From social impact bonds to carbon taxes, legislators are taking a hard look at the socially harmful consequences that result when many parties contribute to a problem but no one bears the full cost.
Unfortunately, business leaders are constrained by legal duties and corporate laws that are decades old and don’t account for these so-called negative externalities. Like it or not, the CEOs of most corporations are simply not allowed to let social factors interfere with profitability. The law is clear: management’s duty is to the corporation. And the corporation is composed of its shareholders.
One way that corporations wishing to earn profits in a socially responsible way can deal with this is to include a provision in their articles of incorporation that entitles managers to account for things like pollution, environmental sustainability and clean energy when making business decisions. These ”social responsibility” provisions would allow management to make choices that may be less profitable in the short term but should ultimately contribute to a better society. By making it clear from the outset that profitability is not the only driver of corporate action, directors and officers could do this without fear of a lawsuit from unwitting and disgruntled shareholders.
The key question is whether investors would in fact be willing to invest in this kind of corporation. A social responsibility provision may also be a yellow light to investors, a warning that returns may be less lucrative than those from an identical company dedicated solely to profit.
This is where tax law comes into play. The government could pass an amendment to the Income Tax Act that allows taxpayers to deduct from their income all or part of their investment in a qualifying corporation.
The Act already allows taxpayers to deduct charitable donations of shares and ecologically sensitive land. The policy behind that is that this kind of behaviour is socially desirable and actually reduces the burden on the government. After all, if corporations take care of the environment, there is less for the government to clean up. A deduction for socially responsible corporate investment is therefore both socially and economically justified.
It need not be a 100 percent deduction — the government should collect some revenue to account for the fact that the taxpayer has acquired valuable equity in the corporation. But it should be large enough to affect a rational investor’s decisions.
A tax incentive for shareholders who invest in a socially responsible corporation would produce four major benefits. First, it would encourage corporations to include social responsibility provisions in their charter before going public. Second, it would hold corporate managers to account for their actions in accordance with these provisions, since investors would have a right of action if management shirks its duties. Third, it would lower the cost of capital for corporations that wish to contribute to the public welfare in addition to generating profit. Finally, it would provide a measure of comfort to corporate managers, who would be clearly and legally entitled to balance profit with other stakeholder interests. A tax incentive would make a clear statement that Canada is committed to social responsibility, but not at the expense of shareholder rights.
Laura McGee is a law student at the University of Toronto.