The limits of quantitative analysis

Published October 28, 2019, 12:00 AM

by manilabulletin_admin

Bernardo M. Villegas
Bernardo M. Villegas

The recent debate precipitated by the decision of the Business Roundtable, an association of leading US chief executives, to repudiate a single focus on the interests of shareholder and instead address a more comprehensive set of values to stakeholders illustrates another case of the limit of quantitative analysis. Ever since the triumph of the capitalistic over the socialist model in delivering economic success in the Western world, free market economics—especially promoted by the late Milton Friedman of the University of Chicago—has been the predominant doctrine taught in schools of business and economics in the U.S and other capitalistic countries in Europe. As Professor Friedman famously said, “The only business of business is profit.” Since profit accrues in the market economy to the shareholders, the shareholder-first mantra reigned supreme in the business world. There were token recognitions of other “stakeholders” in the business community, such as the consumers, rank-and-file workers, the managers, the suppliers of the inputs, the immediate human community and physical environment in which a business operates, and the public at large represented by the duly-elected Government. Unfortunately, for these stakeholders other than the stockholders, it was not easy to quantify the benefits conferred on them by the operation of a business. For example, how does one quantify total consumer welfare or total worker welfare? On the favorable side of the stockholders, even the taxes that a business pays to the State measure only a small fraction of what its operations contribute to the whole of society, such as jobs generated, manpower trained and educated, or the appreciation of the real estate where it builds its factories or offices. So almost by default, the maximization of profit, being the most measurable dimension of the business operations, was equated with the sole purpose of a business.

Those who are criticizing this refocusing of purpose by the Business Roundtable CEOs point out that the values to the other stakeholders are not as susceptible to measurement as profit, most of them being qualitative, such as consumer welfare or community development. The critics, therefore, fear that considering other non-quantifiable purposes may lead to suboptimal outcome on all goals. Sarah Kaplan (Financial Times, August 28,2019), business professor at Toronto’s Rotman School of Management, points out, however, that the findings of psychologists and moral philosophers suggest that human beings are capable of accommodating multiple values at the same time. Making trade-offs is a daily human reality. As Ms. Kaplan points out, conflicting goals often serve as an opportunity for business executives to be more creative in devising strategies to minimize the conflicts. Stakeholder trade-offs in the business community should be considered as an innovation challenge. If management really considers the welfare of their workers paramount, for example, they should rethink the way they design product and place orders in a garments factory if they observe that their workers are spending dangerous amounts of overtime at their sewing machines, instead of just simply complying with factory safety standards. Another example: “If you use toxic glues to assemble your running shoes, then you should invent an assembly process that substitutes 3D stitching for adhesives.” The greater emphasis on stakeholders as against shareholders should arise from the sincere concern of management for the common good, which is defined as a social order which enables every single person affected by the operation of the business to attain his or her integral human development.

We should go back to the basic concept of the business enterprise, not just as an economic machine, but a community of persons who get together to promote the good of one another as they produce or market a good or service to the public. Those who start a business are first and foremost human beings before they are business people. Every human being has to always consider how, in his individual decisions and actuations, he is contributing to the common good. This is a requirement of our very nature as rational creatures with a free will. All these debates about the primacy of profit will stop if we start with the very premise that every business is a community of persons who have a responsibility to one another. Obviously, a business cannot be sustainable unless a minimum of profit is made from its operations. But this is very different from saying that every business must try to make the maximum profit possible, despite its inability to promote a minimum of human welfare for its various stakeholders.

It is about time that we radically change our conception of business that assigns the highest priority to those who provide the equity for its establishment and continued operation. True, a minimum of what is known as the Rate of Return on Equity (ROE) is needed to be sustained if a business is not to close down. But given that minimum (which can be sometimes far lower than what profit maximization may make possible), the interests of the other stakeholders (especially the rank-and-file workers, the professional managers and outside suppliers of goods and services) must be given equal if not greater importance. It cannot be a valid argument that profit maximization should be given priority just because it is the easiest to quantify in cost-benefit terms. I end by quoting a dissenter who argues that “Straying too far from focusing on profits would be a serious mistake” (Geoffrey Owen writing for the Financial Times, August 28, 2019): “There are also situations in which companies should ‘do the right thing’ even though there is no legal obligation to do so and the decision may lead to reduced profits.” Given the sad experiences with free-market capitalism in the last twenty years, I am of the opinion that these situations are too many to count today.

For comments, my email address is [email protected]

 
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