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*Karl P. Sauvant, PhD*
*Resident Senior Fellow*
*Columbia Center on Sustainable Investment*
Columbia Law School - The Earth Institute, Columbia University
435 West 116th St., Rm. JGH 825, New York, NY 10027
| p: (212) 854 0689 | cell: (646) 724 5600 e: [log in to unmask]
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“A New Challenge for Emerging Markets: the Need to Develop an Outward FDI
Policy”, "China Moves the G20 toward an International Investment Framework
and Investment Facilitation", "China Moves the G20 on Investment", "The
Rise of Self-judging Essential Security Interest Clauses in IIAs", "Can
Host Countries have Legitimate Expectations?", "The Next Step in
Governance: The Need for Global Micro-regulatory Frameworks", "The Evolving
International Investment Law and Policy Regime: Ways Forward", "China's
Outward FDI and International Investment Law", and  "Policy Options for
Promoting FDI in the LDCs" *are* available at and

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*Columbia FDI Perspectives*
Perspectives on topical foreign direct investment issues
No. 208  September 11, 2017
Editor-in-Chief: Karl P. Sauvant ([log in to unmask])
Managing Editor: Matthew Schroth ([log in to unmask])
*Corporations need to look beyond profits*
* <#m_-8490954029459918926__edn1>
Lisa Sachs, Jeffrey Sachs and Nathan Lobel** <#m_-8490954029459918926__edn2>

‘In theory, there is no difference between theory and practice. In
practice, there is.’ This adage is useful in assessing Lilac Nachum’s *Columbia
FDI Perspective*.[1] <#m_-8490954029459918926__edn3> She suggests that
society is best served when companies focus on maximizing profits rather
than on their social and environmental impacts. In this regard, Nachum
echoes Milton Friedman’s famous and controversial 1970 position.[2]
<#m_-8490954029459918926__edn4> This may be good theory, but it is bad
practice. The real world is too far from the idealized world of Friedman
and Nachum to let companies off the hook.

Nachum argues that, so long as corporations obey the law in good faith,
they produce the most social benefit by maximizing profits and bringing
goods and services to the market. This argument works under strong
theoretical assumptions, mainly that market prices provide accurate signals
of social costs and benefits. This is true only when markets are perfectly
competitive, negative externalities and information asymmetries are absent
and governments are efficiently providing public goods.

In practice, market prices pervasively diverge from true social costs and
benefits.  Market power is widespread, and firms exercise considerable
control over their product prices. Negative externalities are rarely
addressed through corrective taxation, regulation or direct negotiation.
Governments chronically underprovide public goods. And many enterprises
flout the law, knowing that resulting fines will be dwarfed by ill-gotten

To correct inefficiencies, governments must intervene. But many
corporations employ their formidable resources to drive legislation and
block or roll back responsible regulation. In 2016, special interests spent
US$3.15 billion to employ 11,166 lobbyists in the US.[3]
<#m_-8490954029459918926__edn5> This is not the work of a few corporations;
it is near-universal practice among large firms trying to influence the law
for private benefit. When disasters strike, stories of special interest
lobbying and deregulation are rarely far behind.[4]

Even in a world of governments scrupulously correcting market failures,
corporate profits could still be mal-distributed because of control
failures within the firm itself. Nachum implies that profit-maximization
enables corporations to contribute to society through shareholder wealth,
taxes, jobs, and innovation. In reality, greater profits often lead to
exorbitant executive pay[5] <#m_-8490954029459918926__edn7> (at the
shareholders’ expense)—even for CEOs dismissed for malfeasance[6]
<#m_-8490954029459918926__edn8>— as well as further efforts to avoid and
evade taxation.[7] <#m_-8490954029459918926__edn9>

Given the above, we propose the following standards:

   - Companies should not aim to profit from negative externalities.
   Governments should induce firms to internalize externalities through
   corrective pricing or regulation, but the absence of government action or
   international regulation does not absolve firms of the responsibility to
   avert harms on others.
   - Corporate law should ensure that directors’ duties reflect a
   responsibility to minimize harm to the environment and to society,
   including through observance of workers' rights and environmental, health
   and human rights standards.
   - Firms should refrain from lobbying for the narrow interests of the
   firm or sector, and legislation should restrict undue corporate influence
   on public policy. Governments should pursue the public good rather than
   narrow corporate interests.
   - Investors should engage in environment, social and governance (ESG)
   investing, holding companies to account through shareholder engagement
   (such as the recent ExxonMobil shareholder resolution[8]
   <#m_-8490954029459918926__edn10>) or by divesting from companies that do
   not pass ESG-filters.

Nachum is right that firms are evaluated based on their contribution to
society. So, business leaders should consider why large companies have lost
the public’s trust. Firms need to stop self-interested lobbying, polluting,
cheating, and feathering their own nests, to the detriment of the public
and the firms’ own shareholders. We need social responsibility throughout
society, including in corporate boardrooms and C-suites.

* <#m_-8490954029459918926__ednref1> *The Columbia FDI Perspectives are a
forum for public debate. The views expressed by the author(s) do not
reflect the opinions of CCSI or Columbia University or our partners and
supporters. Columbia FDI Perspectives (ISSN 2158-3579) is a peer-reviewed
** <#m_-8490954029459918926__ednref2> Lisa Sachs ([log in to unmask])
is Director of the Columbia Center on Sustainable Investment (CCSI);
Jeffrey Sachs ([log in to unmask]) is the Director of the Center for
Sustainable Development at Columbia University; and Nathan Lobel (
[log in to unmask]) is the Special Assistant to the Director of
CCSI. The authors are grateful to Jacob Lipton and Olivia McFadden for
their research assistance and to Klaus Leisinger, Peter Muchlinski and Rob
van Tulder for their helpful peer reviews.
[1] <#m_-8490954029459918926__ednref3> “How much social responsibility
should firms assume and of which kind? Firms, governments and NGOs as
alternative providers of social services,”
*Columbia FDI Perspectives*, No. 207, August 28, 2017.
[2] <#m_-8490954029459918926__ednref4> Milton Friedman, “The social
responsibility of business is to increase its profits,” *The New*
*York Times Magazine*, September 13, 1970.
[3] <#m_-8490954029459918926__ednref5> “Lobbying database,” *The Center for
Responsive Politics*,
[4] <#m_-8490954029459918926__ednref6> Juliet Eilperin and Scott Higham,
“How the minerals management service’s partnership with industry led to
failure,” *Washington Post*, August 24, 2010; Deniz Igan and Prachi Mishra,
“Three’s company: Wall Street, Capitol Hill, and K Street,” *Vox Centre for
Economic Policy Research*, August 11, 2011.
[5] <#m_-8490954029459918926__ednref7> “Executive paywatch,” *AFL-CIO*, In 2016, CEOs of S&P 500 Index companies made
an average of US$13.1 million—347 times that of the average US
rank-and-file worker.
[6] <#m_-8490954029459918926__ednref8> Fox News paid US$65 million to
executives dismissed following sexual harassment claims;
[7] <#m_-8490954029459918926__ednref9> Frank Clemente, Hunter Blair and
Nick Trokel, “Corporate tax chartbook: how corporations rig the rules to
dodge the taxes they owe,” *Americans for Tax Fairness*, September 16, 2016.
[8] <#m_-8490954029459918926__ednref10> Gary McWilliams, “Exxon
shareholders approve climate impact report in win for activists,” *Reuters*,
May 31, 2017.
*The material in this Perspective may be reprinted if accompanied by the
following acknowledgment: “Lisa Sachs, Jeffrey Sachs and Nathan Lobel**,
‘Corporations need to look beyond profits,’ Columbia FDI Perspectives, No.
208, September 11, 2017. Reprinted with permission from the Columbia Center
on Sustainable Investment (***
A copy should kindly be sent to the Columbia Center on Sustainable
Investment at **[log in to unmask]* <[log in to unmask]>*. *

For further information, including information regarding submission to the
*Perspectives*, please contact: Columbia Center on Sustainable Investment,
Matthew Schroth, [log in to unmask]

   - No. 207, Lilac Nachum, “How much social responsibility should firms
   assume and of which kind? Firms, Governments and NGOs as Alternative
   Providers of Social Services Rwanda,” August 28, 2017.
   - No. 206, Victor Steenbergen and Ritwika Sen, “Increasing vertical
   spillovers from FDI: ideas from Rwanda,” August 14, 2017.
   - No. 205, Jing Li and Jun Xia, “State-owned enterprises face challenges
   in foreign acquisitions,” July 31, 2017.

*All previous FDI Perspectives are available at *
*. *

*Other relevant CCSI news and announcements*

   - *On September 19, 2017*, CCSI will will launch its* Fall 2017
   International Investment Law and Policy Speaker Series
   We’re delighted to announce that this year’s speakers will include Laurence
   Boisson de Chazournes, Vladimir Khvalei, Annette Magnusson, Fuad Zarbiyev,
   Adrian Jones, and Carlos Correa. This fall, the series will again be
   co-sponsored by Crowell & Moring LLP and Baker & McKenzie LLP.
   The series will be moderated by Ian Laird, Grant Hanessian and Kabir
   Duggal. All talks will take place at Columbia Law School. Select
   presentations will be webcast; please see our website
   the schedule and more details. No registration is required.
   - *On September 20, 2017*, CCSI and the UN Sustainable Development
   Solutions Network (SDSN), under the guidance of Prof. Jeffrey Sachs,
   Special Adviser to the UN Secretary-General on the SDGs, and Laurent
   Fabius, President of the Constitutional Council of the French Republic,
   will host a one-day conference to present and discuss the blueprint for a
   Global Pact for the Environment. Coinciding with the 72nd Session of the
   UN General Assembly, this Conference will offer a high-level opportunity to
   explore the complex legal and political challenges of the Global Pact in
   light of existing agreements and soft law principles on the environment,
   and the current global political scene. Distinguished panelists include
   International Union for Conservation of Nature President Zhang Xinsheng, UN
   Environment Program Executive Director Erik Solheim, and President of the
   National Green Tribunal for India, the Honorable Justice Swatanter
Kumar. *The
   event is free and open to the public, but advance registration here
   required. For more information, please visit our website here
   a message to government and business leaders at the Paris launch of the
   Global Pact for the Environment on June 24, 2017, Prof. Jeffrey Sachs
   affirmed the critical importance of the Global Pact for the Environment to
   put the protection of the environment on a rigorous, sound, clear and
   universal legal basis. *View the video here
   - *On September 21, 2017*, CCSI, the UN Sustainable Development
   Solutions Network’s Thematic Network on Good Governance of Extractive and
   Land Resources (‘SDSN Thematic Network’), GIZ, the International Council on
   Mining and Metals (ICMM), the Responsible Mining Index, the
   Intergovernmental Forum on Mining, Minerals, Metals and Sustainable
   Development (IGF), and the Prospectors & Developers Association of Canada
   (PDAC), and the University of Cape Town will host a strategic meeting to
   take stock of initiatives seeking to operationalize the Sustainable
   Development Goals (SDGs) for companies and other relevant stakeholders,
   assess whether and how private sector reporting mechanisms and frameworks
   are or should be aligned with the SDG Indicator framework and how they
   could be harmonized, and identify next steps for advancing the various
   efforts being undertaken to improve the contribution of the extractive
   industries to sustainable development.*The event is free and open to the
   public, but advance registration is required. To register, please contact
   Nathan Lobel at [log in to unmask]
   <[log in to unmask]>. For more information, please visit our
   website here

Karl P. Sauvant, Ph.D.
Resident Senior Fellow
Columbia Center on Sustainable Investment
Columbia Law School - Earth Institute
Ph: (212) 854-0689
Fax: (212) 854-7946
*Copyright © 2017 Columbia Center on Sustainable Investment (CCSI), All
rights reserved.*
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