Ron Baker: Well, welcome, Ed. What do you think? Are corporations socially responsible?
Ed Kless: By definition.
Ron Baker: That is exactly my take, by definition.
Ed Kless: End of show. I guess we're done.
Ron Baker: All right, folks, next week ... No, absolutely. This whole corporate social responsibility movement, which has been around for a long time, I mean, I didn't go back and look and see when it originated, but I want to say in the '70s, maybe '80s, but what really put it on the map was a talk that Bill Gates delivered in January of 2008 in Davos, Switzerland, at the World Economic Forum where he coined and introduced the world to this concept of creative capitalism. He basically said that there were two great forces in human nature. He said there was self-interest and caring for others, which I would tend to agree with that, and he said that corporations needed to do a better job lifting the poor from poverty and solving other types of problems, malaria and water and all of these different things. He coined this term, creative capitalism, and I was thinking the whole time, Ed, wait a minute, I thought capitalism was creative.
Ed Kless: Absolutely. I can say yet another redundant term. I hate to be redundant again but yes. By definition, that's what companies, corporations, entrepreneurs do. Let me state this. At least originally, right? Every organization goes into business with a thought process behind it about what is it that I can do that helps someone else? In helping someone else, yes, I'm going to get paid for that, but because I can do it for them better than they can do it, it's a win-win situation, and we've talked about this on a number of shows, but I think today we're going to really clarify in our listeners' minds in a lot of ways why we even call this show The Soul of Enterprise because both of us in our heart of hearts really believe that it's the purpose of corporations to do good by definition, and the fact that they give to charity, that's even better in certain circumstances, and we'll talk about the specifics of that, but just being in business and being sustainable, and that's really the new buzzword, right, Ron? Sustainability.
Ron Baker: Absolutely.
Ed Kless: As an ongoing concern benefits society by definition because both sides in a transaction benefit. Now, we're not talking about rent-seeking and businesses that do things that are surreptitious in some way, and there are clearly some that do that, but the overwhelming majority of businesses do good. They do good.
Ron Baker: You know, Ed, do you think some of this, not to pull back too far in this, but do you think some of this is because capitalism or as Dierdre McCloskey would say, what is it? Market-tested innovation and s-
Ed Kless: Market-tested innovation and supply, yes.
Ron Baker: And supply. Thank you.
Ed Kless: Yep.
Ron Baker: That's mouthful.
Ed Kless: Yeah, but dead on accurate.
Ron Baker: It is, it is, but do you think, whether you call it capitalism or the other one, do you think it's because it's kind of a counterintuitive system? Nobody marches in the streets for capitalism. People put on Che Guevara T-shirts and march for socialism and social justice and all of this, but who sits around and marches for capitalism? You know the old joke about this is why libertarians don't do street marches; they all end up in the bookstores. There is no good theory. Capitalism doesn't sound too good in theory, but it works really well in practice, and socialism and communism is just kind of the opposite.
Ed Kless: Right, right, where it works in theory, just not in practice. Yeah. I think there is. I think capitalism has gotten a bad name, and in a lot of ways it is spurred on more recently by things that the pope is saying about capitalism. What I found interesting is there was a poll this week done about religious affiliation and whether or not you are for big government, small government by the Pew Institute, and one of the things that they point out is that is that the Hispanic population in the United States tends to be more about big government whereas everyone else including, and this was, by the way, specifically about Catholics. They were the only group of Catholics that overwhelmingly favored bigger government.
Ron Baker: Yes.
Ed Kless: I think that this has to do with the origins and history of the way "capitalism" has worked in Latin America because it has never really been what you and I are using the [heuristic 04:58] for is shorthand, capitalism. It's never really been that. It's always been cronyism, and I think that the current pontiff is subject to that misinterpretation, to be honest with you.
Ron Baker: Yeah, no. I think you're exactly right. In fact, crony capitalism is a contradiction in terms. Capitalism isn't about cronyism, so I like John Stossel's term. It should be called crapitalism.
Ed Kless: I think handy capitalism was another one. I like that one, too.
Ron Baker: Right. You know this corporate social responsibility, I have to tell you I've been reading this book, or rereading it because I actually read it a while ago, and it's called Creative Capitalism. It's edited by Michael Kinsley who is a journalist at Slate, the online magazine, which I think at one time or maybe still is owned by Microsoft.
Ed Kless: Yeah, it was definitely spawned off by Microsoft.
Ron Baker: Right, and at one point I think Michael Kinsley was the narrator on the William F. Buckley show, Firing Line. Another conservative likes to call him the present-day Eleanor Roosevelt, but I don't want to get too personal. Anyway, he edited this book called creative capitalism and, folks, as you know, we'll put all of the books we mention on our show notes, and it's a compendium of essays and contributions from different thinkers, people like Ricard Posner; Warren Buffett; Bill Gates himself, of course; Larry Summers; Steven Landsburg, the economist that we enjoy so much, and it really looks at all sides of this corporate responsibility, social responsibility issue, and one thing I found interesting, Ed, was Robert Reich, former labor secretary under Clinton, he said CSR, and let's just call it CSR from now on. That stands for corporate social responsibility. He said it's as meaningful as cotton candy. Even somebody you would think would be for it ideologically said this is a completely ridiculous term.
Now, he may have different reasons, but I think if you talk about this issue, like you said, you have to understand that corporations are here to serve others and mostly strangers for the most part and to do well. They don't start out with pernicious intent, and one of the essays that your ideas that you have to confront when talking about this is Milton Friedman's famous September 1970 article that he wrote in the New York Times Magazine called The Social Responsibility of Business is to Increase Profits. In the book, of course, all the people on the left took this to task and said well, that's not really the goal and that can lead to chaos and all of this stuff, but Friedman's point was a company has to earn a decent return for its shareholders. It's got a fiduciary duty to do so, but it also has to do things under a legal and ethical framework. It was an obligation. It was an actual and ethical obligation that they had to increase their profits because fact of the matter is people that work for corporations are agents, and the shareholders actually own the corporation, and you can't just go spend their money. That was kind of one of his points. You work in a public corporation, Ed, so this has got to be true for you.
Ed Kless: No, absolutely. We're stewards of the shareholder money, and we have to take that into account in the decisions that we make. We have a fiduciary responsibility to do so. That's critically important. It's a tough situation because I think why this gets such play is because, as you said, it sounds so right. It's like motherhood and apple pie. Of course, we're going to be corporately responsible, socially responsible. Of course, we're going to separate out our white paper from the other paper and recycle and do all of these good things, but in many cases these things are just things that we would naturally do in business and we put a label on it and throw it into this lump thing called corporate social responsibility, I guess, to make us all feel better about it. I don't know. I feel pretty good about what I do for Sage. I feel pretty good about what Sage does for the world by creating greater freedom for people to succeed by putting good software out.
Ron Baker: Absolutely. Yeah. It's a really good point. The other thing that Friedman pointed out was that because it's not the agent's money who work for the corporation, it's the shareholder's money, he said if you go out and do the business right and innovate and take care of your customers which, by the way, is no given. Let's face it. Most businesses don't make a profit, so we can come back to that, but he said then what you're doing is you're enhancing your dividends or maybe their capital gains, and then they can take the money and give to the charity of their choosing. It's very important here to point out that both you and I, Ed, I think, and certainly Milton Friedman in this article are not anti-charity. That's not what we're arguing. Friedman's arguing that a public corporation doesn't have the right to spend the shareholders' money without some type of prior consent. We can talk about the exceptions like Whole Food, but I think that's a vital point that people love to jump over.
Ed Kless: Well, let me ask you this, Ron. What do you think about corporations making political donations?
Ron Baker: Yeah, I would say the same thing. It's not their money. Now, we can get into all the arguments about it's rent-seeking and hey, if they didn't do this the might get laws and regulations passed that would work against them and, therefore, this is an ordinary and necessary cost of doing business, but fact of the matter is these people have a fiduciary responsibility to do what's right by their shareholders whether that's, say, taxes or whatever, and it's not their money. This was the point that Friedman was making, and it's a very ethical and moral point. It's not just an economic point nor is it just an efficiency point.
Ed Kless: Right.
Ron Baker: It's an ethical argument.
Ed Kless: No, it is. It is. I think for most small businesses out there that are maybe listening to the show, they are almost one and the same, right? I want to come back to your point, though, on this is it's crucial to understand that it's not their money and whether or not that you think you're spending it in the right place is irrelevant to the question. It's not even germane. It's a moot point from the very beginning.
Ron Baker: Well, welcome, Ed. What do you think? Are corporations socially responsible?
Ed Kless: By definition.
Ron Baker: That is exactly my take, by definition.
Ed Kless: End of show. I guess we're done.
Ron Baker: All right, folks, next week ... No, absolutely. This whole corporate social responsibility movement, which has been around for a long time, I mean, I didn't go back and look and see when it originated, but I want to say in the '70s, maybe '80s, but what really put it on the map was a talk that Bill Gates delivered in January of 2008 in Davos, Switzerland, at the World Economic Forum where he coined and introduced the world to this concept of creative capitalism. He basically said that there were two great forces in human nature. He said there was self-interest and caring for others, which I would tend to agree with that, and he said that corporations needed to do a better job lifting the poor from poverty and solving other types of problems, malaria and water and all of these different things. He coined this term, creative capitalism, and I was thinking the whole time, Ed, wait a minute, I thought capitalism was creative.
Ed Kless: Absolutely. I can say yet another redundant term. I hate to be redundant again but yes. By definition, that's what companies, corporations, entrepreneurs do. Let me state this. At least originally, right? Every organization goes into business with a thought process behind it about what is it that I can do that helps someone else? In helping someone else, yes, I'm going to get paid for that, but because I can do it for them better than they can do it, it's a win-win situation, and we've talked about this on a number of shows, but I think today we're going to really clarify in our listeners' minds in a lot of ways why we even call this show The Soul of Enterprise because both of us in our heart of hearts really believe that it's the purpose of corporations to do good by definition, and the fact that they give to charity, that's even better in certain circumstances, and we'll talk about the specifics of that, but just being in business and being sustainable, and that's really the new buzzword, right, Ron? Sustainability.
Ron Baker: Absolutely.
Ed Kless: As an ongoing concern benefits society by definition because both sides in a transaction benefit. Now, we're not talking about rent-seeking and businesses that do things that are surreptitious in some way, and there are clearly some that do that, but the overwhelming majority of businesses do good. They do good.
Ron Baker: You know, Ed, do you think some of this, not to pull back too far in this, but do you think some of this is because capitalism or as Dierdre McCloskey would say, what is it? Market-tested innovation and s-
Ed Kless: Market-tested innovation and supply, yes.
Ron Baker: And supply. Thank you.
Ed Kless: Yep.
Ron Baker: That's mouthful.
Ed Kless: Yeah, but dead on accurate.
Ron Baker: It is, it is, but do you think, whether you call it capitalism or the other one, do you think it's because it's kind of a counterintuitive system? Nobody marches in the streets for capitalism. People put on Che Guevara T-shirts and march for socialism and social justice and all of this, but who sits around and marches for capitalism? You know the old joke about this is why libertarians don't do street marches; they all end up in the bookstores. There is no good theory. Capitalism doesn't sound too good in theory, but it works really well in practice, and socialism and communism is just kind of the opposite.
Ed Kless: Right, right, where it works in theory, just not in practice. Yeah. I think there is. I think capitalism has gotten a bad name, and in a lot of ways it is spurred on more recently by things that the pope is saying about capitalism. What I found interesting is there was a poll this week done about religious affiliation and whether or not you are for big government, small government by the Pew Institute, and one of the things that they point out is that is that the Hispanic population in the United States tends to be more about big government whereas everyone else including, and this was, by the way, specifically about Catholics. They were the only group of Catholics that overwhelmingly favored bigger government.
Ron Baker: Yes.
Ed Kless: I think that this has to do with the origins and history of the way "capitalism" has worked in Latin America because it has never really been what you and I are using the [heuristic 04:58] for is shorthand, capitalism. It's never really been that. It's always been cronyism, and I think that the current pontiff is subject to that misinterpretation, to be honest with you.
Ron Baker: Yeah, no. I think you're exactly right. In fact, crony capitalism is a contradiction in terms. Capitalism isn't about cronyism, so I like John Stossel's term. It should be called crapitalism.
Ed Kless: I think handy capitalism was another one. I like that one, too.
Ron Baker: Right. You know this corporate social responsibility, I have to tell you I've been reading this book, or rereading it because I actually read it a while ago, and it's called Creative Capitalism. It's edited by Michael Kinsley who is a journalist at Slate, the online magazine, which I think at one time or maybe still is owned by Microsoft.
Ed Kless: Yeah, it was definitely spawned off by Microsoft.
Ron Baker: Right, and at one point I think Michael Kinsley was the narrator on the William F. Buckley show, Firing Line. Another conservative likes to call him the present-day Eleanor Roosevelt, but I don't want to get too personal. Anyway, he edited this book called creative capitalism and, folks, as you know, we'll put all of the books we mention on our show notes, and it's a compendium of essays and contributions from different thinkers, people like Ricard Posner; Warren Buffett; Bill Gates himself, of course; Larry Summers; Steven Landsburg, the economist that we enjoy so much, and it really looks at all sides of this corporate responsibility, social responsibility issue, and one thing I found interesting, Ed, was Robert Reich, former labor secretary under Clinton, he said CSR, and let's just call it CSR from now on. That stands for corporate social responsibility. He said it's as meaningful as cotton candy. Even somebody you would think would be for it ideologically said this is a completely ridiculous term.
Now, he may have different reasons, but I think if you talk about this issue, like you said, you have to understand that corporations are here to serve others and mostly strangers for the most part and to do well. They don't start out with pernicious intent, and one of the essays that your ideas that you have to confront when talking about this is Milton Friedman's famous September 1970 article that he wrote in the New York Times Magazine called The Social Responsibility of Business is to Increase Profits. In the book, of course, all the people on the left took this to task and said well, that's not really the goal and that can lead to chaos and all of this stuff, but Friedman's point was a company has to earn a decent return for its shareholders. It's got a fiduciary duty to do so, but it also has to do things under a legal and ethical framework. It was an obligation. It was an actual and ethical obligation that they had to increase their profits because fact of the matter is people that work for corporations are agents, and the shareholders actually own the corporation, and you can't just go spend their money. That was kind of one of his points. You work in a public corporation, Ed, so this has got to be true for you.
Ed Kless: No, absolutely. We're stewards of the shareholder money, and we have to take that into account in the decisions that we make. We have a fiduciary responsibility to do so. That's critically important. It's a tough situation because I think why this gets such play is because, as you said, it sounds so right. It's like motherhood and apple pie. Of course, we're going to be corporately responsible, socially responsible. Of course, we're going to separate out our white paper from the other paper and recycle and do all of these good things, but in many cases these things are just things that we would naturally do in business and we put a label on it and throw it into this lump thing called corporate social responsibility, I guess, to make us all feel better about it. I don't know. I feel pretty good about what I do for Sage. I feel pretty good about what Sage does for the world by creating greater freedom for people to succeed by putting good software out.
Ron Baker: Absolutely. Yeah. It's a really good point. The other thing that Friedman pointed out was that because it's not the agent's money who work for the corporation, it's the shareholder's money, he said if you go out and do the business right and innovate and take care of your customers which, by the way, is no given. Let's face it. Most businesses don't make a profit, so we can come back to that, but he said then what you're doing is you're enhancing your dividends or maybe their capital gains, and then they can take the money and give to the charity of their choosing. It's very important here to point out that both you and I, Ed, I think, and certainly Milton Friedman in this article are not anti-charity. That's not what we're arguing. Friedman's arguing that a public corporation doesn't have the right to spend the shareholders' money without some type of prior consent. We can talk about the exceptions like Whole Food, but I think that's a vital point that people love to jump over.
Ed Kless: Well, let me ask you this, Ron. What do you think about corporations making political donations?
Ron Baker: Yeah, I would say the same thing. It's not their money. Now, we can get into all the arguments about it's rent-seeking and hey, if they didn't do this the might get laws and regulations passed that would work against them and, therefore, this is an ordinary and necessary cost of doing business, but fact of the matter is these people have a fiduciary responsibility to do what's right by their shareholders whether that's, say, taxes or whatever, and it's not their money. This was the point that Friedman was making, and it's a very ethical and moral point. It's not just an economic point nor is it just an efficiency point.
Ed Kless: Right.
Ron Baker: It's an ethical argument.
Ed Kless: No, it is. It is. I think for most small businesses out there that are maybe listening to the show, they are almost one and the same, right? I want to come back to your point, though, on this is it's crucial to understand that it's not their money and whether or not that you think you're spending it in the right place is irrelevant to the question. It's not even germane. It's a moot point from the very beginning.
Ron Baker: Right.
Ed Kless: It's not your money. End of story.
Ron Baker: Absolutely, Ed, but I think you raise another interesting point. Let's talk about are they spending in the right ways. If you look at some of the corporate philanthropy that these corporations engage in, it's for the symphony, it's for the museums, art museums, this isn't really lifting the poor out of poverty or solving the world's problems, right? This is really benefiting the people in the middle or the people in the upper tiers, so you can get into what are they spending on, and it should be a personal choice of the shareholders, not the individual managers that work in the corporation.
Ed Kless: Yes, and we're clearly not against that. Now, I think the point being is that unless the purpose or intent of the corporation that you're founding is to do some of this stuff, right? You're not talking about not-for-profits. You're not talking about ... or, as you said, Whole Foods that say no, no, no, no. It's part of our foundational documents to give X percent to charity or to do certain things within the community or to use the fair trades-type stuff because it's in their founding documents.
We're back, and today we're talking about corporate social responsibility or, as the new buzzword calls it, sustainability. Ron and I have talked about a famous essay by milton Friedman in which the basic thesis is hey, the corporations can't do a lot of this stuff or shouldn't do a lot of this stuff because, let's face it, it's not their money. It's not really just us and Milton Friedman saying this, right, Ron? There's a famous case in history going back to Henry Ford and the Dodge brothers in the early 1900s, right?
Ron Baker: Yeah. It's actually from the Michigan Supreme Court. Dodge actually was a shareholder in Ford when it was a public company. Ed, this would have been in the 1910s, 1919, so the whole Taylorism era of increasing efficiency in the factory and all of this, and it's pretty well-known that Ford was selling a lot of Model T's during this time making a lot of profit. Well, Henry Ford decided to take that profit and do three things with it.
First off, he paid his laborers $5 a day, and that was a substantial raise for the time, so he had a line of people that were willing and able to work for him. He also cut the price of his cars, so he gave some of the money to his workers, he gave some of the money to his customers, obviously, in the form of lower prices, and he also took the profits and reinvested and built his bigger plants, and he also was trying to vertically and horizontally integrate the whole production chain of building his cars. Dodge said hey, Henry, this is all great, but it's not your money, pal. He took him to court, and the Michigan Supreme Court ruled, I believe in 1919, that Dodge was right, and they forced Henry Ford to pay a dividend. I think Ford got so pissed off he took his company private again.
Ed Kless: Yep. Yeah, there was something on the History Channel about this where he went through and through all of this because he really also wanted to build a brand new plant, and he didn't want them to benefit from that, either, so there was this whole big story about how he had to buy all of the shares back in this other name or through his kids or something like that but, yes, it's a really interesting thing about that. When you think about it, Ron, the corporate taxes are trying to do really the same thing that Henry Ford was trying to do, only in reverse, right? Corporate taxes in a sense take away from two big constituencies, the obvious ones being employees, and the next one being the customers because you and I have known thousands, tens of thousands of businesses. All of them manage the tax line just like another expense.
Ron Baker: Absolutely.
Ed Kless: And that they try to minimize it. When I was hiring people, we would never figure what just their salary was. We were always thinking okay, fully-burdened employee, and we would multiply it. What was going to be their salary times sometimes 1.5 or 1.7 just so that we knew what was this going to cost us from a fully-burdened employee standpoint and took other factors into case, but one of the factors that was included in the 0.7 was taxes, right?
Ron Baker: Right.
Ed Kless: Look, this is, I think, beyond reproach, this idea that corporate taxes, the place that it's paid for most is wages of employees and in passed-on cost to customers. Even the folks on the left, not just the Heritage Foundation but I can't think of-
Ron Baker: Brookings?
Ed Kless: Brookings Institute.
Ron Baker: Brookings.
Ed Kless: Brookings Istitute says this is unequivocal that this is the case.
Ron Baker: Yeah, the incidence of taxation. Let's face it, Ed. Corporations don't pay taxes. They collect them. This is so poorly understood. I think this is really even poorly understood in my recovering profession of CPAs. Corporations don't pay taxes. There's nobody here but us people. I wish my car paid my automobile tax. Unfortunately, I do. Buildings don't pay taxes, either. We can call these things whatever we want, but they all fall on individual people and, as you say, it's either coming out of the consumers' pocket in form of higher prices, coming out of the laborers' pocket in terms of lower wages, or it's coming in reduced returns to investors and shareholders, and there's pretty good consensus among economists about 70, 80% of it is coming out of the hide of workers. We do have the highest corporate income tax rate in the world.
Ed Kless: Which leads us to a conversation that I think is very germane to today's topic, and that is the Burger King's acquisition of Tim Hortons in Canada, and the "tax inversion" that they're doing. I know we both have lots of thoughts on that, but first, if you wouldn't mind, what do you think about the whole idea of this tax inversion thing and the bad press they're getting? It sounds to me the way that you read the stories, it sounds like they're avoiding any and all tax whenever you read something.
Ron Baker: Which is pure nonsense because Burger King is still going to pay corporate income tax from the dollars it earns in the United States of America. It's not going to have to pay on worldwide sales. It can avoid some of that, not all of it, so these inversions are being done because of high income tax rates. On the one hand, the government likes to point at these companies, call them traitors, Benedict Arnolds. On the other hand, they write the very policies that provide the incentive to do this. Again, these people are fiduciaries for the shareholders' money, and they have an obligation to lower their tax bill.
Ed Kless: Wouldn't they be in some cases, you could argue that the SEC could get after them for not lowering their tax burden because they're not being fiduciarily responsible?
Ron Baker: Absolutely, or the shareholders could bring a class action suit against them. I mean, there's a lot of liability here. There's a great article in The Economist, Ed, on government punishing corporations and criminalizing their behavior. This is from the August 30th - September 5th issue of The Economist. It's the cover story, and it's called The Criminalisation of American Businesses. In the early '90s, there were 300 thousand laws and regulations that could produce criminal liability for a corporation or the employees thereof, and that number has got to be an underestimate by today's standards. Three hundred thousand.
Ed Kless: Wow. Wow.
Ron Baker: It's pretty remarkable, so when you see these inversion things, and this is the seventh time, I think, that they're saying seven times the lucky one for Burger King; it's their seventh owner, but I find it funny that Mr. Buffett who calls for higher corporate taxes and higher personal taxes on the wealthy is involved in this deal, even though I guess he says publicly he's against it, but he's dumping some big bucks into it.
Ed Kless: Well, yeah. Well, I don't know that he's ever said that he was against or for higher corporate taxes. I don't know if I've ever heard him say that. I certainly think that he has made the point that he and his secretary shouldn't have, or he shouldn't pay less as a percentage basis than his secretary.
Ron Baker: Correct.
Ed Kless: Now, I think that he's then made the argument for higher taxation on him as an individual to which point I usually just say listen, Mr. Buffett, why don't you just go make a one-time payment to the treasury, which anyone can do if you go to, I think it's treasury.gov/pay or something. They will let you do a payment to pay down the national debt.
Ron Baker: Absolutely. You're right.
Ed Kless: Log on. Log on and make your dang payment.
Ron Baker: Your voluntary contribution.
Ed Kless: Your voluntary contribution. Go for it, and nobody's going to stop you and, oh, by the way, if you really think that government does a better job of spending this money, why do you have these foundations that spend your money where you want to spend it?
Ron Baker: Or give it to the other richest guy in the world and let him spend it for you.
Ed Kless: Right.
Ron Baker: Right? The Bill & Melinda Gates Foundation, which please pledge this fortune to. This kind of goes back to this whole thing, Ed, that there's some type of mutual exclusivity between socially responsible behavior and profits, and that kind of drives me crazy because, like we talked about in our ethics program, enterprise is a serious moral undertaking. It requires kindness to strangers and a whole range of virtues from prudence to risk taking to caring for others and serving others and putting their interests first.
Let's face it. No customer goes into a store to please the shop owner. They're there to shop and look for what they want, and the shop owner has to please them if he expects them to buy or come back, so this whole idea that profits are socially irresponsible, and in this book I was talking about Creative Capitalism, Warren Buffett actually calls for 3% of the corporate income tax raise to be devoted to a fund that would be administered by some representative of corporate America to be used in intelligent ways for the long-term benefit of society. I'm thinking, well, first off, who's that omniscient to know how to spend 3% of the corporate tax revenue we raise, but why does he think that corporations aren't doing this on their own?
Ed Kless: Absurd. Absolutely absurd. Well, this gets back to a point that we've made, I think, on previous shows, but it's absolutely worth repeating that really profits are an indicator of altruism, and this is from George Gilder who we're both big fans of. I've said this in front of hundreds of audiences and, I got to tell you, there's nothing that gets a rise out of most people like making that statement. Until you begin to explain it to them that look, altruism means other-centeredness, other-directedness, focused on other people, and isn't that exactly what most organizations, most companies do? They focus on other people? The other people happens to be called a customer, and you have to be focused on their needs, their wants, their desires in order for them to pay you. There's nobody going around with guns saying you must pay me for my product or I will shoot you.
Ron Baker: Right, right. We can talk about big business and how we're all beholden to big business. What nonsense. I mean, Shell Oil can't force me to buy their product any more than IBM or Apple or Microsoft or anybody else. The other thing that I find just absolutely amazing is if Bill Gates had followed his advice when he was at Microsoft, when he was leading Microsoft and founding it and doing everything he did to make it successful, he wouldn't have the Bill & Melinda Gates Foundation. What does he think created the wealth in the first place so he could give it away? I mean, it's the whole putting the cart before the horse. It's just mind-boggling to me. By the way, he was in a company that made I would call it supernormal profits, at the least. You might even say in the category of windfall profits. Most companies don't have the profits to distribute. Think of airlines. Think of grocery stores or even fast food chains. They don't have all this excess profit that they can use for these philanthropic endeavors.
Ed Kless: No, and I think that's another misnomer, too, is that all companies are making super windfall profits. That's clearly not the case, but who is to say? This gets back, and I think your point raises and interesting question for me. It gets back to Ayn Rand's concept of the sanction of the victims in that why is it that so many business people feel guilty about the work that they do and in creating wealth for not only themselves; this is the thing that I think it constantly missed, not only themselves but other people. It is a win-win, as we've demonstrated before. It is not a zero-sum game. Business is not zero sum.
Ron Baker: You know, Ed, just a final point and then we'll go to break, but capitalism is the only known vehicle, it's the only known antidote to poverty. It's lifted millions of people out of poverty, and it's the only system that ever has, period. This idea that, the Bill & Melinda Gates Foundation, sure, it's going to do a lot of good but, I'll tell you, it's not going to do a tenth of the good that Microsoft itself did.
Ed Kless: Earlier, Ron talked about Milton Friedman and a famous paper that he wrote, but we wanted to contrast that with what founder R. W. Johnson wrote in his credo in 1943 about ethical decisions that would be made by the organization Johnson & Johnson and, of course, they applied this in their famous Tylenol poisonings of 1982 and 1986, which I think ended up costing them, I don't know, 140 million or so, huge, huge number. Ron, you say they actually have this in stone outside their corporate offices. Is that right?
Ron Baker: Yeah, they do, Ed. We should probably get a picture of it and put it up, but people can go to Google and see it. The credo lays out their order of responsibility, and this is the thing that's very intriguing because I saw somebody ask Milton Friedman this. They say their first responsibility is to their doctors, nurses, hospitals, mothers, basically the customers who use their products to make products that are good, that do what they say they're going to do, efficacious, all of that. Then their second responsibility is to those who work with them, so this is their employees, right?
Ed Kless: Mm-hmm (affirmative).
Ron Baker: Their third responsibility is their management, so these are the agents, so you're putting the agents here above the principals in their chain here. Their fourth responsibility is to the communities in which they operate, be good citizen, don't pollute, but follow the laws, all of that, pay your taxes. Their fifth and last responsibility is to their stockholders. Now Milton Friedman, this credo was put in front of them, and he was asked doesn't this contradict what you say about a corporations only social responsibility is to increase profits? He said no. He said this is what I'm saying. He says if they have to do all of these things even in that order to increase their profits, then they're operating in an ethical, moral framework. They're operating within the law, they're providing goods and services that people want and desire, they're innovating. He said that's key and that's driving profit.
He said that is my argument. They're just saying it in a different way. You know, Ed, the other thing about this corporate social responsibility that Milton Friedman points out is not only is it not their money, that's one of his arguments, but he's got another argument that I think might actually be more powerful, not certainly from a moral standpoint, but from an economic standpoint. He says businesses are very focused and specialized entities. They don't know how to lift people out of poverty. They don't know how to cure malaria or other of the world's problems. They know how to make cars. They know how to make toasters. They know how to make computers or software, in your case. You can't expect them to do stuff that's outside of their knowledge zone.
Ed Kless: No, but I think at the same time it's okay for some of these companies to try to do some of these things that they perceive is good. I don't think we're arguing against that. I want to bring up another point, though, because this gets into something that you and I talk an awful lot about, and that is the difference between purpose and results, right?
Ron Baker: Yes.
Ed Kless: I think one way to think of it, and we're trying to square this circle that we've painted out here with contrasting Friedman with the Johnson credo, is the result of a business is always going to, well, not always, it should be to make a profit. That's the result, but that's not the purpose. The purpose is in the case of Sage to create greater freedom for folks to succeed. That's in our purpose. Other businesses have these purpose statements that don't talk about making profit. They talk about serving customers, and in the case of Johnson & Johnson credo they believe that their first responsibility is to doctors and others who use their products, so they must be the highest quality. That's really what their purpose is. Then what they're listing here is in order of precedent their purpose, and I think they're right in a sense that this last thing that they do but, again, it's the result of all of the other things that they do, which is to produce a profit. If they do these first four things well, then the result will be to produce a profit.
Ron Baker: Right, and look, those first four things are tough. As you know, it's tough to stay on the cutting edge of innovation and come out with new products and try and stay ahead of the market and all of that. Those are not givens. That's a lot of work in and of itself, and to be distracted by other concerns that you really don't have any expertise in, it's kind of delusional. What you said about the purpose versus the goal of a bu- Or the objective-
Ed Kless: Result.
Ron Baker: Yeah, the result of a business, I mean, Henry Ford, I think, said it very eloquently when he said business must be run at a profit else it will die, but when anyone tries to run a business solely for profit, then also the business must die, for it no longer has a reason for existence. David Packard said much the same thing. If you look at any of these great entrepreneurs, Steve Jobs, they all said this. That's not the purpose of a business, to create a profit. It's an outcome, but it's not why we exist. We exist, like Steve Jobs said, to put a dent in the world.
Ed Kless: In the universe, I think.
Ron Baker: In the universe, yeah. Yeah.
Ed Kless: Not just the world, the universe. [crosstalk 33:47].
Ron Baker: Or produce really cool things, right?
Ed Kless: Yeah, yeah.
Ron Baker: Yeah.
Ed Kless: Look, in a lot of ways there's overlap here because it turns out to be good business. I've recently become a fan of the show Selfridge, or Mr. Selfridge, I'm sorry, on PBS. I love it for a couple reasons, but the first reason is that it is finally a show on television, PBS, no less, PBS, that portrays the business owner as the good guy.
Ron Baker: That's rare. I mean, look at [crosstalk 32:19].
Ed Kless: It is rare. It is rare.
Ron Baker: Even Avatar, right? The businessman's always the evil person lurking in the background.
Ed Kless: Yeah. I have asked that question in front of audiences. Name the last movie or television show where you saw that the business person was portrayed as the good guy, and the only answer that I ever got from a friend of ours, Robert Wood, was Batman, which Bruce Wayne is the good guy but, of course, he's a vigilante good guy, but he's a good guy.
Ron Baker: He's good. Even our beloved Simpsons has Burns, right?
Ed Kless: Evil Mr. Burns. Right.
Ron Baker: [crosstalk 32:52], yeah.
Ed Kless: Right, but Selfridge is perceived, I mean he's got peccadilloes and all kinds of stuff. He's not portrayed as a saint, but from a business context he's portrayed as the good guy, and this past, I guess they call them seasons or series because it's a BBC show, in series two, and I don't want to spoil too much. I won't give away the details of the show, but there's a scene where some of the union guys are trying to get the employees at Selfridges to join their union. They end up showing up at this meeting hall place, and they're rallying them up.
The guys from Selfridges says well, what are you going to do for us? He says well, I'm going to make sure that you get paid overtime for working, I think it was more than 50 hours a week. I'm going to make sure that you have healthcare provided to you, and I'm going to make sure that your widows are compensated for, and all of this stuff that he goes through this litany of things, and the guys are standing around that are working from Selfridges, and he goes well, we already have that. Selfridge in order to hire and retain some of the best workers, and they point this out in the show, Mr. Selfridge has dentists come in once a week, and anyone that's having a problem with their teeth we just go see the dentist right there on site.
Ron Baker: It sounds like Google. It sounds like Google, right? Take a nap and dry cleaning and a whole list of stuff.
Ed Kless: Exactly because he recognized that in order to keep the best talent, he went above and beyond but, again, he's famous for being the customer is first. It was the customer first and then, well, I think he really put his employees first even though he said it was the customer first, and there's just evidence of that over and over again in his thinking that it was really the employees and customers. Again, this idea of being altruistic, of other-centered, other-directed outside of themselves, right? It's not focused on internal profit. It's not just me, me, me, me.
Ron Baker: Right. Absolutely. Larry Summers in this book, Creative Capitalism, made a very good point. He said okay, you want to talk about creative capitalism or CSR, however you want to term it, he says I've got a wonderful creative capitalist idea. He says promoting homeownership is a great thing, right? People have a stake in the economy. They have a stake and they're going to take care of their home. They're going to build equity. They're going to become responsible citizens and all of that. He said so we should promote homeownership, so let's create government-sponsored enterprises to help do this. This is a great CSR type of undertaking, and they produced Fannie and Freddie Mac.
Ed Kless: Hmm. I wonder where this story's going.
Ron Baker: Yeah. Wow. Ed, this was from Larry Summers, the former president of Harvard and Clinton and even Obama's chief economic advisor, no man of the right, I might add. He really took this concept of creative capitalism to task. He said this is ludicrous because this is the kind of thing or we could talk about Solyndra or these other rent-seeking types of behaviors that the governments and corporations can engage in. This is what's known in the field as pernicious CSR. When companies lobby for tariffs or quotas against foreign goods because none of us like competition in whatever it is we're selling. Or if they go after if they sell fair trade coffee or something like that. These are all things that are pernicious. Steven Landsburg pointed out the best thing Nike can do for underdeveloped countries like Africa or anywhere else, he said, is not to sell them sneakers at a low price. It's to make them productive to produce sneakers for the rich world that will actually carry them out of poverty, and that's a really good point.
Ed Kless: Yeah, and people get crazed over this, the whole Apple, what is it? Foxconn challenge that was laid down. Look, I'm not suggesting that it's a good thing if there are armed guards outside a factory trying to keep people in that that's a good thing. I'm a libertarian. That's absolutely incorrect. That's wrong, but in many cases some of the folks who are working in these factories, the alternative was standing in a rice field for hours upon end, right?
Ron Baker: Yep. Exactly.
Ed Kless: I think it was Professor McCloskey brought this up, let's take a look at how many people have been uplifted out of bone-crunching poverty, abject, nasty, brutish, and short life in the last 30 years.
Ron Baker: Yep. Even, Ed, in the last 10 or 20 we've lifted almost 800 million or close to 900 million, I think it is, out of dire poverty mostly in India and China but in other places, as well. There's only one thing that did that, and it's called capitalism. That's it. That's it. That's the only antidote to this poverty, so to say that this isn't socially responsible. Michael Novak in his wonderful book called Business as a Calling argues that the moral of capitalism, why it's a moral system is because it's the only thing that cures poverty. THat's a point that's often overlooked.
Ed Kless: Amen.
Ron Baker: Just to wrap up Ed, I would have to vote after exploring this issue with you and just on my own and the reading I've done, I would say CSR, even this whole sustainability movement, if you want to call it that, or the triple bottom line, there's all sorts of names for it, I really do think it's more PR than progress. If the world wants progress to fight poverty, then it needs more capitalism, not more CSR.
Ed Kless: Yeah. Amen, brother. I definitely think that that's the case, and it's unfortunate, too, because I think what has happened is the "marketers" have gotten a hold of this and turned it into something that it really is not intended to be. In any case, it's supposed to be authentic, and it's not. I did want to mention one last thing on this. I was at our conference Sage Summit this past year. Biz Stone, the founder of Twitter, talked about one potential marketing strategy, and it was a marketing strategy in this, and I think it goes to your point. He said if you got $4 million to spend on marketing, maybe you should give away 3 million of it to a charity and spend the other million talking about what you did. I don't know whether that is the most blatant example of this being "marketing" or potentially the most brilliant example of where you could make it work.
Ron Baker: It certainly doesn't fit in with the concept of compassionate charity. We do charity because we want to do it, right? Not because of the PR it's going to get us and the accolades. The best charity I know of is anonymous.
Ed Kless: Mm-hmm (affirmative). Yep, yep.
Ron Baker: Right?
Ed Kless: Yep.
Ron Baker: The people that give the most don't talk about it.
Ed Kless: Nope. As Peter Block puts it, once you professionalize care it ceases to be care.
Ron Baker: Absolutely. You can't professionalize compassion, at least not in that way. I think it's PR, but certainly it's a debate that will continue. There's a great article on sustainability in the recent Economist, as well, in the same issue, and they basically say this is the wrong word. These are efficiency things, recycling, knocking out waste, saving energy. This isn't anything to do with sustainability, which can't even be defined. It's more just about increasing efficiency, which corporations already have an automatic built-in incentive to do anyway.
Ed Kless: Yep. True, true. We got an e-mail this week, Ron.
Ron Baker: We did, Ed, from Tim Rodman. This comes from us on, I think he wrote last week sometime. He said Ron and Ed, I recently started listening to your show. He said so far I'm up to Appraisal Agony. Tim, we hope you enjoy that one. We had a lot of fun doing it. He wrote to me that he was happy to learn on the show that I started in accounting, as well, but have successfully transitioned out of the department where all good ideas go to die. Tim started in accounting, too. He was an auditor at Deloitte and, of course, I worked at KPMG. But he asks us this question, Ed, and it's very, very thought-provoking.
He says, "Ron and Ed, maybe you can cover this in a future show, but I'm curious to hear your thoughts on personal branding in the professional arenas like blogs, Twitter, and LinkedIn. Are consumers really more likely to buy from a person than an organization? What should motivate someone to spend time cultivating a brand around their own name?" Ed, I think that's an interesting question because you're certainly out there on social media and you've quite a big following on your blog and you're considered a thought leader in your field.
Ed Kless: I prefer the term knowledge badass.
Ron Baker: Badass, okay. Agree. I hate the term thought leader, as well, but, heck, you're even a thought leader in my former profession. In the CPA world, you're somebody that's held up in high regard. I've written some books and, yeah, I've made top 100 people list, all of this type of thing, but I never set out to do that. I guess my model has always been Peter Drucker or George Gilder. You just study something and you write about it or your speak about it, you're passionate about it, and people that are attracted to your viewpoint will follow you, and I do think in that way you can build up, what do you want to call it? A personal brand or a reputation or a following. That's kind of how I did it. I didn't set out to brand myself.
Ed Kless: Right. I think this could be a whole 'nother show, and maybe we'll have our friend Tim Williams on when we talk about the difference between a brand and reputation, and I think that's probably what Tim Rodman means on this, this idea of reputation. I'm a big believer in it. I have done it and, like you said, I didn't set out to do it. Anything that I've done in the personal branding space has been completely almost on accident. It's just because I wanted to do it. I started my block not because I thought other people would read it but because I needed an outlet for myself, and what I found is that blogging made me a better public speaker because when you're writing something you have to write and be succinct about it and make sure that you're conveying the concept for someone who's only going to read this once.
When you're speaking, as you know, Ron, if somebody looks at you quizzically you can just try to explain it a different way. One thing enhanced the next. Then once I had a blog set up and then Twitter came along, and I said oh, I connect these two things together and I connect it to Facebook and all of this stuff, so it really hasn't been a plan, but in the end that's what it's done. It's created my personal brand. Our friend and colleague at VeraSage, Michelle Golden, has a great analogy that she uses to do this. It's a rock star-type thing, right, Ron?
Ron Baker: Yes, yes. Doesn't she say like a radio station or a record label, they have talent. They have rock stars, and there might be a whole bunch of different ones, but just like a radio station has on-air talent and just like companies are going to have rock stars in their ranks like you, Ed, are at Sage.
Ed Kless: Yeah. The brands of the company are then perceived as smart for signing that particular act, right?
Ron Baker: Right.
Ed Kless: Columbia Records was smart for signing, I don't know, I think Billy Joel and Bruce Springsteen were both on Columbia, right?
Ron Baker: Right.
Ed Kless: They were smart to do that. I guess if you get big enough, you do become your own brand like the Beatles had to do Apple Records, but then they signed other talent, right?
Ron Baker: Sure.
Ed Kless: Once they got rolling on it.
Ron Baker: Like Oprah and Martha Stewart. They're all brands. The other thing, too, Ed, I think it feeds on itself, doesn't it? It starts to spiral upwards once you start blogging and speaking and all these things. It all does come together in this confluence of more influence, and that certainly happened to me when I became a LinkedIn influencer. I think the there really key point about this, too, is I've always felt that it's really important to give your intellectual capital away because if I give it away either through books or on this radio show or in other formats, then I've got to replenish it and it keeps me at the cutting edge, or at least I try and stay at the cutting edge of events. I can only do that if I give it away.
Ed Kless: Right, as opposed to try to just hold on to it. Yeah, for a long time people were very concerned that I would give away my PowerPoints, not as just PDF files but as actual PowerPoint. No, here's the whole PowerPoint presentation. People were like woah, they'll just take your stuff. I'd say well, they can't deliver it the way I do.
Ron Baker: That's right. They're not Ed. Your kind of a monopoly, but I do think people hire people inside companies, not the organizations themselves, at least in the professional arena but, Ed ...
Ed Kless: It's not your money. End of story.
Ron Baker: Absolutely, Ed, but I think you raise another interesting point. Let's talk about are they spending in the right ways. If you look at some of the corporate philanthropy that these corporations engage in, it's for the symphony, it's for the museums, art museums, this isn't really lifting the poor out of poverty or solving the world's problems, right? This is really benefiting the people in the middle or the people in the upper tiers, so you can get into what are they spending on, and it should be a personal choice of the shareholders, not the individual managers that work in the corporation.
Ed Kless: Yes, and we're clearly not against that. Now, I think the point being is that unless the purpose or intent of the corporation that you're founding is to do some of this stuff, right? You're not talking about not-for-profits. You're not talking about ... or, as you said, Whole Foods that say no, no, no, no. It's part of our foundational documents to give X percent to charity or to do certain things within the community or to use the fair trades-type stuff because it's in their founding documents.
We're back, and today we're talking about corporate social responsibility or, as the new buzzword calls it, sustainability. Ron and I have talked about a famous essay by milton Friedman in which the basic thesis is hey, the corporations can't do a lot of this stuff or shouldn't do a lot of this stuff because, let's face it, it's not their money. It's not really just us and Milton Friedman saying this, right, Ron? There's a famous case in history going back to Henry Ford and the Dodge brothers in the early 1900s, right?
Ron Baker: Yeah. It's actually from the Michigan Supreme Court. Dodge actually was a shareholder in Ford when it was a public company. Ed, this would have been in the 1910s, 1919, so the whole Taylorism era of increasing efficiency in the factory and all of this, and it's pretty well-known that Ford was selling a lot of Model T's during this time making a lot of profit. Well, Henry Ford decided to take that profit and do three things with it.
First off, he paid his laborers $5 a day, and that was a substantial raise for the time, so he had a line of people that were willing and able to work for him. He also cut the price of his cars, so he gave some of the money to his workers, he gave some of the money to his customers, obviously, in the form of lower prices, and he also took the profits and reinvested and built his bigger plants, and he also was trying to vertically and horizontally integrate the whole production chain of building his cars. Dodge said hey, Henry, this is all great, but it's not your money, pal. He took him to court, and the Michigan Supreme Court ruled, I believe in 1919, that Dodge was right, and they forced Henry Ford to pay a dividend. I think Ford got so pissed off he took his company private again.
Ed Kless: Yep. Yeah, there was something on the History Channel about this where he went through and through all of this because he really also wanted to build a brand new plant, and he didn't want them to benefit from that, either, so there was this whole big story about how he had to buy all of the shares back in this other name or through his kids or something like that but, yes, it's a really interesting thing about that. When you think about it, Ron, the corporate taxes are trying to do really the same thing that Henry Ford was trying to do, only in reverse, right? Corporate taxes in a sense take away from two big constituencies, the obvious ones being employees, and the next one being the customers because you and I have known thousands, tens of thousands of businesses. All of them manage the tax line just like another expense.
Ron Baker: Absolutely.
Ed Kless: And that they try to minimize it. When I was hiring people, we would never figure what just their salary was. We were always thinking okay, fully-burdened employee, and we would multiply it. What was going to be their salary times sometimes 1.5 or 1.7 just so that we knew what was this going to cost us from a fully-burdened employee standpoint and took other factors into case, but one of the factors that was included in the 0.7 was taxes, right?
Ron Baker: Right.
Ed Kless: Look, this is, I think, beyond reproach, this idea that corporate taxes, the place that it's paid for most is wages of employees and in passed-on cost to customers. Even the folks on the left, not just the Heritage Foundation but I can't think of-
Ron Baker: Brookings
Ed Kless: Brookings Institute.
Ron Baker: Brookings.
Ed Kless: Brookings Istitute says this is unequivocal that this is the case.
Ron Baker: Yeah, the incidence of taxation. Let's face it, Ed. Corporations don't pay taxes. They collect them. This is so poorly understood. I think this is really even poorly understood in my recovering profession of CPAs. Corporations don't pay taxes. There's nobody here but us people. I wish my car paid my automobile tax. Unfortunately, I do. Buildings don't pay taxes, either. We can call these things whatever we want, but they all fall on individual people and, as you say, it's either coming out of the consumers' pocket in form of higher prices, coming out of the laborers' pocket in terms of lower wages, or it's coming in reduced returns to investors and shareholders, and there's pretty good consensus among economists about 70, 80% of it is coming out of the hide of workers. We do have the highest corporate income tax rate in the world.
Ed Kless: Which leads us to a conversation that I think is very germane to today's topic, and that is the Burger King's acquisition of Tim Hortons in Canada, and the "tax inversion" that they're doing. I know we both have lots of thoughts on that, but first, if you wouldn't mind, what do you think about the whole idea of this tax inversion thing and the bad press they're getting? It sounds to me the way that you read the stories, it sounds like they're avoiding any and all tax whenever you read something.
Ron Baker: Which is pure nonsense because Burger King is still going to pay corporate income tax from the dollars it earns in the United States of America. It's not going to have to pay on worldwide sales. It can avoid some of that, not all of it, so these inversions are being done because of high income tax rates. On the one hand, the government likes to point at these companies, call them traitors, Benedict Arnolds. On the other hand, they write the very policies that provide the incentive to do this. Again, these people are fiduciaries for the shareholders' money, and they have an obligation to lower their tax bill.
Ed Kless: Wouldn't they be in some cases, you could argue that the SEC could get after them for not lowering their tax burden because they're not being fiduciarily responsible?
Ron Baker: Absolutely, or the shareholders could bring a class action suit against them. I mean, there's a lot of liability here. There's a great article in The Economist, Ed, on government punishing corporations and criminalizing their behavior. This is from the August 30th - September 5th issue of The Economist. It's the cover story, and it's called The Criminalisation of American Businesses. In the early '90s, there were 300 thousand laws and regulations that could produce criminal liability for a corporation or the employees thereof, and that number has got to be an underestimate by today's standards. Three hundred thousand.
Ed Kless: Wow. Wow.
Ron Baker: It's pretty remarkable, so when you see these inversion things, and this is the seventh time, I think, that they're saying seven times the lucky one for Burger King; it's their seventh owner, but I find it funny that Mr. Buffett who calls for higher corporate taxes and higher personal taxes on the wealthy is involved in this deal, even though I guess he says publicly he's against it, but he's dumping some big bucks into it.
Ed Kless: Well, yeah. Well, I don't know that he's ever said that he was against or for higher corporate taxes. I don't know if I've ever heard him say that. I certainly think that he has made the point that he and his secretary shouldn't have, or he shouldn't pay less as a percentage basis than his secretary.
Ron Baker: Correct.
Ed Kless: Now, I think that he's then made the argument for higher taxation on him as an individual to which point I usually just say listen, Mr. Buffett, why don't you just go make a one-time payment to the treasury, which anyone can do if you go to, I think it's treasury.gov/pay or something. They will let you do a payment to pay down the national debt.
Ron Baker: Absolutely. You're right.
Ed Kless: Log on. Log on and make your dang payment.
Ron Baker: Your voluntary contribution.
Ed Kless: Your voluntary contribution. Go for it, and nobody's going to stop you and, oh, by the way, if you really think that government does a better job of spending this money, why do you have these foundations that spend your money where you want to spend it?
Ron Baker: Or give it to the other richest guy in the world and let him spend it for you.
Ed Kless: Right.
Ron Baker: Right? The Bill & Melinda Gates Founda-, which please pledge this fortune to. This kind of goes back to this whole thing, Ed, that there's some type of mutual exclusivity between socially responsible behavior and profits, and that kind of drives me crazy because, like we talked about in our ethics program, enterprise is a serious moral undertaking. It requires kindness to strangers and a whole range of virtues from prudence to risk taking to caring for others and serving others and putting their interests first.
Let's face it. No customer goes into a store to please the shop owner. They're there to shop and look for what they want, and the shop owner has to please them if he expects them to buy or come back, so this whole idea that profits are socially irresponsible, and in this book I was talking about Creative Capitalism, Warren Buffett actually calls for 3% of the corporate income tax raise to be devoted to a fund that would be administered by some representative of corporate America to be used in intelligent ways for the long-term benefit of society. I'm thinking, well, first off, who's that omniscient to know how to spend 3% of the corporate tax revenue we raise, but why does he think that corporations aren't doing this on their own?
Ed Kless: Absurd. Absolutely absurd. Well, this gets back to a point that we've made, I think, on previous shows, but it's absolutely worth repeating that really profits are an indicator of altruism, and this is from George Gilder who we're both big fans of. I've said this in front of hundreds of audiences and, I got to tell you, there's nothing that gets a rise out of most people like making that statement. Until you begin to explain it to them that look, altruism means other-centeredness, other-directedness, focused on other people, and isn't that exactly what most organizations, most companies do? They focus on other people? The other people happens to be called a customer, and you have to be focused on their needs, their wants, their desires in order for them to pay you. There's nobody going around with guns saying you must pay me for my product or I will shoot you.
Ron Baker: Right, right. We can talk about big business and how we're all beholden to big business. What nonsense. I mean, Shell Oil can't force me to buy their product any more than IBM or Apple or Microsoft or anybody else. The other thing that I find just absolutely amazing is if Bill Gates had followed his advice when he was at Microsoft, when he was leading Microsoft and founding it and doing everything he did to make it successful, he wouldn't have the Bill & Melinda Gates Foundation. What does he think created the wealth in the first place so he could give it away? I mean, it's the whole putting the cart before the horse. It's just mind-boggling to me. By the way, he was in a company that made I would call it supernormal profits, at the least. You might even say in the category of windfall profits. Most companies don't have the profits to distribute. Think of airlines. Think of grocery stores or even fast food chains. They don't have all this excess profit that they can use for these philanthropic endeavors.
Ed Kless: No, and I think that's another misnomer, too, is that all companies are making super windfall profits. That's clearly not the case, but who is to say? This gets back, and I think your point raises and interesting question for me. It gets back to Ayn Rand's concept of the sanction of the victims in that why is it that so many business people feel guilty about the work that they do and in creating wealth for not only themselves; this is the thing that I think it constantly missed, not only themselves but other people. It is a win-win, as we've demonstrated before. It is not a zero-sum game. Business is not zero sum.
Ron Baker: You know, Ed, just a final point and then we'll go to break, but capitalism is the only known vehicle, it's the only known antidote to poverty. It's lifted millions of people out of poverty, and it's the only system that ever has, period. This idea that, the Bill & Melinda Gates Foundation, sure, it's going to do a lot of good but, I'll tell you, it's not going to do a tenth of the good that Microsoft itself did.
Ed Kless: Earlier, Ron talked about Milton Friedman and a famous paper that he wrote, but we wanted to contrast that with what founder R. W. Johnson wrote in his credo in 1943 about ethical decisions that would be made by the organization Johnson & Johnson and, of course, they applied this in their famous Tylenol poisonings of 1982 and 1986, which I think ended up costing them, I don't know, 140 million or so, huge, huge number. Ron, you say they actually have this in stone outside their corporate offices. Is that right?
Ron Baker: Yeah, they do, Ed. We should probably get a picture of it and put it up, but people can go to Google and see it. The credo lays out their order of responsibility, and this is the thing that's very intriguing because I saw somebody ask Milton Friedman this. They say their first responsibility is to their doctors, nurses, hospitals, mothers, basically the customers who use their products to make products that are good, that do what they say they're going to do, efficacious, all of that. Then their second responsibility is to those who work with them, so this is their employees, right?
Ed Kless: Mm-hmm (affirmative).
Ron Baker: Their third responsibility is their management, so these are the agents, so you're putting the agents here above the principals in their chain here. Their fourth responsibility is to the communities in which they operate, be good citizen, don't pollute, but follow the laws, all of that, pay your taxes. Their fifth and last responsibility is to their stockholders. Now Milton Friedman, this credo was put in front of them, and he was asked doesn't this contradict what you say about a corporations only social responsibility is to increase profits? He said no. He said this is what I'm saying. He says if they have to do all of these things even in that order to increase their profits, then they're operating in an ethical, moral framework. They're operating within the law, they're providing goods and services that people want and desire, they're innovating. He said that's key and that's driving profit.
He said that is my argument. They're just saying it in a different way. You know, Ed, the other thing about this corporate social responsibility that Milton Friedman points out is not only is it not their money, that's one of his arguments, but he's got another argument that I think might actually be more powerful, not certainly from a moral standpoint, but from an economic standpoint. He says businesses are very focused and specialized entities. They don't know how to lift people out of poverty. They don't know how to cure malaria or other of the world's problems. They know how to make cars. They know how to make toasters. They know how to make computers or software, in your case. You can't expect them to do stuff that's outside of their knowledge zone.
Ed Kless: No, but I think at the same time it's okay for some of these companies to try to do some of these things that they perceive is good. I don't think we're arguing against that. I want to bring up another point, though, because this gets into something that you and I talk an awful lot about, and that is the difference between purpose and results, right?
Ron Baker: Yes.
Ed Kless: I think one way to think of it, and we're trying to square this circle that we've painted out here with contrasting Friedman with the Johnson credo, is the result of a business is always going to, well, not always, it should be to make a profit. That's the result, but that's not the purpose. The purpose is in the case of Sage to create greater freedom for folks to succeed. That's in our purpose. Other businesses have these purpose statements that don't talk about making profit. They talk about serving customers, and in the case of Johnson & Johnson credo they believe that their first responsibility is to doctors and others who use their products, so they must be the highest quality. That's really what their purpose is. Then what they're listing here is in order of precedent their purpose, and I think they're right in a sense that this last thing that they do but, again, it's the result of all of the other things that they do, which is to produce a profit. If they do these first four things well, then the result will be to produce a profit.
Ron Baker: Right, and look, those first four things are tough. As you know, it's tough to stay on the cutting edge of innovation and come out with new products and try and stay ahead of the market and all of that. Those are not givens. That's a lot of work in and of itself, and to be distracted by other concerns that you really don't have any expertise in, it's kind of delusional. What you said about the purpose versus the goal of a bu- Or the objective-
Ed Kless: Result.
Ron Baker: Yeah, the result of a business, I mean, Henry Ford, I think, said it very eloquently when he said business must be run at a profit else it will die, but when anyone tries to run a business solely for profit, then also the business must die, for it no longer has a reason for existence. David Packard said much the same thing. If you look at any of these great entrepreneurs, Steve Jobs, they all said this. That's not the purpose of a business, to create a profit. It's an outcome, but it's not why we exist. We exist, like Steve Jobs said, to put a dent in the world.
Ed Kless: In the universe, I think.
Ron Baker: In the universe, yeah. Yeah.
Ed Kless: Not just the world, the universe. [crosstalk 33:47].
Ron Baker: Or produce really cool things, right?
Ed Kless: Yeah, yeah.
Ron Baker: Yeah.
Ed Kless: Look, in a lot of ways there's overlap here because it turns out to be good business. I've recently become a fan of the show Selfridge, or Mr. Selfridge, I'm sorry, on PBS. I love it for a couple reasons, but the first reason is that it is finally a show on television, PBS, no less, PBS, that portrays the business owner as the good guy.
Ron Baker: That's rare. I mean, look at [crosstalk 32:19].
Ed Kless: It is rare. It is rare.
Ron Baker: Even Avatar, right? The businessman's always the evil person lurking in the background.
Ed Kless: Yeah. I have asked that question in front of audiences. Name the last movie or television show where you saw that the business person was portrayed as the good guy, and the only answer that I ever got from a friend of ours, Robert Wood, was Batman, which Bruce Wayne is the good guy but, of course, he's a vigilante good guy, but he's a good guy.
Ron Baker: He's good. Even our beloved Simpsons has Burns, right?
Ed Kless: Evil Mr. Burns. Right.
Ron Baker: [crosstalk 32:52], yeah.
Ed Kless: Right, but Selfridge is perceived, I mean he's got peccadilloes and all kinds of stuff. He's not portrayed as a saint, but from a business context he's portrayed as the good guy, and this past, I guess they call them seasons or series because it's a BBC show, in series two, and I don't want to spoil too much. I won't give away the details of the show, but there's a scene where some of the union guys are trying to get the employees at Selfridges to join their union. They end up showing up at this meeting hall place, and they're rallying them up.
The guys from Selfridges says well, what are you going to do for us? He says well, I'm going to make sure that you get paid overtime for working, I think it was more than 50 hours a week. I'm going to make sure that you have healthcare provided to you, and I'm going to make sure that your widows are compensated for, and all of this stuff that he goes through this litany of things, and the guys are standing around that are working from Selfridges, and he goes well, we already have that. Selfridge in order to hire and retain some of the best workers, and they point this out in the show, Mr. Selfridge has dentists come in once a week, and anyone that's having a problem with their teeth we just go see the dentist right there on site.
Ron Baker: It sounds like Google. It sounds like Google, right? Take a nap and dry cleaning and a whole list of stuff.
Ed Kless: Exactly because he recognized that in order to keep the best talent, he went above and beyond but, again, he's famous for being the customer is first. It was the customer first and then, well, I think he really put his employees first even though he said it was the customer first, and there's just evidence of that over and over again in his thinking that it was really the employees and customers. Again, this idea of being altruistic, of other-centered, other-directed outside of themselves, right? It's not focused on internal profit. It's not just me, me, me, me.
Ron Baker: Right. Absolutely. Larry Summers in this book, Creative Capitalism, made a very good point. He said okay, you want to talk about creative capitalism or CSR, however you want to term it, he says I've got a wonderful creative capitalist idea. He says promoting homeownership is a great thing, right? People have a stake in the economy. They have a stake and they're going to take care of their home. They're going to build equity. They're going to become responsible citizens and all of that. He said so we should promote homeownership, so let's create government-sponsored enterprises to help do this. This is a great CSR type of undertaking, and they produced Fannie and Freddie Mac.
Ed Kless: Hmm. I wonder where this story's going.
Ron Baker: Yeah. Wow. Ed, this was from Larry Summers, the former president of Harvard and Clinton and even Obama's chief economic advisor, no man of the right, I might add. He really took this concept of creative capitalism to task. He said this is ludicrous because this is the kind of thing or we could talk about Solyndra or these other rent-seeking types of behaviors that the governments and corporations can engage in. This is what's known in the field as pernicious CSR. When companies lobby for tariffs or quotas against foreign goods because none of us like competition in whatever it is we're selling. Or if they go after if they sell fair trade coffee or something like that. These are all things that are pernicious. Steven Landsburg pointed out the best thing Nike can do for underdeveloped countries like Africa or anywhere else, he said, is not to sell them sneakers at a low price. It's to make them productive to produce sneakers for the rich world that will actually carry them out of poverty, and that's a really good point.
Ed Kless: Yeah, and people get crazed over this, the whole Apple, what is it? Foxconn challenge that was laid down. Look, I'm not suggesting that it's a good thing if there are armed guards outside a factory trying to keep people in that that's a good thing. I'm a libertarian. That's absolutely incorrect. That's wrong, but in many cases some of the folks who are working in these factories, the alternative was standing in a rice field for hours upon end, right?
Ron Baker: Yep. Exactly.
Ed Kless: I think it was Professor McCloskey brought this up, let's take a look at how many people have been uplifted out of bone-crunching poverty, abject, nasty, brutish, and short life in the last 30 years.
Ron Baker: Yep. Even, Ed, in the last 10 or 20 we've lifted almost 800 million or close to 900 million, I think it is, out of dire poverty mostly in India and China but in other places, as well. There's only one thing that did that, and it's called capitalism. That's it. That's it. That's the only antidote to this poverty, so to say that this isn't socially responsible. Michael Novak in his wonderful book called Business as a Calling argues that the moral of capitalism, why it's a moral system is because it's the only thing that cures poverty. THat's a point that's often overlooked.
Ed Kless: Amen.
Ron Baker: Just to wrap up Ed, I would have to vote after exploring this issue with you and just on my own and the reading I've done, I would say CSR, even this whole sustainability movement, if you want to call it that, or the triple bottom line, there's all sorts of names for it, I really do think it's more PR than progress. If the world wants progress to fight poverty, then it needs more capitalism, not more CSR.
Ed Kless: Yeah. Amen, brother. I definitely think that that's the case, and it's unfortunate, too, because I think what has happened is the "marketers" have gotten a hold of this and turned it into something that it really is not intended to be. In any case, it's supposed to be authentic, and it's not. I did want to mention one last thing on this. I was at our conference Sage Summit this past year. Biz Stone, the founder of Twitter, talked about one potential marketing strategy, and it was a marketing strategy in this, and I think it goes to your point. He said if you got $4 million to spend on marketing, maybe you should give away 3 million of it to a charity and spend the other million talking about what you did. I don't know whether that is the most blatant example of this being "marketing" or potentially the most brilliant example of where you could make it work.
Ron Baker: It certainly doesn't fit in with the concept of compassionate charity. We do charity because we want to do it, right? Not because of the PR it's going to get us and the accolades. The best charity I know of is anonymous.
Ed Kless: Mm-hmm (affirmative). Yep, yep.
Ron Baker: Right?
Ed Kless: Yep.
Ron Baker: The people that give the most don't talk about it.
Ed Kless: Nope. As Peter Block puts it, once you professionalize care it ceases to be care.
Ron Baker: Absolutely. You can't professionalize compassion, at least not in that way. I think it's PR, but certainly it's a debate that will continue. There's a great article on sustainability in the recent Economist, as well, in the same issue, and they basically say this is the wrong word. These are efficiency things, recycling, knocking out waste, saving energy. This isn't anything to do with sustainability, which can't even be defined. It's more just about increasing efficiency, which corporations already have an automatic built-in incentive to do anyway.
Ed Kless: Yep. True, true. We got an e-mail this week, Ron.
Ron Baker: We did, Ed, from Tim Rodman. This comes from us on, I think he wrote last week sometime. He said Ron and Ed, I recently started listening to your show. He said so far I'm up to Appraisal Agony. Tim, we hope you enjoy that one. We had a lot of fun doing it. He wrote to me that he was happy to learn on the show that I started in accounting, as well, but have successfully transitioned out of the department where all good ideas go to die. Tim started in accounting, too. He was an auditor at Deloitte and, of course, I worked at KPMG. But he asks us this question, Ed, and it's very, very thought-provoking.
He says, "Ron and Ed, maybe you can cover this in a future show, but I'm curious to hear your thoughts on personal branding in the professional arenas like blogs, Twitter, and LinkedIn. Are consumers really more likely to buy from a person than an organization? What should motivate someone to spend time cultivating a brand around their own name?" Ed, I think that's an interesting question because you're certainly out there on social media and you've quite a big following on your blog and you're considered a thought leader in your field.
Ed Kless: I prefer the term knowledge badass.
Ron Baker: Badass, okay. Agree. I hate the term thought leader, as well, but, heck, you're even a thought leader in my former profession. In the CPA world, you're somebody that's held up in high regard. I've written some books and, yeah, I've made top 100 people list, all of this type of thing, but I never set out to do that. I guess my model has always been Peter Drucker or George Gilder. You just study something and you write about it or your speak about it, you're passionate about it, and people that are attracted to your viewpoint will follow you, and I do think in that way you can build up, what do you want to call it? A personal brand or a reputation or a following. That's kind of how I did it. I didn't set out to brand myself.
Ed Kless: Right. I think this could be a whole 'nother show, and maybe we'll have our friend Tim Williams on when we talk about the difference between a brand and reputation, and I think that's probably what Tim Rodman means on this, this idea of reputation. I'm a big believer in it. I have done it and, like you said, I didn't set out to do it. Anything that I've done in the personal branding space has been completely almost on accident. It's just because I wanted to do it. I started my block not because I thought other people would read it but because I needed an outlet for myself, and what I found is that blogging made me a better public speaker because when you're writing something you have to write and be succinct about it and make sure that you're conveying the concept for someone who's only going to read this once.
When you're speaking, as you know, Ron, if somebody looks at you quizzically you can just try to explain it a different way. One thing enhanced the next. Then once I had a blog set up and then Twitter came along, and I said oh, I connect these two things together and I connect it to Facebook and all of this stuff, so it really hasn't been a plan, but in the end that's what it's done. It's created my personal brand. Our friend and colleague at VeraSage, Michelle Golden, has a great analogy that she uses to do this. It's a rock star-type thing, right, Ron?
Ron Baker: Yes, yes. Doesn't she say like a radio station or a record label, they have talent. They have rock stars, and there might be a whole bunch of different ones, but just like a radio station has on-air talent and just like companies are going to have rock stars in their ranks like you, Ed, are at Sage.
Ed Kless: Yeah. The brands of the company are then perceived as smart for signing that particular act, right?
Ron Baker: Right.
Ed Kless: Columbia Records was smart for signing, I don't know, I think Billy Joel and Bruce Springsteen were both on Columbia, right?
Ron Baker: Right.
Ed Kless: They were smart to do that. I guess if you get big enough, you do become your own brand like the Beatles had to do Apple Records, but then they signed other talent, right?
Ron Baker: Sure.
Ed Kless: Once they got rolling on it.
Ron Baker: Like Oprah and Martha Stewart. They're all brands. The other thing, too, Ed, I think it feeds on itself, doesn't it? It starts to spiral upwards once you start blogging and speaking and all these things. It all does come together in this confluence of more influence, and that certainly happened to me when I became a LinkedIn influencer. I think the there really key point about this, too, is I've always felt that it's really important to give your intellectual capital away because if I give it away either through books or on this radio show or in other formats, then I've got to replenish it and it keeps me at the cutting edge, or at least I try and stay at the cutting edge of events. I can only do that if I give it away.
Ed Kless: Right, as opposed to try to just hold on to it. Yeah, for a long time people were very concerned that I would give away my PowerPoints, not as just PDF files but as actual PowerPoint. No, here's the whole PowerPoint presentation. People were like woah, they'll just take your stuff. I'd say well, they can't deliver it the way I do.
Ron Baker: That's right. They're not Ed. Your kind of a monopoly, but I do think people hire people inside companies, not the organizations themselves, at least in the professional arena but, Ed ...