I am an outside member of the board of a midsized pharmaceutical company. The employees receive excellent pay and benefits; their team spirit is high; personnel turnover is very low. The business has been consistently profitable, and annual profits have exceeded twenty-five percent of book value since three drugs the company developed for veterinary medicine became big winners. Indeed, even without the drugs marketed for veterinary medicine, the balance sheet would have been in the black every year.
One of the veterinary drugs cures a disease in cattle caused by a parasite. This disease is so debilitating that animals afflicted with it used to be destroyed. Now, an initial course of heavy medication eliminates the parasite; the animal recovers completely; and a low, maintenance dose administered for the rest of its life protects it against any further invasion.
In some very poor tropical countries, but nowhere else, a similar parasite afflicts humans with equally devastating effects. The researchers who developed the veterinary drug worked up a proposal to modify and test it for human use. If people in affluent countries were afflicted with this disease, it would be good business to go ahead. In this case, though, the people who need the drug will not be able to pay for it. Management studied the probable costs of development, manufacturing, and distribution. Sources of funding were investigated—our own government, various international agencies, several foundations, and so forth—with negative results. The conclusion was that this project inevitably would lose money, reducing after-tax profit by around ten percent for two to three years. The board unanimously decided not to proceed.
Two further developments have reopened the question. First, some members of the research team and certain other employees offered to donate overtime work to the project, which would significantly reduce development costs. Second, when they learned of the employees’ offer, the company’s public relations consultants worked up an attractive proposal to use the project in advertising to improve the company’s image and win good will from an influential segment of the public, including opinion leaders in the media and government.
Management’s analysis of the question makes several points clear. (1) The project is feasible and almost certain to result in a drug that will cure hundreds of thousands of people. (2) Accepting the employees’ offer would be in line with the company’s highly successful employee-relations policy, but not accepting it probably would not cause any lasting harm. (3) The project’s usefulness for public relations, while not precisely calculable, would be significant; the favorable publicity would strengthen the company’s position in any future situation where public opinion was a factor. (4) Nevertheless, even considering long-term benefits to the company, the project cannot be justified on an economic basis alone.
If we approve going forward with this project, then, we are committing the company to a substantial act of philanthropy. Since the corporation is publicly held, this work of mercy will reduce the return of stockholders who, presumably, invested to make money, not do works of mercy. Still, I am personally inclined to vote in favor, for I think a business should be more than a money-making engine. It must make a profit, of course, but I believe any business, and above all a pharmaceutical firm, should serve human needs and contribute as a good member to the larger community, and this project undeniably would fulfill these wider responsibilities.
This question calls for the derivation of a specific moral norm regarding the philanthropic activity of profit-making businesses. The common end of every voluntary association is determined by its participants’ mutual understanding and consent. A profit-making business is a voluntary association of the persons who cooperate in the specific activities for which it was organized, in order to achieve various economic benefits. The common good of participants in a business is the principle grounding and limiting the authority of those entrusted with the decision making that shapes their cooperation. So, like the people who exercise authority in any other voluntary association, the directors and managers of a business should not elect to use its resources for purposes that, however good in themselves, do not contribute to its common good. Therefore, though the proposed project, considered in itself, would be good, the directors should not vote to proceed with it as a philanthropic act. However, they and others should try to carry out the project by the voluntary cooperation of participants in the business and other parties able and willing to contribute.
To see how a director should vote on this issue, one first must consider the principle underlying all the responsibilities of members of a profit-making corporation’s board of directors. It is neither maximum profit for shareholders nor the interests of everyone who affects and is affected by the business’s actions—the various individuals and groups collectively called “stakeholders” by some theorists.305 Rather, it is the common good of the business as a community of persons freely cooperating in the specific activities for which it was organized.
Though many people think a profit-making enterprise’s sole end is profit, which its directors and managers should use every lawful means to maximize, I agree with you that “a business should be more than a money-making engine.” While a profit-making corporation considered as a legal entity primarily represents and limits shareholders’ interests and involvement in the enterprise, the shareholders themselves—and, therefore, the directors and managers—have moral responsibilities to others. They should not regard other peoples’ activities essential for the business’s success as mere means for making profits.
Investment deserves a fair return, but work has priority over capital (see LCL, 763). Money is not a basic human good but only a means; it does not fulfill persons, but only enables them to do things—which fulfill or, perhaps, injure themselves and/or others. By contrast, work is both a basic human good, inasmuch as it realizes certain basic potentialities of workers, and is the principal efficient cause of valuable results. Moreover, insofar as more or less regular suppliers of materials and services, and purchasers of the business’s products or services contribute to the business’s success by their morally upright activities, they too should be considered participants in the enterprise. Their cooperation should not be regarded as a mere means to protecting and rewarding the shareholders’ investment.
But even though maximum profit for shareholders is too narrow a goal to serve as a morally acceptable principle for directors’ decisions, maximizing the interests of as many stakeholders as possible is too wide.306
Of course, the directors and managers of a profit-making business are bound by not only the legal requirements but the moral norms binding all groups and individuals. They may not intend as either an end or a means that the business’s activities injure anyone or any community; they may not unfairly accept side effects harmful to anyone; they must see to it that the business fairly plays its part in wider communities to which it belongs—for example, by avoiding unfair competition and obeying just laws. So, the directors and managers do have some moral responsibilities toward every individual and group affected by the business’s activities. Moreover, directors and managers can be morally required to act for outsiders’ interests insofar as that is conducive to the business’s own survival and flourishing. Thus, the public relations value of the project would justify part of its cost.307
Still, in making decisions, directors and managers of a business may not use as a principle the best interests of all those who will be (or could be) affected by what the business does. It is easy to see why.
Everyone has a set of moral responsibilities, usually including duties to care properly for himself or herself, to care for dependents, help friends, do some sort of work, pay taxes, and so on. This set of responsibilities limits each person’s freedom to do things good in themselves, including things that otherwise would be obligatory and greatly beneficial to others. So, good people never form or enter into any voluntary association without assuring themselves that its activities involving them and affecting their interests will be consonant with their already-existing responsibilities. Taking advantage of this necessary social practice, even people who are not so good, being jealous of their own interests, demand assurances that any voluntary association in which they participate will limit its activities to pursuing its specific, agreed upon purpose or purposes. Consequently, each voluntary association is organized for a limited and definite common good, and the authority of those who make its decisions is limited to using its resources and shaping its cooperation toward that good.
Sometimes a voluntary association’s common good and the limits it imposes are explicitly formulated in a written constitution, legally binding contracts, or some other way. Whether or not such a formulation exists, an association’s authority is morally limited by participants’ mutual understanding and agreement, and while these often are unclear and disputable, they sometimes are clear beyond reasonable doubt and often more restrictive than any explicit formulation indicates. For example, a neighborhood garden club may have no written constitution or a constitution that does not limit the purposes for which its funds can be spent or that can be amended by two-thirds of the members present at any meeting. Still, if two-thirds of its members happen to be Catholics, they act unfairly in deciding, without other members’ unanimous agreement, to use the surplus in the club treasury to buy a new set of hymnals for their parish church.
Like any other voluntary association, a profit-making business is organized for a limited specific good. Because it is an association for ongoing cooperation by which money, work, services, and products are contributed by and distributed among various groups of participants, its common good is effective economic cooperation and fairness to all participants. Some businesses, however, are organized wholly or partly to benefit individuals or groups who do not contribute to the economic cooperation, or to benefit some contributors more generously than their contributions warrant. Unless all participants at least implicitly agree to such a gratuitous arrangement, fairness requires distributing all benefits to participants in such a way that what they get is proportionate to what they contribute. Generally speaking, of course, participants in most businesses do not agree to a gratuitous arrangement. Their duties may rule that out, or they may prefer other means of benefiting others gratuitously, or they may be selfish.
Your question implies that the pharmaceutical company on whose board you serve is organized without any gratuitous arrangement for providing benefits to anyone who does not contribute. If that is so, the preceding explanation makes it clear that the principle that should shape directors’ and managers’ decisions is the common good of all who actively participate in the business by cooperating in its proper activities. There are five such groups: investors who provide the needed capital, managers whose activity directs and coordinates the other parties’ activities, nonmanagement employees who create and distribute the company’s products, more or less regular suppliers of materials and services, and more or less regular purchasers of the business’s products. The members of all five groups should benefit insofar as the enterprise is successful and its common good is realized: investors by receiving a reasonable rate of return; managers, besides sharing in the benefits accruing to other employees, by enjoying self-fulfillment in their role of service and receiving the respect and gratitude of those they serve; employees by doing fulfilling work under decent conditions and receiving fair wages and benefits in return for what they do; suppliers by receiving fair prices, with some assurance of a market for their goods and services; and wholesale purchasers and ultimate buyers by receiving good products at fair prices, with some assurance of a dependable source of supply.
You ask whether to support a project to supply a drug that will cure a devastating disease in hundreds of thousands of very poor people, even though this project is likely to lose money, reducing profit over two or three years. My answer is no. The reduction in profit either will be unfair to investors or not. If it is, that unfairness excludes this use of the company’s resources. If not, then the return investors otherwise would receive must be excessive; and in that case, other participants in the business are getting less benefit than they should for their contributions or paying more than they should for the company’s products, and that unfairness should be corrected.
Assume the reduction in profits would be unfair to at least some investors—for example, recent ones, who purchased their shares at or near current market value, which has taken the company’s anticipated profits into account. Some of them surely are not well-to-do individuals; they may be retired people living off the modest income from their investments or nonprofit organizations that depend on investments for essential income. If you and the other directors reduce their investment income by doing the proposed philanthropic work, you will not be doing a work of mercy—since mercy is not done at others’ expense—but robbing one group of needy people and organizations to benefit some even needier people.
But assume, instead, that the reduction in profits and dividends would not be unfair to investors, and that suppliers, managers, other employees, and wholesale buyers already are being fairly treated. In that case, the ultimate buyers of the company’s products are being charged higher prices than necessary, and those excessive prices would fund this project. But the group paying the excessive prices includes not only wealthy people but poor people and businesses hard pressed by the cost of health insurance. Such buyers plainly have no obligation to fund this project for the benefit of other poor people.
Someone might argue that the company’s products cannot be overpriced, because people freely choose to pay the prices charged for them. Like other elements of health care, however, prescription drugs normally are a necessity, often a very urgent one, and purchasers seldom have much choice about whether to buy a particular drug. People’s willingness to pay whatever they can afford for pharmaceuticals is no indication of fair pricing, especially in the case of drugs still under patent. Moreover, there almost certainly are at least a few people who now forgo buying the company’s products but would enjoy their benefits if the prices were slightly lower.
Again, someone will object that the preceding argument assumes an unrealistic precision about what is fair, given the complexity of the transactions among participants in the business and the unpredictability of the economic factors affecting it. In reality, the objection will continue, it is impossible precisely to calculate or foresee what would constitute a fair share of contributions and benefits for the various participants, so that without being unfair to anyone, the business as a whole could absorb the cost of the philanthropic project, just as it must absorb the cost of various contingencies—new governmental regulations or taxes, the unfavorable outcome of a lawsuit, an unexpected problem with a drug requiring its withdrawal from the market, and so forth. Recalling that the philanthropic project almost certainly would bear fruit in a drug that would benefit hundreds of thousands of people, the objection will conclude that the directors should approve it and allow the business to absorb its cost.
It is true that what is fair to various participants in the business cannot be precisely calculated and various contingencies cannot be forestalled. But those responsible for the business need not and ought not make decisions they know are at odds with its common good. If the directors of a profit-making business use its resources for a philanthropic project not fully justified by anticipated economic benefits to the business, they exceed their authority and misappropriate the resources entrusted to them, just as the employees in charge of warehousing and shipping the company’s products would if they made an unauthorized gift of drugs to a clinic in a poor country.
Finally, someone might argue that this firm ought to develop and distribute this drug because otherwise hundreds of thousands of people almost certainly will continue to suffer the devastating effects of the disease. Even if one has charge of a unique capacity to meet a vital need, however, one may not use the capacity to meet the need if that would violate some prior responsibility. Parents of modest means, for example, may not donate part of the money they could use to meet any genuine need of their own children to famine relief that would save the lives of other children.
But even though the firm as such should not undertake this philanthropic project, it seems to me that the directors and managers should try to bring about this work of mercy. Although earlier efforts failed to turn up outside funding, the employees’ offer to donate overtime work that would significantly reduce development costs might well evoke support previously denied the project. So, in my judgment, you and the other directors should try again to obtain some sort of foundation grant or public subsidy. In doing so, you can explain why the company may not proceed by itself but is prepared to make a significant contribution to the project. Whether or not that effort succeeds, the employees’ offer also points to an interesting possibility. You and the other directors might offer voluntary donations of your own money, and invite the rest of the employees and other groups—the investors, suppliers, wholesale buyers, and retail customers—to help with voluntary contributions of work, supplies, or money. If the project gets favorable publicity, the public at large also might be invited to support it. If this strategy succeeds well enough that either the project’s cost probably will be fully covered or, at least, its impact on profit will be offset by its probable public relations value, you can support it without unfairness to anyone and should do so for the sake of those who will benefit.
305. R. Edward Freeman, Strategic Management: A Stakeholder Approach (Boston: Pitman, 1984), 46: “A stakeholder in an organization is (by definition) any group or individual who can affect or is affected by the achievement of the organization’s objectives.” Since Freeman focuses more on effective management strategies than on ethics (see Part II of his book, 83–192), he does not attempt to distinguish among directors’ and managers’ moral responsibilities to various kinds of stakeholders.
306. Freeman, op. cit., 249, does not assert, but calls for research into, the proposition that managers are fiduciaries to all stakeholders rather than to the stockholders or owners alone—“a concept of management whereby the manager must act in the interests of the stakeholders of the organization.” Thomas Donaldson and Lee E. Preston, “The Stakeholder Theory of the Corporation: Concepts, Evidence, and Implications,” Academy of Management Review, 20 (1995): 65–91 (including an extensive bibliography), advocate the stakeholder approach, reject (85–87) some ways of identifying legitimate stakeholders as too loose, but provide no criterion and fail to distinguish between the rights of participants in the business and the claims of nonparticipants to fair treatment.
307. Much corporate giving, even the sort called “charitable investing,” is motivated (and justified) by the interests of businesses themselves; see John W. Dienhart and Saundra I. Foderick, “Ethical and Conceptual Issues in Charitable Investments, Cause Related Marketing, and Advertising,” Business and Professional Ethics Journal, 7:3–4 (Fall-Winter 1988): 47–59; Kenneth A. Bertsch, Corporate Philanthropy (Washington, D.C.: Investor Responsibility Research Center, 1982), 20–27.