28 November 2019

The drive for profit has raised billions out of poverty – attack it at your peril

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Scotland’s ‘other national drink,’ Irn Bru, was stockpiled in January by fans who disapproved of the impending reformulation to halve the amount of sugar in favour of sweetener.

The ‘Hands off our Irn Bru’ campaign, which had over 53,000 supporters, declared that they “would far rather pay more for a bottle than have an altered recipe version” and that “a responsible adult should have the choice as to what poisons they want to put in their body”.

In response to the sugar tax AG Barr, the makers of Irn Bru, decided they would do the supposedly ‘right’ thing by taking their full sugar product off the market altogether. Chief executive Roger White declared, in support of the sugar tax, that reducing sugar “is so essential for the world going forward” while admitting that it was “not going to keep all of our customers happy”.

Customers, the people who pay White’s salary, were indeed displeased. In July, the company released a statement that profits would be a mammoth 20% lower than expected. The company’s share price nosedived by about 30%.

This episode came to mind when I read the report published today by The British Academy calling for businesses to “place purpose at the heart of the corporation” rather than profit. They want changes to corporate law to require businesses to consider a wider purpose beyond just delivering for shareholders. Professor Colin Mayer, who authored the report, has claimed that “the corporation has failed to deliver benefit beyond shareholders, to its stakeholders and its wider community”.

This is total hogwash. The profit motive has raised billions of people out of poverty by encouraging innovation and ensuring our finite resources are used exceedingly productively. We now live in a country where almost everyone can afford a shelter over their heads, food on the table, and a phone with access to the world’s information. Abandoning this immensely successful, spontaneously-ordered system is fraught with peril.

The social purpose of a business is to pursue profit within the basic rules of society embodied in law and norms. Profit is the reward for providing value to others. It is what you get for creating a product whose worth to consumers is higher than what it costs to produce — while upholding cordial relations with your suppliers, workers and consumers.

As the Irn Bru experience shows, putting the supposed public good above profit causes more issues than it solves. The recipe change proved to be in nobody’s interest: consumers didn’t want to buy the product, workers will have to be sacked or salaries lowered and their shareholders have lost out. Finally getting the message that profit matters, AG Barr has recently announced the miraculous discovery of the ‘original’ 1901 full sugar recipe of Irn Bru. This product will be on sale ‘for a limited time only’ from December 2nd. We’ll see how limited that time is in due course.

Downgrading the importance of profit removes the essential accountability between shareholders, whose investments are at risk, and corporate executives. The move towards ‘shareholder capitalism’ in the 1960s and 1970s, epitomised by the work of Milton Friedman, was precisely in response to corporates becoming unaccountable and stagnant. The cosy system of consensus wasn’t working.

There is nothing evil or wrong or antisocial about pursuing profit. In fact, the profit motive channels people’s energies into serving others. As Adam Smith observed, “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.”

We should also be wary about the deeper agenda that lies beneath efforts to change the purpose of a company. It is no coincidence that this is a key promise from Labour this election. Shadow Chancellor John McDonnell has said that “Labour will rewrite the Companies Act so that directors have a duty to promote the long-term interests of employees, customers, the environment and the wider public, as well as shareholders”.

McDonnell also wants to create a “Companies Commission” that would presumably tell businesses whether or not they are acting in the interests of the “wider public”. This would be completely arbitrary. It risks businesses that the socialist government disagrees with being told how to operate or shut down by the state on the whims of a crony-filled regulator. This isn’t the road to serfdom, it’s halfway down the track to Venezuela.

This insidious effort to tell businesses how to operate goes beyond Labour. The Liberal Democrats have also committed to changing the purpose of companies in their manifesto. Meanwhile, Tories like Jeremy Hunt have said they’d like to “threaten” business to force behavioural change.

If the political class abandon the basic, time-tested ideas that companies exist to be companies, not for the whims of their executives or state regulators, then we risk compromising the free market system upon which our shared prosperity has been built. We attack it at our peril.

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Matthew Lesh is the Head of Research at the Adam Smith Institute