When new investors tried to take over BCE Inc., a major Canadian company, some bondholders tried to stop the deal.
The bondholders said that a business has to be considered as being more than just an engine for the enrichment of its owners. They argued that a business needs to be looked at from the long term and all the stakeholders, the employees, the managers, the shareholders and perhaps even the customers, ought to be considered in deciding the business's future.
That argument was novel and would have made a significant change in Canadian law which normally looks at profit to owners as being the guide for commercial transactions. The Quebec Court of Appeal thought the argument had merit and the takeover was delayed until the Supreme Court of Canada could consider the case.
I remember thinking the bondholders' argument seemed legally unsound and was not overly surprised to see it ultimately rejected last year by the Supreme Court of Canada. But the deal itself fell apart and never closed. And perhaps that's a good metaphor for the problem facing Canada today -- the unbridled profit motive has failed us. In fact, the market, if left unguided, leads to collapse and chaos.
At the end of June Pope Benedict XVI dealt with this collapse when he wrote:
"What should be avoided is a speculative use of financial resources that yields to the temptation of seeking only short-term profit, without regard for the long-term sustainability of the enterprise, its benefit to the real economy and attention to the advancement, in suitable and appropriate ways, of further economic initiatives in countries in need of development."
And so a careful analysis of the issue, and a sensible solution, comes from what might seem to be an unexpected quarter -- the Vatican and a Papal letter.
Papal letters are seldom seen as having much "real world" application. Most people see the Pope's encyclicals as being merely religious documents. But the most recent encyclical is far more than just theology. The Pope says that legal systems and justice require a consideration of more than just selfish interest. Business decisions cannot be based solely on the profit motive. Looking at businesses and the economy as being amoral leads to calamity:
"Then, the conviction that the economy must be autonomous, that it must be shielded from 'influences' of a moral character, has led man to abuse the economic process in a thoroughly destructive way. In the long term, these convictions have led to economic, social and political systems that trample upon personal and social freedom, and are therefore unable to deliver the justice that they promise."
The key then is to see that the marketplace must be put into a context that recognizes all human aspects and potentials. Business management cannot concern itself only with the short-term interests of the owners, "but must also assume responsibility for all the other stakeholders who contribute to the life of the business: the workers, the clients, the suppliers of various elements of production, the community of reference." The BCE Inc. bondholders were right; a business is, and must be, more than just a profit-making centre.
Therein lies an answer to our current economic crisis. Businesses ought to be responsive, in the long term, to the market. The market is a tremendous mechanism for production of goods people want and will use. But such market responsiveness ought not to blind businesses to their duty to more than just the owners -- businesses have a duty to their stakeholders and to society as a whole.
The ability to use financial markets to make a quick profit at the expense of employees and society is wrong. Business decisions must be informed by more than just the ability to turn a quick profit -- they must be seen in light of the broader implications of that decision.
Investment always has moral, as well as economic, significance.
James Morton is a lawyer with Steinberg Morton Hope & Israel LLP and was counsel to a group of investors in the BCE Inc. litigation.
James Morton
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