May 11, 2004
Should Google-Watchers Invest in a Goody Two-Shoes? (Part Three in a Series)
Posted by Gordon Smith

I’ve just finished reading the Google S-1, which is more interesting than a lot of Oprah’s picks that I’ve read. In practice, I represented energy companies, not Internet companies, and the S-1 forms that I read were never this delightful. Any disclosure document that uses the words “triumvirate” and “fizzle” on the same page makes subscribing to Edgar worth twice the cost!

A much-mentioned section in the S-1 is entitled “Making the World a Better Place.” In this section, the founders describe their Google Grants program, which gives free advertising to certain non-profit companies, and plans for the Google Foundation, which will be funded with “1% of Google’s equity and profits in some form.” The question that this section raises is whether the existence of these programs should encourage or discourage potential investors.

In answering this question, I am going to assume that investors fall into two categories. The first, overwhelmingly large category of investors comprises profit-seeking investors. The second, much, much smaller category of investors comprises profit-seeking voters. I can prove that this category exists because I am a profit-seeking voter (PSV). Although I don’t invest in individual stocks much anymore, when I did, I voted with my dollars. My economics teacher in high school told me that dollars are votes, and I internalized that view. When I invest in a company, I am voting for a product or a service or even a world view that the company seems to espouse. I would not knowingly invest in a company that manufactured or sold weapons, alcohol, or tobacco, for instance, even if those companies were very profitable. I would, however, invest in companies that seemed to have philosophies compatible with my socially liberal outlook: Gardenburger, The Body Shop, and Whole Foods. I am voting for the kind of companies that I want to exist. I am, however, willing to believe that the PSV category is relatively small, but I know it exists because there are mutual funds aimed at this category. Obviously, PSVs will be attracted to the “Make the World a Better Place” company, but the rational, profit-seeking investor will probably want to look a little more critically.

As Google admits several times in its S-1, a corporation’s first (and only) priority is to maximize shareholder value. Actually, Google admits only that “our duty is to advance our shareholders’ interests,” which may arguably not be the same. Putting that aside, a valid question is whether a corporation with a mandate to maximize shareholder value can strive to “make the world a better place.” This question is on my mind because I recently read The Corporation: The Pathological Pursuit of Profit and Power by Joel Bakan. In one chapter, Bakan posits the argument (made to him by Noam Chomsky and Milton Friedman) that given the legal mandate to the American corporation to maximize profits, a corporation violates this moral code, albeit ironically, by having voluntary social responsibility as one of its objectives. According to this argument, a corporation can only morally present itself as a socially responsible company if its true aim is benefit the economics of the corporation. In fact, Bakan shows, most corporate measures advertised as “community involvement” or “social responsibility” benefit the company either directly or indirectly. For example, a company will fund initiatives to create a safer neighborhood, especially when the company’s plant or headquarters is in that neighborhood or the employees live in that neighborhood. Or, an energy company will advertise itself as a “green” company in order to create brand loyalty and goodwill.

Therefore, the profit-seeking investor may rationally choose to invest in a company purporting to make the world a better place if these efforts are public relations expenditures that will benefit the bottom line. However, as with must public relations budgets, the corporation will find a point of diminishing returns in its community spending. Bakan’s book gives The Body Shop as an example of a company with a social agenda that could not compete for profit-seeking investors after going public. Most corporations seem to know where the line is between creating goodwill that grows profits and trying to run a publicly-held corporation as a co-op, and I’m willing to bet that Google is well aware of that line.

For instance, Google touts several times in its S-1 that employees are encouraged to spend 20% of their time (one day a week) on whatever project they think will benefit Google. This is not the action of a touchy-feely elementary teacher giving students free art time. This is a company that hires very creative people who will be creating projects in their free time anyway. Instead of these projects being created in an employee’s garage and then becoming the next Dell Computer, these projects will be created at Google as work-for-hire and will be owned forever by Google. That’s not letting employees be expressive, that’s just good business.

As for whether the profit-seeking investor should be looking for corporations that will make charitable contributions for them, investors may be better off making their own charitable contributions and investing in corporations that use excess cash to fund profitable projects. Unless, of course, these charitable contributions are widely publicized and used to attract customers to the brand. Some libertarians say that morally we should not delegate to the government our own moral obligation to give charitably. I’m not sure I believe with the results of that argument, but the same argument could be made that we should not delegate to corporations our obligation to give charitably.

So, the bottom line is. . .well, the bottom line. Is the company striving to make the world a better place also making itself a more beloved and more profitable company because of it? If so, then an investor would be rational, not just sentimental, in investing in that company.

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