Companies Should Not Impose Costs on Communities
Summary. Today,
when a company closes a plant, it does so to increase its profits, but most of
the cost of the closing is born by the plant’s community. These costs include
lost income, reduced property values and retraining costs. It is unjust for the
cost of a business decision to be paid by people who do not share in its
returns. We need to find a way to insure that the company’s shareholders bear
at least some of the costs of decisions that create profits for them. This is a difficult problem, and I invite readers to submit comments or pieces for posting that explore ways to do it.
The Wealthy Traditionally Recognize Responsibility for Their
Communities
Two recent posts on this blog that were written by friends
of mine dealt with the problem of the responsibility that companies may have
for the communities in which they operate.
So, I would like to offer a more systematic meditation on the
subject. It is almost universally
recognized that wealthy and prominent members of a community have
responsibilities toward their community that are commensurate with their wealth
and positions. We in the Fox cities have
been very fortunate in having people in our community who feel that
responsibility deeply. Thus for example,
we have Theda Clarke hospital and a performing arts center, which was largely
paid for by contributions from prominent members of our community. Sometimes, a company itself rather than an
individual may identify closely with the community where it operates and feel a
responsibility to contribute to its well-being.
In the Fox Cities, we have Thrivent financial, which has been a fine
corporate citizen for many years.
Today, Large Companies Often Feel No Responsibility
Today however, many large companies are owned by thousands
of shareholders who know nothing of the communities in which those companies
operate. Some of those shareholders are
likely to be pension funds or mutual funds who are not even interested in the
companies accept as their operations are reflected in the prices of their
shares. Companies with these kinds of
shareholders are likely to have little interest in the communities where they
operate and may well cause those communities great harm by closing facilities
and firing workers.Costs Imposed on Communities are “Externalities”
In this situation, a company may increase its profits or its share price by imposing large costs on a community. These costs may include lost income for the laid-off workers and for the merchants who sell to them. The costs may also include lost value for homeowners and other property holders as well as retraining costs for the workers. When a company is able to impose costs on persons outside of the company, is said to externalize the costs, and externalized costs are referred to by economists as “externalities.”
Injustice of Externalities Is Recognized By Our Laws
Our laws recognize the injustice of externalities in some
cases. For example, we no longer allow
companies to impose the cost of environmental pollution on the communities where
they operate. We require the companies
to install scrubbers on their smokestacks or to clean up their waste products
before dumping them into our waterways.
We may even require companies to assist in cleaning up the environment
when they have already polluted it as in the case where companies that dumped
PCBs into the Fox River have been required to pay part of the cost of removing
them.
A different kind of
example may be found in unemployment insurance.
A company may be able to increase its profits or insure its survival by
laying off its workers. In this case, we
recognize that the cost of the layoff is borne by the workers, and so we have
created unemployment insurance and required employers to pay into the insurance
fund. Thus, at least part of the cost of
the layoffs is borne by the employers.
