President Calvin Coolidge famously said that the business of America is business. He might have added that the business of business is to pursue profits — because some corporate leaders and others seem to have lost sight of that basic precept.
Instead, they have embraced various kinds of policies that are no more than virtue-signaling. A few years ago, a prevailing motif was corporate social responsibility, the politically correct buzzword du jour of activists who sought to advance social goals that they decided were virtuous and who coveted the deep pockets of the world's capitalists .
Examples ranged from Novartis, at the time the world's fifth largest pharmaceutical company, "collaborat[ing] constructively with the UN and civil society to define the best way to improve human rights" to McDonald's decision to end its popular supersized portions in the name of checking obesity. A variation on the theme is companies making big internal investments in diversity, equity, and inclusion, often at the expense of corporate efficiency, talent, and morale.
However, businesses don't have social responsibilities. Only people do. And because corporate leaders work for business owners, their legal and moral responsibility is to pursue the best interests of their employers (that is, shareholders) — interests that relate primarily to making as much money as possible while conforming to the laws, regulations, and ethical norms of society.
By spending the company's funds on activities that he or she decides arbitrarily are socially responsible, a corporate executive, in effect, reduces returns to shareholders and is, therefore, spending someone else's money.
Billions of corporate dollars, however, are now being diverted from investors and redistributed elsewhere, often according to the whims of social activists who are accountable to no one but themselves and who pursue goals based not on a desire for greater corporate efficiency or profits but on their own vision of what is sustainable, equitable, and good for the rest of us.
In recent years, a new form of virtue-signaling has appeared: "impact investing," i.e., investing by individual buyers, stock funds, and others in ways intended to "benefit society," as well as to generate financial returns. It differs from corporate social responsibility because while companies typically invest in projects and capabilities, investors choose which financial instruments to buy and sell — nobody is forced to buy an environmental, social, and governance fund, which offers investors a way to invest in companies that align with the issues that are important to them.
Impact investing has attracted enormous amounts of capital. According to New York University Professor Aswath Damodaran, in 2021 alone, there was more than $1.16 trillion in impact investing , "with pension funds, insurance companies, and for-profit mutual funds joining the more traditional base of endowments and nonprofit funds."
Damodaran identifies at least two kinds of impact investing:
Inclusionary investing directs money to businesses most likely to improve specific social problems, often paying higher prices than would be justified by the resulting financial payoffs. Exclusionary investing entails the selling of shares, or the refusal to buy shares, of firms seen as worsening the targeted social problem.
But such choices can lead to unintended consequences. With inclusionary investing, investors may misidentify "good" companies. Examples include those that claim to be "net zero" with respect to greenhouse gas emissions by having bought worthless "offsets." And with exclusionary investing, market forces may induce private investors to step in after impact investors push prices down below "fair" values.
Neither free enterprise nor the human condition is likely to experience a net benefit from companies pursuing corporate social responsibility or impact investing. Such actions do, however, raise the cost of doing business and lower corporate innovation and productivity. By diverting resources away from productive capital, businessmen will hurt many of the very people they claim to want to help.
"The last capitalist we hang shall be the one who sold us the rope," Karl Marx predicted. He may have been right.
Henry I. Miller, a physician and molecular biologist, is the Glenn Swogger distinguished fellow at the American Council on Science and Health.