented values in an effort to recruit and retain dedicated employees. When a firm has hybrid values, meaning that it pursues social values and profit in a way that balances the two, then again, it is difficult for leaders at firms to communicate accurately how they make trade-offs between the values. So, while it may be an effective recruitment strategy, it is difficult to make it an honest strategy.

When the social benefits of a company align with profit maximization, firms can honestly tell employees about the social benefits of a firm when recruiting and managing them. As Jensen writes, “if we simply tell all participants in an organization that its sole purpose is to maximize value, we will not get maximum value for the organization… . We must give people enough structure to understand what maximizing value means so that they can be guided by it and therefore have a chance to actually achieve it.”Footnote ³⁶ For example, for-profit pharmaceutical companies are also extraordinarily socially beneficial. Emphasizing the life-saving benefits of pharmaceutical innovation is an honest and effective way for people in the industry to recruit and retain talented workers.

However, if the purported social benefits of a company do not align with profit maximization, then profit-maximizing firms cannot honestly tell people that they are advancing a social good when recruiting and managing them. Deception about a firm’s mission prevents people from weighing their employment options and voluntarily deciding where to work. In the more sinister cases, profit-maximizing employers might characterize the firm’s mission in terms of ideological or social values to make workers feel that their work is more meaningful, which may enable employers to pay lower wages. Though this tactic may be conducive to profit maximization, the price mechanism in the labor market is only welfare-promoting when the market is transparent. There are also moral side-constraints that prohibit this kind of recruitment strategy.

Consumers are also entitled to know something about the firms they interact with. If a company is actually maximizing profit, consumers should know that. Sometimes, dressing a company up as something it is not by citing social values that the firm is not sincerely committed to advancing can be misleading advertising.Footnote ³⁷ Sometimes, it is strategically useful for corporate leaders to take a position on social issues for the sake of maximizing the long-term market value of the firm. But as above, there are ways to do this without misleading consumers. For example, a profit-maximizing firm might say, “We know our customers care about animal welfare, so that’s why we’re not using animal products in our makeup.” They might even honestly claim to value animal welfare (albeit instrumentally).

In this way, profit-maximizing companies can honestly communicate a commitment to social values. Honest communication might even be more of a challenge for companies that are not committed to profit maximization. In these cases, corporate leaders might disclose to consumers that they are committed to promoting other values at the expense of their bottom line. Again, these companies will have difficulty communicating how they balance the various values they endorse.

Other stakeholders benefit from the transparency and honesty that a commitment to profit maximization imposes on firms. Companies that measure and report profits and make decisions based on that information are likely to be more predictable and easier for community members to work with. Although stakeholders may not always agree with a profit-maximizing firm’s choices, they benefit from the ability at least to know how the firm makes the decisions that affect them.

Profit maximization and equality

The egalitarian case for profit maximization begins with the observation that alternative approaches enable well-placed and powerful members of an organization to use the firm’s resources to advance their own special interests. Typically, the people capable of directing a firm to advance values other than profit have more status within an organization or with their community than do people with different values. For this reason, when a firm aims to promote values other than profit, this choice may reflect an inegalitarian organizational structure that privileges high-status or powerful interests over the interests of lower-status employees, consumers, or shareholders. These inegalitarian organizational structures can also become self-reinforcing due to the lack of transparency in firms that adopt multiple values without specifying how they make trade-offs.

To clarify what I am arguing here, it is important to distinguish cases where firms adopt social values as a productive management or marketing tactic from cases where firms are actually committed to some social values at the expense of profit. Perhaps counterintuitively, I am not arguing that firms should refrain from citing social values to motivate employees or to sell their goods and services. For example, some companies may advertise that they care about animal welfare, treat their chickens well, do not test their products on mice, and devote some of their profits to animal welfare initiatives. These honest advertisements could be conducive to profit maximization because customers like me prefer free-range chicken and shampoo that was not tested on animals. In such cases, including social values in one’s business model can be conducive to profit maximization and animal welfare enhancement. In these cases, corporate leaders can credibly claim that touting social values is part of their profit-maximizing strategy and, in claiming this, they do not intend to disparage people who do not share their social values.

In contrast, firms should refrain from genuinely committing to advance some social values at the expense of profit because when firms focus on social values or ideological projects other than profit, they are expressing a disrespectful judgment toward workers and customers who do not share those values. Unlike cases where corporate leaders can claim that they are adopting political positions for the sake of the bottom line when companies adopt social values at the expense of profit, they are essentially communicating the view that they are willing to pay money to create a workplace or a product that excludes people who do not share those values. This position is more expressively disrespectful than the position of a company that adopts social values to improve the long-term market value of the firm.

To motivate this argument, consider firms such as Hobby Lobby and Patagonia. Hobby Lobby is a craft supply company founded by the Green family to promote Christian values. Patagonia is a clothing company founded by Yvon Chouinard to protect the environment. Both companies’ leaders have explicitly stated that they forgo opportunities to profit so that they can advance other social values.Footnote ³⁸

Hobby Lobby and Patagonia are not public companies, so it may seem that these cases are similar to examples of billionaire philanthropy, where rich people use their personal wealth to promote some cause.Footnote ³⁹ As Friedman writes: “The situation of the individual proprietor is somewhat different. If he acts to reduce the returns of his enterprise in order to exercise his ‘social responsibility,’ he is spending his own money, not someone else’s. If he wishes to spend his money on such purposes, that is his right, and I cannot see that there is any objection to his doing so.”Footnote ⁴⁰ In these cases, it might seem that private business owners are entitled to invest their companies’ resources in promoting their values, just as they are entitled to invest their personal wealth in promoting their values.

Yet even when a company is privately owned, there are still moral reasons against using its resources to advance social values. For one thing, even individual proprietors have compelling moral reasons to promote overall social welfare that weigh against their agent-relative prerogatives to advance other social values. Egalitarians should also criticize privately owned, socially responsible firms on the grounds that their commitment to multiple values makes employees more vulnerable to workplace domination.Footnote ⁴¹

However, another egalitarian reason against incorporating social values into one’s business, even in the case of a private company, has heretofore been overlooked. Namely, when business leaders use their company to advance their personal social values, they often risk doing so in ways that entrench an inegalitarian organizational structure that privileges the bosses’ interests over the interests of customers and lower-status employees. Again, this is not to say that business owners are not entitled to make these decisions; they just have moral reasons not to.

Consider the organizational culture at a workplace such as Patagonia to illustrate this point. Patagonia’s CEO, Ryan Gellert, recently directed the company to pull its products from the shops at a resort that hosted a Republican politician’s fundraiser.Footnote ⁴² The company also endorses Democratic party candidates, sued the Trump Administration, and is sharply critical of abortion restrictions. Similarly, after the 2016 election, the CEO of GrubHub, a food delivery company, encouraged Trump-supporting employees to “reply to this email with your resignation because you have no place here.”Footnote ⁴³ In these cases, business leaders create a workplace environment that expresses disapproval for their employees, community members, and customers when they incorporate social values other than profit into their organizational culture.

I can imagine a skeptical egalitarian interlocutor balking at this argument. After all, I am arguing that it is better, from an egalitarian standpoint, for the owners of capital to focus narrowly on profits instead of trying to protect the environment or provide their workers with better conditions. In response to these cases, one might reply that employees who do not share the company’s values should go elsewhere or that potential Republican employees are likely to be less qualified for a role in these companies because they do not share the organization’s values or fit into the culture. However, I suspect that part of this skepticism arises because egalitarians are often sympathetic to the causes that socially responsible businesses adopt.

Return to the Hobby Lobby example to consider how these defenses of socially responsible businesses fare in other contexts. In the United States, Christianity is the dominant religion. When companies like Hobby Lobby use their market power to advocate policies that are friendly to Christians, they act to further entrench the dominant (Christian) ideology in their corporate culture. Likewise, companies like Patagonia that explicitly adopt progressive social values alongside their interest in making a profit create a corporate culture that alienates workers and consumers who do not share their ideology. In defense of Patagonia, one may reply that progressive social values are egalitarian, unlike Hobby Lobby’s Christian ideology. Yet progressive social values are the dominant ideology within educated communities and in culturally significant industries. Progressives cannot justify excluding and condemning Republicans on the grounds that they are ideologically committed to equality, just as Christians would not be justified in excluding and condemning non-Christians on the grounds that Christianity is fundamentally an egalitarian religion and pro-life advocacy aims to protect the most vulnerable members of society, namely, unborn children.

Contrast the disposition to promote social values in businesses with Michael Jordan’s famous remark that “Republicans buy sneakers, too.” The profit motive prompts people to view each other not as political enemies, but as potential trading partners. In this way, a profit-maximizing orientation prompts business leaders to implement organizational structures and institutional identities that are as inclusive as possible because anyone can be a productive worker or a loyal customer. When firms adopt social values other than profit, promoting these values can create an exclusionary workplace culture. Even worse, when an exclusionary workplace culture develops, it can be especially difficult to reform in a firm where managers are empowered to evaluate employees on a range of dimensions rather than based on their contribution to the long-term market value of the firm.

Lessons for nonprofits

So far, I have focused on commercial organizations. This section will address two significant implications of my argument for nonprofit organizations. The first implication is that nonprofits and philanthropic organizations should also adopt a single evaluative standard for their institutions. The second implication is that nonprofits should adopt an evaluative standard that encourages their institutions to be at least as socially beneficial as for-profit companies.

Begin with the claim that nonprofits should choose a single value to promote and evaluate their performance based on whether they promote that value. Some nonprofits, including most American universities and political nonprofits such as the American Civil Liberties Union, tend to value many things, including freedom, civic engagement, diversity, women’s rights, egalitarian justice, and knowledge production. When an organization has so many guiding values, members are not constrained or accountable to any single socially beneficial outcome. In these cases, organizational leaders are empowered to write their own assessments and to grade themselves by whatever standards they choose.

This dynamic explains why nonprofits can be very frustrating workplaces. The absence of unified organizational values enables workplace domination because nonprofit workers who are managed and evaluated based on many social goals are always vulnerable to negative evaluations. This lack of managerial accountability is a broader problem for these organizations, too, because it reflects a broader lack of strategic focus.Footnote ⁴⁴ Consider, for example, universities that evaluate employees and job candidates based on teaching, research, departmental and professional service, and their commitment to progressive values. If a university does not specify how these different values weigh against each other, academic administrators are empowered unaccountably to sanction employees and reject prospective job candidates who fail on any of these four dimensions.

For the same reason that for-profit firms should only focus on maximizing the long-term market value of the firm, nonprofits should also pick a single metric to pursue. For example, a nonprofit may aim to maximize the number of children who can read by eighth grade, the number of sandwiches distributed to homeless people, the number of houses built for veterans, or any other social value they hold. Specifying a single organizing mission for the organization makes members of a nonprofit accountable to donors, employees, board members, and the people they serve. Highly paid nonprofit executives must justify their salaries on the grounds that they are better at promoting whatever value the nonprofit is pursuing than a lower-paid administrator would be.

The aforementioned argument that socially responsible for-profit companies may struggle to honestly explain their decision-making process is also a concern for nonprofits. There is a vast difference between looking good and doing good. Plenty of nonprofits look good, but they do not clearly do good. When looking good and doing good conflict due to scarce resources, for example, members of nonprofits have little incentive to choose to do good because they raise money by looking good.Footnote ⁴⁵ Donors should demand that nonprofits measure and report their progress and, insofar as they promote multiple causes, they should at least explain the principle they use to make trade-offs between competing priorities.

Of course, if nonprofits were more honest and transparent about their priorities, they might struggle to sustain their organization. As Jon Schwartz writes, the Iron Law of Institutions is that “[t]he people who control institutions care first and foremost about their power within the institution rather than the power of the institution itself. Thus, they would rather the institution ‘fail’ while they remain in power within the institution than for the institution to ‘succeed’ if that requires them to lose power within the institution.”Footnote ⁴⁶ Ideally, in a for-profit company, the people who control the firm advance their power within the institution by contributing to the firm’s long-term market value. In a nonprofit or in a firm that has multiple goals, the people who control the institution are not as strongly incentivized to preserve their power within the institution by advancing their firm’s or nonprofit’s goals, because they can always justify their power-seeking conduct with reference to some combination of their organization’s many values. This lack of accountability exacerbates the problems associated with the Iron Law of Institutions.

If nonprofits choose a single value to promote and evaluate their performance based on that value, which values should they choose to promote? Here again, the case for profit maximization is informative. Return to Hussain’s argument that the Metropolitan Museum of Art (“the Met”) should not be required to maximize the long-term market value of the institution. To be sure, people should be permitted to purchase and display art to the public, but this does not mean people should invest time and resources in art museums. A good way for an organization to know whether it is producing something valuable to people is by trying to profit in ways that promote long-run market value.Footnote ⁴⁷ Hussain claims that the leaders of the Met are not morally required to promote the museum’s long-run market value. This is a claim that most proponents of profit maximization would likely not dispute, especially because the museum is not accountable to shareholders. Still, Hussain’s argument does not establish that it is good that the Met is a nonprofit.

Supporters of nonprofit art museums should consider how the social benefits of their preferred charities compare to the social benefits of for-profit companies. An institution such as the Met uses its property and endowment to benefit art lovers like me. Say that the leaders of the Met aim to expose as many people as possible to the wonderful art in their collection. If they were to focus on this goal rather than profit, the Met would not be profitable. Meanwhile, the for-profit Disney corporation makes billions of dollars in annual gross profit because Disney creates entertainment experiences that billions of people value so much that they are willing to pay for them.Footnote ⁴⁸ The fact that the Met is not profitable indicates that it is not creating entertainment experiences that people value as much as they value the next Marvel movie.

This example shows that the failure to make a profit can sometimes indicate that a charitable organization is not providing a product that people value at a level that exceeds the cost of providing the product. But not all charitable organizations are like this. Consider charities that benefit people who have very little political or market power. This may include charities that benefit children, disabled people, or future generations. For example, imagine a nonprofit that aims to maximize the number of approved drugs that can effectively treat a rare disease. A nonprofit like this would invest in early-stage research that reduces the upfront costs of drug development. This investment would then lower the costs for pharmaceutical companies to invest in bringing new rare disease treatments to market.Footnote ⁴⁹ Without the nonprofit, for-profit drugmakers may lack incentives to bring new rare-disease treatments to market because there are not enough potential rare disease customers to justify the investment. That this organization is not profitable does not necessarily indicate that they are not creating research that people value. Rather, this nonprofit creates public goods that are underprovided by the market. Treatments for rare diseases are underprovided by the market because rare-disease patients cannot use the price mechanism to signal the demand for new drugs, especially if public officials enforce regulations that distort pharmaceutical drug pricing. In this context, the fact that for-profit companies subsequently use the nonprofit’s research to develop new treatments suggests that the initial research is socially beneficial even if it is not always profitable.

In other cases, charities may outperform for-profit companies at advancing social welfare because they benefit people who do not have access to the benefits of trade.Footnote ⁵⁰ For example, the Against Malaria Foundation (AMF) freely provides people in Africa with antimalarial bed nets with the goal of reducing mortality from Malaria. In light of the foregoing argument, one might think that a market in bed nets is more likely to promote overall social welfare. Researchers at GiveWell find that while the AMF bed net program distorts local markets for nets, free bed net distribution prevents more deaths from Malaria than a bed net market would.

A proponent of profit maximization in all contexts might argue that AMF’s free net distribution program only outperforms a net market in these contexts because individual consumers do not value a reduced chance of malaria enough to justify spending their already scarce resources on a net. Still, they do value a reduced chance of malaria enough to use a free net. This is true, but it does not establish that AMF’s free net distribution program is inefficient. These purchasing patterns may instead reflect other inefficiencies in local markets, such as weak protections for property rights, that encourage purchasing decisions that have clear short-term benefits and artificially prevent people from making purchasing decisions that are in their long-term interests. In this case, AMF’s intervention in this market is not paternalistic in the way that a for-profit company’s decision not to sell cigarettes would be paternalistic, because AMF does not prevent people from purchasing bed nets on the private market. Nor does their program express the view that people who choose not to purchase or use nets are incapable of making their own decisions.

Although these cases show that some eleemosynary organizations may do good by focusing on values other than profit maximization, they also reinforce arguments for the social value of profit-maximizing companies. Nonprofits that invest in medical research often partner with for-profit firms to bring drugs to the market because for-profit firms are structurally incentivized to develop and distribute the product sustainably and cost-effectively. Similarly, nonprofits that focus on causes that affect the global poor can provide effective short-term interventions that are more beneficial than for-profit firms’ services. However, in the long term, economic development in the form of investment by for-profit companies is more likely to benefit the global poor than any nonprofit intervention could. And even nonprofits that aim to aid the global poor in the short term rely on for-profit firms to fulfill their mission.Footnote ⁵¹

Another way to compare the social benefits of nonprofits against the benchmark of for-profit businesses is to ask whether the amount of money a nonprofit spends providing a benefit to some people exceeds the benefit of an equivalent cash transfer, which recipients would then use to purchase goods and services from for-profit companies. We can conceive of “social benefit” in different ways. AMF may prevent more premature deaths than a cash transfer would, while a cash transfer may better satisfy recipients’ immediate preferences. But, however we measure social benefits, the presence of a for-profit sector can provide a useful benchmark for holding nonprofits accountable to their social missions. If the beneficiaries of a nonprofit’s work would benefit more by receiving their share of the money that the nonprofit spends to benefit them in cash, that would suggest that the nonprofit is not as socially beneficial as profit-maximizing companies.