If the last few weeks have taught us anything, social responsibility is not very profitable. First you had ethical investment week between 13- 19 October. Here was an opportunity for financial journalists to assess the Ethical Investment industry. They found that so called sin industries like tobacco, alcohol and gambling are generally quite profitable giving higher returns to investors than industries that fall under the umbrella of ethics. Then you have the vexed question as to what constitutes as ethical? This is somewhat blurry as much as it is divisive. Starbucks might be ethical, but it does not like paying taxes building up the pockets of the bigwigs in Seattle and their fancy lawyers. Tesco sells eggs, some from chickens that roam around free; others in cages.
Next you have the Cooperative Bank, UKs mutual, which has a sizable (£1.5 billion) capital deficit effectuated by its failed merger with Britannia building society. The company has to be restructured involving bondholder bail-ins (in other words creditors suffer from reduced repayment of loans), mutual ownership replaced by hedge fund ownership more concerned about profits and value than love-thy-neighbouring sharing, and questions about governance of mutual companies. The merger was viewed as a risk in the first place, so why did the mutual bank risk the money of its customers in taking the jump if not only for greater profits? Not good for a company priding itself as a community orientated bank.
While on the subject of ethical banks, let us not forget about Rabobank, which has agreed to pay $1 billion to UK, US and Dutch authorities to settle allegations about it manipulating libor rates (an act of fraud). The bank was formed as a co-operative bank founded by farmers that traces its roots back to the 19th century.
There is an irony for purveyors of ethical thinking. While criticism can be levelled at the companies, be they financial or commercial, for morally dubious policies, these companies themselves are in existence because of customer demand. The customer’s income is the lifeblood of their existence, and customers want a return for their disbursed income, be it a product or revenues. The company has to generate revenues to produce the goods that the person desires. Occasionally, it might have to undertake contrarian moves to ensure its sustainability. This is what Cooperative Bank did, although quite badly.
People may argue that the objectives of companies are to remunerate shareholders, but shareholders are investors that provide funding to a company that provides goods to the individuals who purchases. They want a return.
But dubious companies would fail if consumers did not purchase the goods on offer. If on mass individual stop purchasing cigarettes, or moved away from Royal Bank of Scotland for their banking needs, or were willing to pay for renewable energy regardless of the cost then ethics would have a lot more value. The onus really lies on the sprawling masses to realise the power of their money. But banks are so embedded in the system that people cannot be bothered to transfer their accounts even if banks engage in destructive practices. Renewable energy is a bit of a burden if it means one has to turn their electricity and gas and live the life of a hermit. The cost of transfer is far too high.
Banks, energy companies and non-ethical companies know that the consumers are in a captive market. They have the information, the resources, and the experience to provide the goods the consumer demands, even if grudgingly. Some may rebel and divest, but it is only a few. The rest remain obsequious. The trick for them is to eat away at consumer surplus without there being a fall in demand. For most consumers, they are not at the end of their tether with high prices, questionable employment practices or dubious financial practices. Until that point, they can acknowledge the system is not orientated to ethics, but rather to their demand.