Companies do good by serving consumers

North Carolina businesses are generous donors of time and money to worthy causes across our state and beyond. Major corporations such as Truist, Duke Energy, Blue Cross Blue Shield, and Bank of America give tens of millions of dollars a year to charities through their respective foundations. Many other companies, large and small, aid nonprofits directly with checks, in-kind services, or teams of volunteers.

More broadly, North Carolina is home to hundreds of grantmaking foundations created by individuals or families whose wealth came from creating and running successful businesses. I serve as president of one of them, the John William Pope Foundation, which awards about $15 million in grants each year.

For all the good these philanthropic activities do, their significance pales in comparison to the core social benefit of private businesses. It’s not about charity. Nor is it about the employees companies hire and train or the retirees whose pensions are funded by company earnings, though these are large and worthy sets of beneficiaries.

No, the primary means by which companies do good is by providing valuable goods and services to consumers.

“In the search for heroes, we enshrine political leaders or military commanders or TV cops or movie action heroes or the glorious protagonists of our mythical and legendary past,” I wrote in my first book, The Heroic Enterprise: Business and the Common Good. “But those who create the amenities we enjoy and the innovations that make our lives safer, healthier, and happier exist, with very few exceptions, in relative obscurity.”

In that book, published in 1996, I offered hundreds of examples of profit-seeking entrepreneurs and companies revolutionizing the way we live, eat, travel, study, work, play, and shop.

“It is through invention and innovation,” I argued, “that business makes its most significant social contribution.”

What I wish I’d had back then is the kind of empirical evidence to be found in a recent study by scholars at Stanford University, New York University, the International Monetary Fund, and the University of California at Berkeley. Released by the National Bureau of Economic Research, the paper sought to quantify the value of four kinds of social impact: consumer surplus, worker surplus, profits, and externalities.

To explain their results, I must first define their terms. Consumer surplus consists of the value customers place on the goods and services they consume minus what they have to give up to obtain them. When I purchase a cheeseburger for $4, that doesn’t mean the burger is worth $4. It’s worth more than $4 to me, in fact.

Human beings don’t actually go around trading the equivalent of four $1 bills for two $2 bills, because we also value our time. That’s what makes economic activity a positive-sum game, not a zero-sum game. When I buy and eat that burger, the experience is worth more than $4 to me. For those who staff, supply, or own the restaurant, the burger is worth less than $4, which is why they’re willing to part with it at that price. All parties to the transaction are made better off.

Similarly, worker surplus represents the net value to employees of being employed at a particular firm. Profits are returns to owners or shareholders. And externalities represent the effects of a company’s operations on other groups of people, such as neighbors forced to breathe toxic fumes (a negative externality) or communities made better off when at-risk youths find gainful employment (a positive one).

After quantifying these effects as best they could, the researchers found that for most companies, consumer surplus is by far the largest social impact, “dwarfing profits, worker surplus, and externalities.”

Another key finding here is that the much-politicized practice of evaluating businesses according to environmental, social, and governance (ESG) criteria has been misguided.

“Company-level scores from several prominent ESG rating systems are essentially unrelated to our estimates of corporate social impact,” they concluded.

I couldn’t have said it better myself.

John Hood is a John Locke Foundation board member. His latest books, Mountain Folk and Forest Folk, combine epic fantasy with early American history.