Profit for Good- an FAQ Responsive to EA Feedback
By Brad West @ 2023-06-08T13:52 (+17)
I would like to share an FAQ regarding Profit for Good produced by the Consumer Power Initiative's Director of Research Blake Hannagan, which he created responsively to questions/redteaming of primarily Effective Altruists. Profit for Good consists of companies with popular charities in the 90%+ shareholder position, meaning profits primarily benefit charities (Examples: Newman's Own, Humanitix, Patagonia)We believe such companies can produce goods and services of similar quality at similar price, enabling consumers, employees other economic actors to benefit charities without making any sacrifice, unlike donations. This positive discrimination we call Charity Choice, and offers the ability for philanthropists to leverage their charitable dollars through a world which would rather the money from their purchases went to end malaria, for instance, rather than enrich further wealthy investors.
I am going to be doing a TEDx talk on Profit for Good in late July and am interest in feedback on my draft talk (PM me). Donations are also most welcome to our 501c3- significant costs are associated regarding travel expenses for the talk, rebranding and development of our website, and preparing to establish an incubator/accelerator/funder for Profit for Good companies. Said costs are primarily now being borne by myself, with difficulty.
Here is a list of reading materials on Profit for Good, with a good starting place being this essay on the forum. Our website
FAQ:
1. What if the charity needs the money now? It isn’t very useful for a charity to be entitled to the profits of a company if they need funding immediately, right?
Even though the charity would not possess cash, they would possess assets against which they can borrow. If shares were purchased for $X, then the charity should fairly safely be able to borrow between 0.5*P*$X and 0.7*P*$X depending on the specific context where P is a positive discrimination multiplier which should be greater than 1. They can then pay back the loan with the dividends they receive later because they own the stock. Additionally, the charity could benefit from some positive discrimination from their lender and receive lower interest rates as a way for the lender to cultivate a positive public image. Ultimately, they may not be able to access $X immediately, but they would likely be able to access a large portion of $X soon. There do exist some optimistic scenarios where charities could actually access more than $X relatively quickly. If you would like more information on these scenarios, please contact Blake Hannagan by emailing blake@consumerpowerinitiative.org.
2. Wouldn’t a Profit for Good (PFG) company have trouble competing in the market because they can’t reinvest their profits back into their company?
No! This is one of the great things about the Profit for Good (PFG) framework; the PFG company still operates as a for-profit company the same way any other for-profit company operates. They are still able to reinvest some, or all, of their profits back into the company. The only difference is who gets the dividends/profits companies do pay out. The charities get their dividends the same way any other investor would get their dividends.
3. I’ve seen companies donate proceeds to charity before; how is PFG different?
Oftentimes companies donate proceeds or profits to charities as a marketing tactic to reach new customers or as a way to gain positive publicity. However, in these situations, donations represent an additional cost to the company. In contrast, PFG companies do not pay any additional costs to make charitable donations; rather their profit, which would usually be paid to ordinary shareholders, are instead paid to shareholders which happen to be charities.
4. How will consumers know if a purchase is from a PFG company?
This is an important component of the PFG framework; if consumers cannot easily identify a PFG company’s product, then it will be challenging/cumbersome for them to positively discriminate in favor of PFG companies. Our plan is to display the CPI logo (displayed at the top of this page) on each product produced by PFG companies as our stamp of certification and to signal to consumers the profit from buying this product will benefit charities.
5. Aren’t the charities who own the stock in the PFG companies, in actuality, also in charge of running the company? If so, isn’t it reasonable to think they may not be very good at that and hence the company would actually perform worse and decrease in value?
This is a topic CPI would like to research further. We have identified some studies which suggest corporations primarily owned by charities may benefit from some advantages with regard to corporate governance. Additionally, for this and other reasons, we currently believe it would be preferable for a charitable foundation to own the stock instead of the charities themselves so the charitable foundation(s) can help the charities navigate certain financial obstacles and conduct the necessary research to elect strong board members.
6. What’s motivating PFG companies to perform well? If they no longer have a profit motive, won’t they lack the incentives to perform optimally? What would Milton Friedman and other free-market economists say about the PFG framework?
PFG companies are still for-profit companies. This is a point worth emphasizing. They are still seeking to maximize profits for their shareholders the same way any other company would. They also still have the ability to reinvest a portion of their profits the same way any other company would. None of this has changed. The only thing which has changed is who the shareholders are - they are now charities or charitable foundations. These shareholders still want the company to succeed, perform exceptionally well, and maximize profits so the shareholders can access large funds.
Regarding Milton Friedman, Friedman was a very strong supporter of charitable foundations. In fact, he felt charitable foundations were so great at meeting the needs of everyday people there was little to no need to develop a government-run social safety net. Additionally, Friedman thought companies competing in the “free market” were well-incentivized to maximize their profits and that, to some extent, was a benefit to society all by itself (think of, or search for, his famous pencil example if you need clarification here). The PFG framework still works within the framework of the “free market” and therefore still enjoys many, if not all, of its benefits. However, we theorize PFG companies, capitalizing on consumer’s good will, enjoy a competitive advantage in the marketplace and their profits are better allocated to make the world a better place than they would if they were allocated to the average investor (in expectation).
7. Why not just earn to give? Shouldn't people just make money starting a company and then donate their money?
Earning to give is actually more of a complementary idea to the PFG framework than a substitute. Profit for Good companies are still for-profit companies and therefore are still able to, and ideally should, pay market wages. Therefore, if Microsoft were a PFG company (they are pretty close to being one as it is), and someone makes a lot of money working as a “insert fancy job title here”, they can still donate money from their personal income to effective charities and the company’s profits will also be donated to (hopefully effective) charities.
We at CPI believe starting a company and donating the profits to charities alone is inherently ineffective because that company would fail to capitalize on the good will their customers feel towards charities. Additionally, we believe founding a PFG company would increase your probability of success because you would be able to capitalize on consumer good will, benefit from business services at lower prices (because of positive discrimination), and take advantage of the environment CPI is trying to develop where consumers are aware of the PFG framework in general, the logo of CPI, and may even seek out PFG companies from which to purchase products.
8. Won't companies without private shareholders lack necessary signals they get from the buying and selling of shares? Won't singular ownership otherwise adversely affect corporate governance?
There may be certain situations where it is advantageous for only 90% (just a put a number here) of the shares to be held by charities or charitable foundations for price discovery and/or corporate governance reasons. In situations like this, it may also be beneficial for non-charity shareholders to gain disproportionately large voting rights so the charities and/or charitable foundations are effectively not (or at least far less) responsible for corporate governance but may still have veto power in case other investors are advocating for questionable or unethical practices or other exceptional circumstances. This is an area the CPI research team would like to explore more in the future. In particular, we would like to identify when different strategies would be most appropriate and what the effects of different strategies would be.
9. Consumers are very set in their habits and loyal to their brands: what makes you think they would shift purchasing for a factor that doesn't benefit them? Might consumers think they are implicitly paying someone to donate?
Our claim is not that all consumers would shift their purchasing habits to purchase from PFG companies. Rather, our claim is that some consumers will shift their purchasing habits because they are more or less indifferent between the different brands. Additionally, maybe consumers are more likely to try a product if it is produced by a PFG company. The PFG company does not need to monopolize their market for their market share to increase; the PFG framework merely relies on an increase in sales. In fact, if one percent of consumers shift their purchasing habits, that could have an exceptionally large impact on the value of the PFG company, depending on the market and their initial market share. Additionally, for some brands, donating all of their profits to charities may make their product a status symbol. For instance, Patagonia could market that wearing their products displays to the world you care about the environment and have made a choice to support organizations who share your values.
Regarding whether consumers believe they are implicitly paying someone to donate, it is important for our marketing and outreach teams to clarify only the profit which would have been paid out to other shareholders anyway. This is not an extra cost on the business consumers have to pay for. This may be challenging to communicate, but as the PFG framework develops and spreads, we hope the public will develop a clearer understanding.