Tuesday, September 28, 2010

Are corporations allowed to sell healthy food?

Whenever advocates for healthy food talk to food business executives, one common response is:
Personally, I would like to serve a healthier product.  But, if these efforts threaten profitability, I risk getting sued by stakeholders.  Corporations are obliged to pursue maximum profits and no other goal.
The executives' response is not entirely correct.  Courts give a lot of deference to corporate management to use their own best business judgment.  Admittedly, a corporation cannot simply give away profits freely to serve public causes like better nutrition.  However, the managers have plenty of legal maneuvering space to develop a healthy product line, without fear that shareholder lawsuits will succeed. 

A recent working paper (.pdf) by Tufts economics professor Julie Nelson reviews the long history of relevant court cases.  She finds that, when people argue that the law requires profit maximization as the sole goal, they commonly are really describing their wishes that this were true, not evidence that it actually is true.
The profit maximization doctrine appears to operate far more strongly at the level of theory or ideology, than at the level of the actual practice of business management and corporate law. It seems, in short, to be a case of transcendental nonsense.
Nelson also tackles the more philosophical question of how profit-seeking should be related to other virtues and relationships, even love for our fellow person.  I suspect that I like markets better than she does, on balance.  But, like Nelson, I think markets should not be a social goal in themselves. They are a means to achieve bigger goals.  Just as a tennis game is most fun when two friends compete hard by the rules, I think competitive markets make our society better.  Markets are a great game, but a dreadful religion.

If one can argue with a straight face that selling healthier food enhances the reputation and long-term prospects of the company, I think that would count as a reasonable business judgment.  Corporations may not want to make sacrifices, but I doubt many claims that they are legally prevented from serving healthy food.

3 comments:

Veronica Bielat said...

I cannot agree more with your comment

"The profit maximization doctrine appears to operate far more strongly at the level of theory or ideology, than at the level of the actual practice of business management and corporate law. It seems, in short, to be a case of transcendental nonsense."

Having gone through a business school for my undergrad in the Reagan years, I was there as the business mantra changed from a longevity model to the current short term profits only model. When I began, the emphasis on stockholders were as "investors" in future profits, and risk takers as business expanded and invested for long term viability. By the time I was done with the degree, it was all focused on short term thinking and profits for investors.

It was a sad time--and really laid the groundwork for the problems we are experiencing today.

Anonymous said...

You "quote" was a straw man: no corporate manager ever said that or thinks that. But taking the bait ...

I think corporations can and do sell both types of food. And consumers can buy whichever one they want.

So the question is what should corporations do if consumers don't buy a healthy, attractively packaged, well marketed, and reasonably priced (given the costs in producing and marketing it) product? In the dog-eat-dog real world supermarkets won't even give products shelf space if they don't sell. Should corporations just let stuff accumulate in their warehouses, and then ship it out to landfills or homeless centers?

In other words, should corporations commit harakiri just because consumers are "stupid"?

If there's a market for healthy food corporations will rush to fill it, because there would be money in it. But if there's no significant market for it, what can we expect them to do? And I think they eat their own dog food, literally: The management and employees of most corporations eat crappy food, because in the end they are just normal people.

Also, the evil "shareholders" are in fact the pension organizations that you and I will depend on in old age.

Parke Wilde said...

Actually, I have heard executives give this legal argument about fear of share-holder lawsuits. However, since I composed those words rather than quoting precisely, I can see why you might say this is a straw man. What I'll do is wait until the next time somebody in business gives me this argument. Then, I'll add a comment to this thread with their exact wording.

Meanwhile, I enjoyed the rest of your comment. You press me to be clearer. Nobody claims companies are forbidden to include healthy food as one product line. The post is about the more challenging question: are companies legally permitted to limit their product line to healthy food, even if this means sacrificing profits on some product lines for some time periods?

One paradox is that companies could probably afford to sell healthier food without losing much profit, if they agreed collectively to enforceable standards. Unfortunately, it may be unprofitable for a single company to sell only healthy food while competitors sell unhealthy food.