A friend of mine recently mentioned he had been to a talk where the speaker discussed firms trying to promote more equitable outcomes for their customers. My friend was skeptical profit-maximizing firms would meaningfully deal with such issues barring state regulation. While I think this may be largely true, I think there are some counterbalancing reasons a firm might promote public goods a little more than initially expected.
First, firms fear future legal risk. The chance of regulation or legal proceedings may deter some bad behavior, even if regulations barring that behavior are not currently in place. For instance, firms may choose to not collect and use excessive low value data from customers if they anticipate possible future changes in the legal or regulatory landscape that would penalize holding such information. Sensitive customer information stored indefinitely may become difficult to manage because of future GDPR-type privacy regulations or may surface during legal proceedings and become very costly.
Second, altruistic behavior may be a marketing ploy. I expect most people view this as the dominant rationale for socially responsible firm behavior. If customers prefer to associate with brands that promote social good, then making charitable donations or engaging in other socially responsible behavior (and publicizing it) may in fact be profit-maximizing.
Third is that employees in a profit-maximizing firm may have interests in social welfare that compete with the firm’s interest in profit-maximization. If the firm does not have optimal control mechanisms to ensure their employees are working to maximize profits, the company’s direction may be drawn closer to the public good insofar as employees have altruistic preferences. This a classic example of the principal-agent problem, which explains how the firm may have difficulty assessing employees’ quality and effort. Inefficiencies in control may actually serve the public good if employees’ deviating behavior draws the firm to improved social outcomes instead of pure profit maximization.
This form of altruism may in fact be a needed substitute to state intervention at moderating firm behavior in some settings. Can a stock of socially benevolent (but delinquent to the firm) employees promote public good when designing good regulations is difficult? It depends on context, but in cases with large information aggregation problems this may be one of the more effective mechanisms for promoting ethical behavior at firms. As Hayek described, a difficulty the government faces in regulating the economy is aggregating and processing information from massive networks of agents in a market, all of whom may have relevant private information they may be unable or unwilling to disclose. This problem may be even worse in cases where information and decision-making is particularly diffuse, like in firms with a large stock of highly-skilled labor. Labor that is scarce may be more difficult to adequately assess quality for; highly skilled workers may not have many co-workers who can precisely understand what exactly they do, how good it should be, and how long it should take. The firm’s difficulty in holding a worker accountable gives the worker more discretion in the direction of the work they do. Ideally, if they have non-profit maximizing preferences, they may use some of their freedom to maneuver the firm towards more ethical outcomes.
Cases where information in a firm is diffuse and employees have greater discretion are precisely when regulation may be the most challenging. If the firm itself cannot assess how well a worker is doing, how can a government acquire the needed information to design optimal policy? Employees are the ones actually executing the tasks of the company and most in-the-know about how the firm operates. Using that information they may nudge their respective functions in the firm towards better behavior. It is possible such altruistic behavior may in part compensate for poor conditions for regulation.
Of course, the opposite is also possible. Employees’ interest in their own rents may dominate whatever altruistic behavior they have, leading to worse outcomes than profit maximizing behavior. Less accountability may lead to higher likelihood of getting away with harassment or other seriously harmful actions. In firms with diffuse information networks, understanding the value of “good” employees on better firm behavior is an interesting and important empirical question.
Finally, employees may push firms to act in the interest of the public good for reasons other than just poor oversight. They may prefer to work on projects they care about, find interesting, and find fulfillment in. In that case allowing work that promotes public good or acquiescing to employee demands may be a method for acquiring and retaining talent. Talent acquisition concerns may also matter when employees face pressure from friends or family outside the firm who view its actions as unethical. Distaste for working for a firm perceived by the public as bad likely explains why JUUL, the e-cigarette maker, purportedly has to pay prospective employees a very significant premium to come work for them.
Still, it is hard to believe altruistic employee preferences or social pressure would be enough to optimally solve externality and public goods problems that we might like firms to address in an ideal setting. Better outcomes require policies and mechanisms to assess and encourage alignment of firm incentives and the public good.