The company of 2021 has lost what, by default, made its legitimacy. In the old world, the paradigm of the invisible hand was prevalent. The search for individual interest and profit in the case of a company converged with the collective interest. To use Adam Smith’s image, it was not the altruism of the baker that was responsible for his efforts to bake the best bread possible, but the search for profit was enough to encourage him to achieve results and thus widen the circle of those who loved his pastry.
Of course there have always been exceptions. Economists have always recognized that the invisible hand mechanism can fail, especially when the production of goods generates externalities, i.e. effects, most often negative, that are not taken into account by the market. Thus, when a producer pollutes the air in the city or the water in the lake where it is located, the question of whether there is a real creation of net value for society is justified: if this production finds buyers, there is a creation of economic value, but the cost of the pollution generated must be deducted to determine the net value for society.
In the previous world, these exceptions to the invisible hand were relatively rare and, above all, very local, which made it possible to correct their effects at the regional or national level. Thus, it was possible to put an end to the major pollution that clouded the cities of London and Pittsburgh, for example.
Times have changed. Since the third quarter of the 20th century we are all polluters. And the pollution in question, especially the emission of CO2, has an impact that can only be taken into account at the global level. This change of paradigm is the result of the explosion of the world population and economic growth: two phenomena which, combined, are responsible for our excess of the planetary limits. We are overexploiting a global common good which is the planet’s capacity to absorb our CO2 emissions but also to preserve biodiversity and more generally to regenerate itself. We are collectively in the position of the producer described above: we are producing goods and services valued by society but we are simultaneously destroying our common capital, thus dramatically reducing the capacity of future generations to reach the same standard of living that we have.
A major consequence of this paradigm shift is to generate systematic doubt about the legitimacy of a company. It is no longer enough to make a profit to justify its existence. Profit is only one of the components of the social value created: by realistically deducting the cost of the use made of the common capital (through its CO2 emissions and the losses of biodiversity generated) can a company manager guarantee that the net value created by his company is positive? Is he not in the position of the florist whose prosperity is based on the fact that he sells by day the flowers he stole by night from the neighboring public park?
This doubt can only be removed through a serious sustainability report producing transparency on the negative counterparts of the economic value generated, gradually leading the company to limit as much as possible its use of the common planetary capital and to compensate society for this use as long as this is not entirely the case. This compensation should logically precede the distribution of dividends. Even for the most hardened capitalist knows there is no moral justification for private distributions made possible only by the free use of common capital.
Jean-Pierre Danthine, Co-Managing Director of the Enterprise for Society Center
This article was originally published in French in Le Temps