Adam Smith writes in The Wealth of Nations, Book I, Chapter VIII: "What improves the circumstances of the greater part can never be regarded as an inconveniency to the whole. No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable."
Does a company doing good for the "greater part" do any good for shareholders?
Many companies recently have committed resources and funds to external projects that, at first glance, only benefit the "common good" and not shareholders.
For instance, in 2004 Goldman Sachs donated 680,000 acres of undeveloped land it picked up through a loan default in Chile to the World Conservation Society to maintain its natural state. Indeed, Goldman acknowledged that the gift was not business related or intended to create shareholder value.
Similarly, President Bush last year asked the CEOs of Citigroup, General Electric, UPS, and Pfizer to help raise funds for earthquake relief in Pakistan, and they more than surpassed the goal of $100 million.
Besides outright gifts, companies have adopted "socially responsible" business policies on global warming, logging, or indigenous peoples. These actions seek to demonstrate a company's desire and commitment to act as a good corporate citizen.
But such activities have opponents, and now a mutual fund has sprung up to halt companies from embracing socially responsible agendas.
The tiny Free Enterprise Action Fund last month shot off an angry letter to fellow Goldman shareholders asking, "Does CEO Hank Paulson run Goldman Sachs for himself or shareholders?" The letter scolded Goldman and Paulson for various philanthropic activities and demanded that Goldman's energies be strictly devoted to promoting shareholder value.
Although the fund's proposal was soundly defeated by fellow shareholders, it generated significant press attention and raised the issue once again of the appropriate role of publicly traded companies.
The evidence, however, is that successful companies pay attention to more than the bottom line. James Collins and Jerry Porras in Built to Last show that "visionary" companies - those with a core purpose beyond making money - do better long term. A dollar invested in a visionary company returned $6,356 from 1929 to 1999; other companies didn't even return $1,000.
Another research study shows that philanthropic companies also gain better reputations, retain employees longer, and are usually given the benefit of the doubt when something goes wrong, all of which does provide shareholders with benefit.
Smith believed that business, as opposed to government, was the best instrument to offer a nation's citizens prosperity and that companies needed to act be- yond their immediate circle of stakeholders. Goldman and others are demonstrating this economic truth. But even if shareholder return is all you care about, keep this in mind: Goldman Sachs shares surged 53% in the past 12 months, while shares in the Free Enterprise Action Fund increased less than 8%.
Fred Bratman is president of Hyde Park Financial Communications.