Myth: Companies are only after maximizing their profits
The recent case of the Volkswagen emissions scandal can be an example of how the law also upholds the interests of the environment towards companies. These are all examples of the law keeping companies in check, but in the past couple of years companies have taken it a step further.
Over a thousand deaths to regret and more than two thousand people injured. These were the sad consequences of the Rana Plaza collapse in Bangladesh on 24 April 2013. The day before, cracks were discovered in the walls of the eight-story building. Although the shops and bank at the lower floors were immediately closed, the garment workers in the various clothing factories were ordered to go to work on that fatal day. It is considered the deadliest garment factory accident in history.
When tragedies like this occur, the finger is often pointed at big companies
Greedy multinationals, only thinking about making more money, people will say, they don’t take any social responsibility. “First of all, multinationals are much more complex than that,” says Anna Beckers, researcher at the Private Law department. “We’re talking about companies that operate in very different countries, have to deal with a lot of stakeholders and have thousands of employees. It’s not just one person, with one objective. Individual wrong-doing could play a part, as could external pressure – companies are often part of a long supply chain and are dealing with different contracts with multiple parties.”
Secondly, Beckers adds, there are means for sanctioning companies if they operate under violation of public interests, contrary to the belief of some people that multinationals can get away with many faults. “The law states that managers have to act in the best interest of the company. The substance of this ‘best interest’ is interpreted in different ways by judges. A company is also a social actor. It has to find a balance between increasing profits and meeting the interests of employees, stakeholders and society in order to remain sustainable in the long term.” Measures that increase short-term profits but damage the chances of long-term sustainability might be considered not to be in the company’s best interest. In countries such as the Netherlands and Germany, these different interests are even structurally institutionalized in the company. “Companies with a certain number of employees have to have employee representatives in the board and managers are legally obliged to respect the interests of different stakeholders in their decision-making.”
The recent case of the Volkswagen emissions scandal – Volkswagen cheated on emission tests by building software into their diesel engines that knew when it was being tested, changing the performance accordingly to improve results – can be an example of how the law also upholds the interests of the environment towards companies, according to Beckers. “The recent consumer litigation in the US and in the EU (it will be interesting to see if this case goes to the European Court of Justice) as well as the administrative enforcement indeed shows this.”
These are all examples of the law keeping companies in check, but in the past couple of years companies have taken it a step further. “They have developed their own corporate codes of conduct. Take Apple, on their website they commit to respecting human rights. They promise to refrain from relying on forced or child labour, to not have people working in dangerous circumstances and to pay them minimum wage.” This may sound like just words, meant to make the customer sympathize with the company, but according to Beckers, these codes hold up in court. “In Europe this would mean consumer organisations can sue a company for false advertisements, in the US also for damages.”
But isn’t this just another smart way for businesses to sell more products – if people think they care about their social responsibility, they would be quicker to buy their products. No, says Beckers. “There is no significant evidence that these codes of conduct always lead to more profits. That only works in niche markets such as the fair trade branch.” Does this then mean that companies are not after maximizing profits at all? “Of course they are, it’s not entirely wrong. But it’s not their sole purpose; it’s much more nuanced than that.”
This blog is a repost and part of Mythbusters, a series published by The Observant in which academics shoot down popular myths on complex topics. Written by Cleo Freriks. Myth buster: Anna Beckers, researcher at the Private Law department.