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SURVEY: CORPORATE SOCIAL RESPONSIBILITY
THE GOOD COMPANY
Jan 20th 2005
From The Economist print edition
The movement for corporate social responsibility
has won the battle of ideas. That is a pity, argues
Clive Crook
OVER the past ten years or so, corporate social responsibility (CSR)
has blossomed as an idea, if not as a coherent practical
programme. CSR commands the attention of executives
everywhere—if their public statements are to be believed—and
especially that of the managers of multinational companies
headquartered in Europe or the United States. Today corporate
social responsibility, if it is nothing else, is the tribute that
capitalism everywhere pays to virtue.
It would be a challenge to find a recent annual report of any big
international company that justifies the firm's existence merely in
terms of profit, rather than “service to the community”. Such
reports often talk proudly of efforts to improve society and
safeguard the environment—by restricting emissions of greenhouse
gases from the staff kitchen, say, or recycling office stationery—
before turning hesitantly to less important matters, such as profits.
Big firms nowadays are called upon to be good corporate citizens,
and they all want to show that they are.
On the face of it, this marks a significant victory in the battle of
ideas. The winners are the charities, non-government organisations
and other elements of what is called civil society that pushed for
CSR in the first place. These well-intentioned groups certainly did
not invent the idea of good corporate citizenship, which goes back a
long way. But they dressed the notion in its new CSR garb and
moved it much higher up the corporate agenda.
In public-relations terms, their victory is total. In fact, their
opponents never turned up. Unopposed, the CSR movement has
distilled a widespread suspicion of capitalism into a set of demands
for action. As its champions would say, they have held companies to
account, by embarrassing the ones that especially offend against
the principles of CSR, and by mobilising public sentiment and an
almost universally sympathetic press against them. Intellectually, at
least, the corporate world has surrendered and gone over to the
other side.
The signs of the victory are not just in the speeches of top
executives or the diligent reporting of CSR efforts in their published
accounts. Corporate social responsibility is now an industry in its
own right, and a flourishing profession as well. Consultancies have
sprung up to advise companies on how to do CSR, and how to let it
be known that they are doing it. The big auditing and general-
practice consulting firms offer clients CSR advice (while
conspicuously striving to be exemplary corporate citizens
themselves).
Most multinationals now have a senior executive, often with a staff
at his disposal, explicitly charged with developing and co-ordinating
the CSR function. In some cases, these executives have been
recruited from NGOs. There are executive-education programmes in
CSR, business-school chairs in CSR, CSR professional organisations,
CSR websites, CSR newsletters and much, much more.
But what does it all amount to, really? The winners, oddly enough,
are disappointed. They are starting to suspect that they have been
conned. Civil-society advocates of CSR increasingly accuse firms of
merely paying lip-service to the idea of good corporate citizenship.
Firms are still mainly interested in making money, they note
disapprovingly, whatever the CEO may say in the annual report.
When commercial interests and broader social welfare collide, profit
comes first. Judge firms and their CSR efforts by what the
companies do, charities such as Christian Aid (a CSR pioneer) now
insist, not by what they say—and prepare to be unimpressed.
By all means, judge companies by their actions. And, applying that
sound measure, CSR enthusiasts are bound to be disappointed. The
2004 Giving List, published by Britain's Guardian newspaper,
showed that the charitable contributions of FTSE 100 companies
(including gifts in kind, staff time devoted to charitable causes and
related management costs) averaged just 0.97% of pre-tax profits.
A few give more; many give almost nothing (though every one of
them records some sort of charitable contribution). The total is not
exactly startling. The figures for American corporate philanthropy
are bigger, but the numbers are unlikely to impress many CSR
advocates.
Still, you might say, CSR was always intended to be more about
how companies conduct themselves in relation to “stakeholders”
(such as workers, consumers, the broader society in which firms
operate and, as is often argued, future generations) than about
straightforward gifts to charity. Seen that way, donations, large or
small, are not the main thing.
Setting gifts aside, then, what about the many other CSR initiatives
and activities undertaken by big multinational companies? Many of
these are expressly intended to help profits as well as do good. It is
unclear whether this kind of CSR quite counts. Some regard it as
“win-win”, and something to celebrate; others view it as a sham,
the same old tainted profit motive masquerading as altruism. And,
even to the most innocent observer, plenty of CSR policies smack of
tokenism and political correctness more than of a genuine concern
to “give back to the community”, as the Giving List puts it. Is CSR
then mostly for show?
It is hazardous to generalise, because CSR takes many different
forms and is driven by many different motives. But the short
answer must be yes: for most companies, CSR does not go very
deep. There are many interesting exceptions—companies that have
modelled themselves in ways different from the norm; quite often,
particular practices that work well enough in business terms to be
genuinely embraced; charitable endeavours that happen to be doing
real good, and on a meaningful scale. But for most conventionally
organised public companies—which means almost all of the big
ones—CSR is little more than a cosmetic treatment. The human face
that CSR applies to capitalism goes on each morning, gets
increasingly smeared by day and washes off at night.
Under pressure, big multinationals ask their critics to judge them by
CSR criteria, and then, as the critics charge, mostly fail to follow
through. Their efforts may be enough to convince the public that
what they see is pretty, and in many cases this may be all they are
ever intended to achieve. But by and large CSR is at best a gloss on
capitalism, not the deep systemic reform that its champions deem
desirable.
Does this give cause for concern? On the whole, no, for a simple
reason. Capitalism does not need the fundamental reform that
many CSR advocates wish for. If CSR really were altering the bones
behind the face of capitalism—sawing its jaws, removing its teeth
and reducing its bite—that would be bad: not just for the owners of
capital, who collect the company's profits, but, as this survey will
argue, also for society at large. Better that CSR be undertaken as a
cosmetic exercise than as serious surgery to fix what doesn't need
fixing.
We are an equal-opportunity employer
But this is not the end of the matter. Particular CSR initiatives may
do good, or harm, or make no difference one way or the other, but
it is important to resist the success of the CSR idea—that is, the
almost universal acceptance of its premises and main lines of
argument. Otherwise bones may indeed begin to snap and CSR may
encroach on corporate decision-making in ways that seriously
reduce welfare.
Private enterprise requires a supporting infrastructure of laws and
permissions, and more generally the consent of electorates, to
pursue its business goals, whatever they may be. This is something
that CSR advocates emphasise—they talk of a “licence to operate”—
and they are quite right. But the informed consent of electorates,
and an appropriately designed economic infrastructure, in turn
require an understanding of how capitalism best works to serve the
public good. The thinking behind CSR gives an account of this which
is muddled and, in some important ways, downright false.
There is another danger too: namely, that CSR will distract
attention from genuine problems of business ethics that do need to
be addressed. These are not in short supply. To say that CSR
reflects a mistaken analysis of how capitalism serves society is
certainly not to say that managers can be left to do as they please,
nor to say that the behaviour of firms is nobody's concern but their
own. There is indeed such a thing as “business ethics”: managers
need to be clear about that, and to comprehend what it implies for
their actions.
Also, private enterprise serves the public good only if certain
stringent conditions are met. As a result, getting the most out of
capitalism requires public intervention of various kinds, and a lot of
it: taxes, public spending, regulation in many different areas of
business activity. It also requires corporate executives to be
accountable—but to the right people and in the right way.
CSR cannot be a substitute for wise policies in these areas. In
several little-noticed respects, it is already a hindrance to them. If
left unchallenged, it could well become more so. To improve
capitalism, you first need to understand it. The thinking behind CSR
does not meet that test.
THE WORLD ACCORDING TO CSR
Jan 20th 2005
From The Economist print edition
Good corporate citizens believe that capitalism is
wicked but redeemable
OVER the past century or so, and especially in the past 50 years,
the western industrial democracies have experienced what can only
be described as an economic miracle. Living standards and the
quality of life have risen at a pace, and to a level, that would have
been impossible to imagine in earlier times.
This improvement in people's lives, staggering by any historical
standard, is not measured solely in terms of material consumption—
important though it is, for instance, to have enough to eat, to keep
warm in winter, to be entertained and educated and to be able to
travel. In addition to material gains such as these, and to all the
other blessings of western “consumer society”, broader measures of
well-being have raced upward as well: infant mortality has
plummeted, life expectancy has soared, and the quality of those
extended years of life, in terms of freedom from chronic sickness
and pain, is better than earlier generations ever dreamed it could
be.
All this has been bestowed not just on an elite, but on the broad
mass of people. In the West today the poor live better lives than all
but the nobility enjoyed throughout the course of modern history
before capitalism. Capitalism, plainly, has been the driving force
behind this unparalleled economic and social progress. Yet today it
is suspected, feared and deplored—and not just by the kind of
energetic anti-capitalists who now and then put bricks through the
windows of McDonald's.
According even to middle-of-the-road popular opinion, capitalism is
at best a regrettable necessity, a useful monster that needs to be
bound, drugged and muzzled if it is not to go on the rampage.
Stranger still, this view seems to be shared by a good proportion of
business leaders. Capitalism, if guided by nothing but their own
unchecked intentions, would be wicked, destructive and
exploitative, they apparently believe—bent on raping the planet and
intent on keeping the poor outside the capitalist West in poverty.
In a much-discussed recent book, “The Corporation: The
Pathological Pursuit of Profit and Power”, Joel Bakan, a law
professor at the University of British Columbia, lays bare the
danger. His themes were further developed and illustrated in a film
of the same title, which was also successful and well reviewed.
The corporation's legally defined mandate is to pursue relentlessly
and without exception its own economic self-interest, regardless of
the harmful consequences it might cause to others...Today,
corporations govern our lives. They determine what we eat, what
we watch, what we wear, where we work and what we do. We are
inescapably surrounded by their culture, iconography and ideology.
And, like the church and the monarchy in other times, they posture
as infallible and omnipotent, glorifying themselves in imposing
buildings and elaborate displays. Increasingly, corporations dictate
the decisions of their supposed overseers in government and control
domains of society once firmly embedded in the public sphere.
Corporations now govern society, perhaps more than governments
themselves do; yet ironically it is their very power, much of which
they have gained through economic globalisation, that makes them
vulnerable. As is true of any ruling institution, the corporation now
attracts mistrust, fear and demands for accountability from an
increasingly anxious public. Today's corporate leaders understand,
as did their predecessors, that work is needed to regain and
maintain the public's trust. And they, like their predecessors, are
seeking to soften the corporation's image by presenting it as
human, benevolent and socially responsible.
In Mr Bakan's view, CSR is mostly a fraud. Companies, after all, are
in “pathological pursuit of profit and power”. CSR is merely a means
to those ends, a way to ingratiate capitalism to a rightly suspecting
public. The book's jacket has blurbs of generous praise not just, as
you might expect, from Noam Chomsky but also from an
investment-fund manager and a CEO, who says it is holding up “a
mirror for [corporations] to see their destructive selves as others
see them”.
Many businessmen do seem to recognise themselves in that mirror.
And popular culture has the corporate psycho in plain view—which
is remarkable, given the corporation's suffocating grip on all
thoughts and deeds. What is the capitalist ethos according to
Hollywood? “Greed is good,” as Gordon Gekko explained in “Wall
Street”. From “RoboCop” (the military-industrial complex) to “Super
Size Me” (fast-food tyrants) and back again, the brave unequal war
against corporate dominion is waged.
This paranoid fear of capitalism, shared by so many of its leading
practitioners, boils down to two main ideas. First, profit in its own
right has nothing to do with the public good. A company in pursuit
of profit is seeking a purely private gain. If the pursuit of profit is to
yield an advance in social welfare, then something else, acting with
deliberation and intelligence from outside the corporation, must
intervene. Second, in their mad pursuit of private gain, companies
are driven by the logic of their quest to place crippling burdens on
society and on the environment.
So far as society at large is concerned, in other words, the
untrammelled pursuit of profit yields nothing, but costs plenty.
Unless it is checked either by CSR or (as Mr Bakan would prefer, if
only as a first step) by double-strength government regulation,
private enterprise makes losers of everyone but itself.
Private profit, public interest
The perceived tension between private profit and public interest
pervades the CSR literature. Yet the idea is never examined. It is
always regarded as self-evident.
The top executives at Royal Dutch/Shell have lately been acting as
CSR thought-leaders—and they are CSR champions in other ways
as well (through the activities of the generously supported
charitable activities of the Shell Foundation, for instance). Shell has
a lot of popular suspicion to live down, following the scandal over its
operations in Nigeria, for instance, and the controversy surrounding
its plans for the disposal of the Brent Spar oil-drilling platform in the
North Sea. Its senior executives have done their best. In a leaflet
explaining why the company had embraced CSR, Sir Mark Moody-
Stuart, who was chairman between 1998 and 2001, and before that
managing director, wrote:
[M]y colleagues and I on the committee of managing directors are
totally committed to a business strategy that generates profits while
contributing to the well-being of the planet and its people.
That seems entirely unobjectionable, you might think: a
commitment to motherhood and apple pie. But the clear
implication—and Sir Mark, to judge by other speeches and articles,
buys it wholesale—is that if Shell simply made profits for its owners,
that would in itself contribute nothing to “the planet and its people”.
From this it follows that if Shell is to justify its activities to society at
large, it has to do more than just make money for its owners.
Therein lies the case for CSR. But is the premise actually true? True
or false, it is never challenged.
One of the world's foremost CSR networks and organisations is the
World Business Council for Sustainable Development. Its
membership is made up of 175 big multinationals, including Shell,
alongside firms such as ABB, Dow Chemical, Ford, General Motors,
Procter & Gamble, Time Warner and so on. One of the council's
publications begins:
Although the rationale for the very existence of business at law and
in other respects is to generate acceptable returns for its
shareholders and investors, business and business leaders have,
over the centuries, made significant contributions to the societies of
which they form part.
Why yes. If you compare people's lives in the West today with those
of people living, say, a century ago, or two centuries ago, it would
be right, if perhaps a little miserly, to concede that business has
made some “significant contributions”. But in the council's opinion
these moderately important benefits did not arise because
businesses generated acceptable returns for their owners; they
arose despite that fact. Profit, unfortunately, is necessary, as the
council sadly notes: otherwise you cannot have business, along with
the possibility of those quite useful contributions. But those
contributions have to be separately willed. It is simply not in the
nature of business as such to contribute. That is an add-on, a
responsibility that business may choose to discharge or not
discharge, as it sees fit.
So, anti-capitalists believe this; angry law-school professors (whose
own significant contributions cannot be in doubt) believe it; and the
leaders of international big business believe it. For good measure,
many industrial-country governments, acting singly or in concert,
believe it as well. Britain is just one of many countries to have
designated a minister responsible for encouraging CSR initiatives. In
2001 the European Commission published a consultative paper
entitled, “Promoting a European Framework for Corporate Social
Responsibility”. The aim is “to launch a wide debate on how the
European Union could promote corporate social responsibility at
both the European and international level”. Values, it says, “need to
be translated into action”.
Leading international institutions such as the World Bank, the
United Nations, the Organisation of Economic Co-operation and
Development, and indeed more or less any outfit of that sort you
care to name, endorse the view that profit serves an exclusively
private interest, and that blind pursuit of profit is therefore likely to
prove socially harmful.
The United Nations is especially keen on CSR, as part of a broad
new approach to global governance. It continues to promote its
“Global Compact”, launched at the World Economic Forum in 1999.
This initiative aims to draw together businesses and business
organisations, NGOs, and UN and other international agencies. The
goal of this new “tripartism”—an ongoing discussion among
governments, companies and civil society (which is how the UN
refers to NGOs)—is to find ways to “underpin the free and open
market system with stable and just societies”.
It is one thing to believe that profit-seeking serves no public
interest directly. It is another to believe that profit-seeking, unless
tempered and channelled by CSR or in some other way, actually
works against the public interest. This second idea, already noted,
is an extension of the first. And this is where “sustainable
development” comes in.
The concept of sustainable development puts flesh on the idea that
business left to its own devices is dangerous. Untamed profit-
seeking, it is argued, puts strain on the environment and exploits
workers. At the same time the goal of sustainable development
points to a more concrete agenda for CSR: while pursuing profit,
enlightened companies should take care to protect the environment
and uphold the rights of workers (and others) as well. Hence the
“triple bottom line” which thought-leaders on CSR (including the
United Nations and the European Commission) want companies to
monitor and report: don't just aim to make money, but protect the
environment and fight for social justice as well.
Unsustainable
One problem with the triple bottom line is quickly apparent.
Measuring profits is fairly straightforward; measuring environmental
protection and social justice is not. The difficulty is partly that there
is no single yardstick for measuring progress in those areas. How is
any given success for environmental action to be weighed against
any given advance in social justice—or, for that matter, against any
given change in profits? And how are the three to be traded off
against each other? (CSR advocates who emphasise sustainable
development implicitly insist that there must be such a trade-off, at
least when it comes to weighing profit against either of the other
two.) Measuring profits—the good old single bottom line—offers a
pretty clear test of business success. The triple bottom line does
not.
The problem is not just that there is no one yardstick allowing the
three measures to be compared with each other. It is also that
there is no agreement on what progress on the environment, or
progress in the social sphere, actually mean—not, at least, if you
are trying to be precise about it. In other words, there are no
yardsticks by which different aspects of environmental protection
can be compared even with each other, let alone with other criteria.
And the same goes for social justice.
One company reduces its emissions of greenhouse gases. One
increases its spending on recycling. Another provides free child-care
facilities for its workers. Another raises the wages of its lowest-paid
workers. All of these things cost money: suppose, for the sake of
argument, that all four have reduced profit by the same amount.
Which company has done most to protect the environment? Which
has done most to advance social progress? Overall, how far has
each company improved its triple bottom line? Bearing in mind the
cost, can you even say that any of them have done so?
The great virtue of the single bottom line is that it holds managers
to account for something. The triple bottom line does not. It is not
so much a licence to operate as a licence to obfuscate.
CSR advocates could reply that this misses the point. The idea of
the triple bottom line is not that the three-dimensional performance
of business can ever be judged as precisely as its orthodox one-
dimensional performance. The triple bottom line is just shorthand
for saying: take other things into account, acknowledge that profit
isn't everything, and don't pursue profit relentlessly, as you would
otherwise be inclined to, even at the expense of damage to the
environment and infringements of the rights of workers and other
stakeholders. You cannot be precise about these things, but at least
you can recognise the social and environmental peril of too narrow
a focus on profit.
That is a perfectly reasonable line of argument—or it would be, if a
narrow focus on profit really did endanger the environment,
systematically infringe the rights of workers and stakeholders, and
in general fail to serve the public interest. That is the world
according to CSR, but is the world really like that? The short answer
is no. For a slightly longer answer, read on.
PROFIT AND THE PUBLIC GOOD
Jan 20th 2005
From The Economist print edition
Companies that merely compete and prosper make
society better off
ADAM SMITH, you might say, wrote the book on corporate social
responsibility. It is entitled, “Wealth of Nations”.
Every individual necessarily labours to render the annual revenue of
the society as great as he can. He generally, indeed, neither intends
to promote the public interest, nor knows how much he is
promoting it...he intends only his own gain, and he is in this, as in
many other cases, led by an invisible hand to promote an end which
was no part of his intention. Nor is it always the worse for the
society that it was no part of it. By pursuing his own interest he
frequently promotes that of the society more effectually than when
he really intends to promote it. I have never known much good
done by those who affected to trade for the public good.
It is not from the benevolence of the butcher, the brewer, or the
baker, that we expect our dinner, but from their regard to their own
interest. We address ourselves, not to their humanity but to their
self-love, and never talk to them of our own necessities but of their
advantages.
Smith did not worship selfishness. He regarded benevolence as
admirable, as a great virtue, and he saw the instinct for sympathy
towards one's fellow man as the foundation on which civilised
conduct is built (he wrote another book about this: “The Theory of
Moral Sentiments”). But his greatest economic insight—and indeed
the greatest single insight yielded by the discipline of economics—
was that benevolence was not in fact necessary to advance the
public interest, so long as people were free to engage with each
other in voluntary economic interaction. That is fortunate, he
pointed out, since benevolence is often in short supply. Self-
interest, on the other hand, is not.
If self-interest, guided as though by an invisible hand, inadvertently
serves the public good, then it is easy to see why society can
prosper even if people are not always driven by benevolence. It is
because Smith was right about self-interest and the public interest
that communism failed and capitalism worked.
Most advocates of CSR, especially those who run giant international
corporations, have probably read some economics in their time.
Many of the officials at the United Nations, World Bank and OECD
who argue in favour of CSR have advanced degrees in the subject
from the best universities. Yet they have apparently failed to grasp
this most basic and necessary insight of the entire discipline.
Through the action of Smith's invisible hand, the private search for
profit does advance the public interest. There is no need for
thought-leaders in CSR armed with initiatives and compacts to bring
this about.
Smith was a genius because this harmony of private interest and
public interest is not at all obvious—and yet, at the same time, once
it is pointed out, the idea is instantly simple and plausible. This is
especially so if you think not about self-interested individuals but
about profit-seeking companies. The value that people attach to the
goods and services they buy from companies is shown by what they
are willing to pay for them. The costs of producing those goods and
services are a measure of what society has to surrender to consume
those things. If what people pay exceeds the cost, society has
gained—and the company has turned a profit. The bigger the gain
for society, the bigger the profit. So profits are a guide (by no
means a perfect one, but a guide nonetheless) to the value that
companies create for society.
Does this mean that Gordon Gekko, the odious protagonist of the
movie, “Wall Street”, was right to say that “greed is good”? No:
greed and self-interest are not the same thing, as Mr Gekko
discovered in that movie. Greed, in the ordinary meaning of the
word, is not rational or calculating. Freely indulged, it makes you fat
and drives you into bankruptcy. The kind of self-interest that
advances the public good is rational and enlightened. Rational,
calculating self-interest makes a person, or a firm, worry about its
reputation for honesty and fair dealing, for paying debts and
honouring agreements. It looks beyond the short term and plans
ahead. It considers sacrifices today for the sake of gains tomorrow,
or five years from now. It makes good neighbours.
Morally, also, there is a world of difference between greed and self-
interest. The first, even if it were not self-defeating, would still be a
gross perversion of the second. Failing to see this distinction, and
thus concluding without further thought that private enterprise is
tainted, is a kind of ethical stupidity. Greed is ugly. There is nothing
ignoble, in contrast, about a calm and moderate desire to advance
one's own welfare, married (as it is in most people) to a
sympathetic regard for the well-being of others. And, as Smith
pointed out, rational self-interest also happens to make the world
go round.
Faulty premise
The premise that CSR advocates never question is in fact wrong. It
is an error to suppose that profit-seeking, as such, fails to advance
the public good, and that special efforts to give something back to
society are needed to redeem it.
However, as already noted, profit succeeds as an indicator of value
creation, and as a signal that draws new investment to socially
useful purposes, only under certain circumstances. It cannot be
taken for granted that these conditions will always be satisfied.
One main requirement is that firms are in competition with each
other. The profits that a monopoly can extract from the economy
are a measure of market power, not social gain. And monopoly
profits may not serve as an effective signal for new investment if
economic barriers of one kind or another hamper competition by
keeping new entrants off the monopolist's turf.
Oddly enough, business leaders who voice their commitment to
good corporate citizenship rarely demand the removal of barriers to
competition in their industries—a measure that would almost
invariably serve the public interest. Manufacturers are far more
likely to call for import barriers to be raised against their foreign
competitors than they are to call for existing tariffs or other barriers
to come down. Producers of all manner of goods and services are
more likely to call for the introduction of licences and controls to
protect their existing positions in their markets than to demand that
newcomers should be permitted and even encouraged to contest
those markets.
And CSR often helps them in this. Although it is true that many
business leaders mean what they say about good corporate
citizenship, and speak up for CSR in good faith, CSR is nonetheless
far more often invoked as a rationale for anti-competitive practices
than as a reason to bolster competition. Incumbent firms or
professions seem to find it easier to comply with burdensome
regulations if they know that those rules are deterring new
entrants. That is why, often in the name of CSR, incumbent
businesses are so given to calling for rules and standards to be
harmonised and extended, both at home and abroad.
For the good of the public, you understand, barristers are opposed
to reforms that would allow solicitors to appear more often as
advocates in English courts (their training just isn't up to it). For the
safety of the consumer, American pharmaceutical companies insist,
extraordinary precautions must be taken before drugs can be
imported from Canada (heaven knows what the Canadians, a devil-
may-care sort of people, put into those pills). For the good of the
world's poor, industrial-country manufacturers believe, goods
should not be imported from countries where employees have to
work long hours for low pay and without statutory vacations (that is
unfair trade).
A great deal of economic regulation makes sense for one reason or
another. But it is striking that business leaders—especially, it
seems, those who speak up most enthusiastically for CSR—call for
regulation that restricts competition far more often than they call
for regulation that strengthens it. This prompts the thought that the
design of economic regulation is best left to governments, rather
than to corporate citizens, however enlightened.
Social prices
A second condition must be met before one can be sure that private
enterprise in competitive markets is advancing the public good.
Prices need to reflect true social costs and benefits. Many
transactions, however, have side-effects—externalities, as they are
called. Where they do, private costs and benefits diverge from
public costs and benefits. Sometimes externalities are positive. If
your neighbour repaints his house, that may increase the value of
yours; since he fails to capture all the gains created by his
spending, he may repaint his house less frequently than would be
best for society at large—or, in this case, for your end of the street.
Markets tend to undersupply goods that involve positive
externalities.
Externalities can also be negative. The classic instance is a polluting
factory. The owners of the factory and the customers for its goods
do not have to bear the full costs of the pollution that comes out of
its smokestacks. Failing to take that into account, the market sets
the price of the factory's goods too low. Demand for the product is
stronger than it should be. Goods that involve negative externalities
tend to be oversupplied.
This kind of argument is invoked to make sense of “sustainable
development” and the claims pressed on business by that idea.
Prices are wrong, the argument goes, so markets are failing.
Pollution, including the accumulation of greenhouse gases, is not
priced into the market, so there is too much of it. Impending
shortages of natural resources are not priced into the market, so
those resources are consumed too rapidly. The value of wilderness,
either for its beauty or for its stocks of endangered species, is not
priced into the market, so too much of it gets cemented over.
Whether the pattern of consumption based on these false prices is
sustainable is really beside the point. Some patterns of consumption
could be indefinitely sustained but still be wrong, causing mounting
damage as far ahead as one can see. Others might indeed be
unsustainable, meaning bound to be halted at some point, yet not
be wrong, as when the approaching exhaustion of a raw material
leads to the invention of a substitute. “Sustainability” has a nice
ring to it, but it is not the issue. The question is whether false prices
are causing big economic mistakes—and, if so, what might be done
about that.
Many market prices do diverge from the corresponding “shadow
prices” that would direct resources to their socially best uses. In
many cases, the divergence is big enough to warrant government
action—a point which all governments have taken on board,
sometimes to a fault. All industrial-country governments intervene
in their economies. In principle, much of this intervention aims to
mitigate the misallocation of resources caused by externalities and
other kinds of market failure. But it is important to keep a sense of
proportion about the supposed unreliability of market signals.
So far as environmental externalities are concerned, most leading
advocates of CSR seem to be in the grip of a grossly exaggerated
environmental pessimism. The claim that economic growth is
necessarily bad for the environment is an article of faith in the CSR
movement. But this idea is simply wrong.
Natural resources are not running out, if you measure effective
supply in relation to demand. The reason is that scarcity raises
prices, which spurs innovation: new sources are found, the
efficiency of extraction goes up, existing supplies are used more
economically, and substitutes are invented. In 1970, global reserves
of copper were estimated at 280m tonnes; during the next 30 years
about 270m tonnes were consumed. Where did estimated reserves
of copper stand at the turn of the century? Not at 10m tonnes, but
at 340m. Available supplies have surged, and, it so happens,
demand per unit of economic activity has been falling: copper is
being replaced in many of its main industrial applications by other
materials (notably, fibre-optic cable instead of copper wire for
telecommunications).
Copper, therefore, is unlikely ever to run out—and if it did, in some
very distant future, it would be unlikely by then to matter. The
same is true for other key minerals. Reserves of bauxite in 1970
were 5.3 billion tonnes; the amount consumed between 1970 and
2000 was around 3 billion tonnes; reserves by the end of the
century stood at 25 billion tonnes. Or take energy. Oil reserves in
1970: 580 billion barrels. Oil consumed between 1970 and the turn
of the century: 690 billion barrels. Oil reserves in 2000: 1,050
billion barrels. And so on.
The colour of gloom
What about pollution? On the whole, rich countries are less polluted
than poor countries, not more. The reason is that wealth increases
both the demand for a healthier environment and the means to
bring it about. Environmental regulation has been necessary to
achieve this, to be sure, because pollution is indeed an externality.
But it is not true that the problem has been left unattended in the
rich world, that things are therefore getting worse, and that CSR
initiatives have to rise to the challenge of dealing with this neglect.
Strong environmental protection is already in place in Europe and
the United States. In some cases, no doubt, it needs to be
strengthened further. In some other cases, most likely, it is already
too strong. Overall, the evidence fails to show systematic neglect,
or any tendency, once government regulation is taken into account,
for economic growth to make things worse.
How much of an exception to this is global warming? Potentially, as
many CSR advocates say, a very important one. Emissions of
greenhouse gases are causing stocks of carbon in the atmosphere
to grow rapidly. Almost all climate scientists expect this to raise
temperatures to some unknown extent during the coming decades.
If temperatures rise towards the upper end of current projections,
the environmental damage will be great.
Yet the world still lacks an effective regime for global carbon
abatement. This is not so much because the United States has
refused to support the Kyoto agreement as because that agreement
is deeply flawed in any case—but this is beside the point. Global
warming is a potentially very significant externality that
governments up to now have failed to address properly.
Another such case is excessive encroachment on wilderness areas.
Once a wilderness has been lost, it cannot be replaced—and, unlike
for copper or oil, there will never be a substitute. Governments in
many rich and poor countries are neglecting this issue.
But on questions such as these, where governments are, it seems,
leaving significant market failures unaddressed, the question for
businesses is whether CSR can do anything useful to bridge the
gap. Many companies at the forefront of the CSR movement have
embarked on initiatives of their own, aimed, for example, at
reducing greenhouse-gas emissions or at protecting wilderness
areas.
These would need to be judged case by case, to see whether
particular policies were instances of “good management” (as when
an oil company invests profitably in alternative fuels, anticipating
both shifts in consumer demand and forthcoming taxes on carbon),
“borrowed virtue”, (for example, creating private wilderness
reserves at shareholders' expense), “pernicious CSR” (blocking
competition in the name of specious environmental goals) or
“delusional CSR” (increasing emissions of greenhouse gases in order
to conserve raw materials that are not in diminishing supply).
There will be good and bad. As a general rule, however, correcting
market failures is best left to government. Businesses cannot be
trusted to get it right, partly because they lack the wherewithal to
frame intelligent policy in these areas. Aside from the implausibility
of expecting the unco-ordinated actions of thousands of private
firms to yield a coherent optimising policy on global warming, say,
there is also what you might call the constitutional issue. The right
policy on global warming is not clear-cut even at the global level, to
say nothing of the national level or the level of the individual firm or
consumer. Devising such a policy, and sharing the costs equitably,
is a political challenge of the first order. Settling such questions
exceeds both the competence and the proper remit of private
enterprise.
THE ETHICS OF BUSINESS
Jan 20th 2005
From The Economist print edition
Good corporate citizens, and wise governments,
should be wary of CSR
RECALL that Joel Bakan, the angry law-school professor and
scourge of modern corporations, argued that CSR is usually a scam.
It is for governments, he says, not firms, to decide questions of
social, environmental and industrial policy—and governments
should know that if they fail in that duty, the psychotic corporation,
quite likely hiding behind CSR, will continue to rape and pillage.
Mr Bakan and those who share his morbid fear of capitalism are
wrong about that second point. Not only is competitive private
enterprise already heavily regulated; it also comes with a great deal
of built-in additional self-interested self-regulation, as it were. But
they are quite right about the first point. It is indeed desirable to
establish a clear division of duties between business and
government. Governments, which are accountable to their
electorates, should decide matters of public policy. Managers, who
are accountable to their shareholders, should run their businesses.
Does this mean that managers need not concern themselves with
ethics? Just the opposite. Managers should think much harder about
business ethics than they appear to at present. It is lack of clarity
about business ethics that gives rise to confusion over what
managers' responsibilities are, and over where the limits of those
responsibilities lie.
The crucial point is that managers of public companies do not own
the businesses they run. They are employed by the firms' owners to
maximise the long-term value of the owners' assets. Putting those
assets to any other use is cheating the owners, and that is
unethical. If a manager believes that the business he is working for
is causing harm to society at large, the right thing to do is not to
work for that business in the first place. Nothing obliges someone
who believes that the tobacco industry is evil to work in that
industry. But if someone accepts a salary to manage a tobacco
business in the interests of its owners, he has an obligation to those
owners. To flout that obligation is unethical.
In addition, of course, managers ought to behave ethically as they
pursue the proper business goal of maximising owner value—and
that puts real constraints on their actions. In most cases, acting
within these constraints advances the aim of the business, just as
individuals find that enlightened self-interest and ethical conduct
usually sit well together. But, for firms as for people, this will not
always be true. Sometimes the aims of the business and rational
self-interest will clash with ethics, and when they do, those aims
and interests must give way.
Much the same goes for acting within the law. In democratic
societies where the rule of law is upheld, businesses and individuals
should work under a strong presumption that they will obey those
societies' laws. This will generally be good for business, and usually
will be ethical as well—but, again, not always. Now and then,
depending on the circumstances, it is wrong to obey the law. And
merely following the law does not exhaust a firm's ethical
responsibilities, any more than it does an individual's. Some things
that are legal are unethical; and many things required by ethics are
not required by law.
Managers of companies must confront these questions in running
their businesses, just as individuals must in leading their everyday
lives. Business ethics, in short, is not an empty box. But what
exactly is in the box?
Elaine Sternberg, an academic philosopher and business consultant
(and a former investment banker), persuasively argues in her book,
“Just Business”, that there are two main things: “ordinary decency”
and “distributive justice”. These need to be understood in relation to
the proper goal of the firm. Without these basic values, business
would not be possible.
Be decent, be just
If owner value, and ownership itself, are to mean anything, there
must be respect for property rights. This excludes, Ms Sternberg
points out, “lying, cheating, stealing, killing, coercion, physical
violence and most illegality”; it calls instead for “honesty and
fairness”. Taken together, in her formulation, these constraints
reflect the demands of “ordinary decency”.
Some businessmen appear to believe that anything which is not
outright illegal, however unethical, can be regarded as proper
business conduct. But without ordinary decency (which goes a long
way beyond what the law requires of firms), business could not be
carried on.
Firms that lie and cheat cannot expect to stay in business very long,
even if their actions are allowed by law. Dishonest companies will
be unable to borrow, to obtain working capital, or to form stable
business relationships with suppliers and customers. Decency in this
sense is not just good for business, it is essential. When it comes to
maximising long-term owner value, honesty is not just the best
policy, it is the only feasible policy.
Crime doesn't pay
What about organised crime, you might ask? The mafia lasted
pretty well as a profit-maximising business, did it not? Yes, but
organised crime nonetheless proves the point. See what a criminal
or “indecent” enterprise has to do to grow and survive: it must
corrupt and intimidate, and thoroughly subvert both politics and the
criminal-justice system. Some sick jurisdictions have let that
happen. Where the rule of law prevails, however, those methods do
not work outside a highly circumscribed and perpetually
beleaguered criminal domain. Inside this zone, enterprises are
small, always in hiding, and in pathological conflict with each other.
Outside it, in the light, honesty and fair dealing are required if
business enterprises are to prosper and survive.
Granted, some critics of business regard “the big multinationals” as
little more than outposts of a mafia-like empire. In the world
according to Michael Moore, such companies do systematically lie
and cheat, and get away with it by corrupting and intimidating, and
subverting both politics and the criminal-justice system. There is
indeed little to choose, on this view, between Halliburton (or IBM,
for that matter, or General Motors or GlaxoSmithKline) and the cosa
nostra. Now and then executives do commit crimes, of course.
Usually, they are found out and punished. That aside, if you believe
that “the big multinationals” are essentially criminal enterprises
getting away with murder (perhaps literally), you are beyond the
reach of an article about business ethics.
What about the second component of business ethics, distributive
justice? In the business context, this simply means aligning benefits
within the organisation to the contribution made to achieving the
aims of the firm. Pay linked to performance and promotion on merit
are instances of distributive justice within the company.
Much of what was said about the role of ordinary decency applies
here too. Again, these notions of what is fair are widely accepted;
on the other hand, they are not, for the most part, required by law;
as a practical matter, they are needed if the business is to do as
well as it can; and they are also questions of ethics, and hence part
of the ethics of business. To promote a friend rather than the best
person for the job, or to reward a manager for incompetence or
wrongdoing, is a bad way to run a business—and is also unethical.
Many writers on business ethics, and just about all advocates of
CSR, argue that this way of thinking mistakes the proper purpose of
the enterprise. Making money for the owners is too narrow a view
of what a corporation is for. It raises ownership—“mere ownership”,
as they would say—too high. Owners are just one group among
many kinds of different “stakeholders” in a business. It is wrong to
run a business in the interest of one kind of stakeholder, ignoring
the legitimate interests of all the others. Is this correct?
There is a lot of unnecessary confusion about “stakeholders”.
Businesses certainly need to take account of other interested
parties if they are to succeed as businesses: they must satisfy their
customers, get on with their suppliers, motivate their workers, and
so forth. In that sense, these different groups of stakeholders will
have their say and exercise their influence. But “taking account of”
is not the same as “being held accountable to”. Accountability refers
to a much more formal and direct set of rights and obligations.
Of course it is always possible, as a matter of law, to create forms
of managerial accountability to non-owners. Through the courts,
you might say, managers are held accountable to society at large.
Public policy can make managers accountable to regulators.
Managerial accountability to workers can also be required by law:
worker representation on company boards is mandated in Germany,
for instance. (Whether this serves the interests of German workers,
or of Germany's citizens in general, is nowadays in doubt.) But all
such lines of accountability recognise owners as primary. You
cannot deem stakeholders to be equal co-owners of a business
without repudiating the very idea of ownership. And where the law
does not create accountability to non-owners, there is none.
In many of the corporate scandals of recent years, it has seemed
that managers have acted as though they were accountable to
nobody—not even, and in some cases least of all, to the firms'
owners. This has been rightly recognised as a problem, and a lot of
time and effort has been spent on trying to make accountability to
shareholders—on matters such as executive pay—more effective.
Muddled thinking on CSR, and on supposed accountability to non-
owners, only makes it harder to put this right. Advocates of CSR
ought to reflect on the fact that the “triple bottom line” and the
bogus pay scheme which rewards bad performance with riches have
something important in common: the idea that the interests of
“mere owners” should not be allowed to come between managers
and their personal objectives. Broken corporate governance and
CSR are close relations. You often see them together.
Good companies, good government
An earlier section of this article sketched out a four-way
classification of CSR: good management, borrowed virtue,
pernicious CSR and delusional CSR. Does business ethics shed any
more light on those categories? It does, though some of the results
are a little troubling at first sight.
Good management and delusional CSR raise no new difficulties from
an ethical point of view: the first, which increases profits and
improves social welfare, is plainly a good thing and the second,
which reduces both, is plainly not. Borrowed virtue has already
been criticised on ethical grounds, even though it is assumed to
advance social welfare. That verdict stands, as you would expect. A
proper understanding of business ethics makes the reasoning
clearer, but the main thing is still that the profits of a publicly
owned company are not the managers' to give away. The remaining
category is pernicious CSR, the kind that raises profits but reduces
social welfare.
Is pernicious CSR also unethical? Often, paradoxically, the answer
will be no. Managers cannot be criticised on ethical grounds for
aiming to increase long-term owner-value: that is their job.
Assuming that they have also acted within the law, the next
question is whether they have violated the standards of ordinary
decency and distributive justice within the organisation. If they
have—if they have lied, or bribed, or coerced, for instance—then
they have behaved unethically. But if they have acted in accordance
with those two standards of business conduct, they are ethically in
the right, even though they have acted against the public interest.
This is not as strange as it seems. Consider the case of monopoly.
Managers are not to be criticised on ethical grounds for striving to
drive their competitors out of business—provided that they do this
by selling a better product, for instance, rather than by deception or
coercion or through unlawful anti-competitive practices. And if they
succeed in establishing a monopoly, it is not unethical to set a price
that maximises the company's profits, or even (to the extent that
the law allows it) to create business barriers to the entry of new
competitors (for instance, by spending heavily on advertising). For
that matter, it is not unethical for a company to lobby the
government for protection from foreign competition, citing its
concerns, as a good corporate citizen, for the well-being of its
workers. All of these things may well be ethical—even when, from
the point of view of society as a whole, they are likely to be
undesirable.
This seeming paradox only underlines the point that businesses
should not try to do the work of governments, just as governments
should not try to do the work of businesses. The goals of business
and the goals of government are different—or should be. That, by
the way, is why “partnership” between those two should always
arouse intense suspicion. Managers, acting in their professional
capacity, ought not to concern themselves with the public good:
they are not competent to do it, they lack the democratic
credentials for it, and their day jobs should leave them no time
even to think about it. If they merely concentrate on discharging
their responsibility to the owners of their firms, acting ethically as
they do so, they will usually serve the public good in any case.
The proper guardians of the public interest are governments, which
are accountable to all citizens. It is the job of elected politicians to
set goals for regulators, to deal with externalities, to mediate
among different interests, to attend to the demands of social
justice, to provide public goods and collect the taxes to pay for
them, to establish collective priorities where that is necessary and
appropriate, and to organise resources accordingly.
The proper business of business is business. No apology required.
SURVEY: CORPORATE SOCIAL RESPONSIBILITY
THE GOOD COMPANY
Jan 20th 2005
From The Economist print edition
The movement for corporate social responsibility
has won the battle of ideas. That is a pity, argues
Clive Crook
OVER the past ten years or so, corporate social responsibility (CSR)
has blossomed as an idea, if not as a coherent practical
programme. CSR commands the attention of executives
everywhere—if their public statements are to be believed—and
especially that of the managers of multinational companies
headquartered in Europe or the United States. Today corporate
social responsibility, if it is nothing else, is the tribute that
capitalism everywhere pays to virtue.
It would be a challenge to find a recent annual report of any big
international company that justifies the firm's existence merely in
terms of profit, rather than “service to the community”. Such
reports often talk proudly of efforts to improve society and
safeguard the environment—by restricting emissions of greenhouse
gases from the staff kitchen, say, or recycling office stationery—
before turning hesitantly to less important matters, such as profits.
Big firms nowadays are called upon to be good corporate citizens,
and they all want to show that they are.
On the face of it, this marks a significant victory in the battle of
ideas. The winners are the charities, non-government organisations
and other elements of what is called civil society that pushed for
CSR in the first place. These well-intentioned groups certainly did
not invent the idea of good corporate citizenship, which goes back a
long way. But they dressed the notion in its new CSR garb and
moved it much higher up the corporate agenda.
In public-relations terms, their victory is total. In fact, their
opponents never turned up. Unopposed, the CSR movement has
distilled a widespread suspicion of capitalism into a set of demands
for action. As its champions would say, they have held companies to
account, by embarrassing the ones that especially offend against
the principles of CSR, and by mobilising public sentiment and an
almost universally sympathetic press against them. Intellectually, at
least, the corporate world has surrendered and gone over to the
other side.
The signs of the victory are not just in the speeches of top
executives or the diligent reporting of CSR efforts in their published
accounts. Corporate social responsibility is now an industry in its
own right, and a flourishing profession as well. Consultancies have
sprung up to advise companies on how to do CSR, and how to let it
be known that they are doing it. The big auditing and general-
practice consulting firms offer clients CSR advice (while
conspicuously striving to be exemplary corporate citizens
themselves).
Most multinationals now have a senior executive, often with a staff
at his disposal, explicitly charged with developing and co-ordinating
the CSR function. In some cases, these executives have been
recruited from NGOs. There are executive-education programmes in
CSR, business-school chairs in CSR, CSR professional organisations,
CSR websites, CSR newsletters and much, much more.
But what does it all amount to, really? The winners, oddly enough,
are disappointed. They are starting to suspect that they have been
conned. Civil-society advocates of CSR increasingly accuse firms of
merely paying lip-service to the idea of good corporate citizenship.
Firms are still mainly interested in making money, they note
disapprovingly, whatever the CEO may say in the annual report.
When commercial interests and broader social welfare collide, profit
comes first. Judge firms and their CSR efforts by what the
companies do, charities such as Christian Aid (a CSR pioneer) now
insist, not by what they say—and prepare to be unimpressed.
By all means, judge companies by their actions. And, applying that
sound measure, CSR enthusiasts are bound to be disappointed. The
2004 Giving List, published by Britain's Guardian newspaper,
showed that the charitable contributions of FTSE 100 companies
(including gifts in kind, staff time devoted to charitable causes and
related management costs) averaged just 0.97% of pre-tax profits.
A few give more; many give almost nothing (though every one of
them records some sort of charitable contribution). The total is not
exactly startling. The figures for American corporate philanthropy
are bigger, but the numbers are unlikely to impress many CSR
advocates.
Still, you might say, CSR was always intended to be more about
how companies conduct themselves in relation to “stakeholders”
(such as workers, consumers, the broader society in which firms
operate and, as is often argued, future generations) than about
straightforward gifts to charity. Seen that way, donations, large or
small, are not the main thing.
Setting gifts aside, then, what about the many other CSR initiatives
and activities undertaken by big multinational companies? Many of
these are expressly intended to help profits as well as do good. It is
unclear whether this kind of CSR quite counts. Some regard it as
“win-win”, and something to celebrate; others view it as a sham,
the same old tainted profit motive masquerading as altruism. And,
even to the most innocent observer, plenty of CSR policies smack of
tokenism and political correctness more than of a genuine concern
to “give back to the community”, as the Giving List puts it. Is CSR
then mostly for show?
It is hazardous to generalise, because CSR takes many different
forms and is driven by many different motives. But the short
answer must be yes: for most companies, CSR does not go very
deep. There are many interesting exceptions—companies that have
modelled themselves in ways different from the norm; quite often,
particular practices that work well enough in business terms to be
genuinely embraced; charitable endeavours that happen to be doing
real good, and on a meaningful scale. But for most conventionally
organised public companies—which means almost all of the big
ones—CSR is little more than a cosmetic treatment. The human face
that CSR applies to capitalism goes on each morning, gets
increasingly smeared by day and washes off at night.
Under pressure, big multinationals ask their critics to judge them by
CSR criteria, and then, as the critics charge, mostly fail to follow
through. Their efforts may be enough to convince the public that
what they see is pretty, and in many cases this may be all they are
ever intended to achieve. But by and large CSR is at best a gloss on
capitalism, not the deep systemic reform that its champions deem
desirable.
Does this give cause for concern? On the whole, no, for a simple
reason. Capitalism does not need the fundamental reform that
many CSR advocates wish for. If CSR really were altering the bones
behind the face of capitalism—sawing its jaws, removing its teeth
and reducing its bite—that would be bad: not just for the owners of
capital, who collect the company's profits, but, as this survey will
argue, also for society at large. Better that CSR be undertaken as a
cosmetic exercise than as serious surgery to fix what doesn't need
fixing.
We are an equal-opportunity employer
But this is not the end of the matter. Particular CSR initiatives may
do good, or harm, or make no difference one way or the other, but
it is important to resist the success of the CSR idea—that is, the
almost universal acceptance of its premises and main lines of
argument. Otherwise bones may indeed begin to snap and CSR may
encroach on corporate decision-making in ways that seriously
reduce welfare.
Private enterprise requires a supporting infrastructure of laws and
permissions, and more generally the consent of electorates, to
pursue its business goals, whatever they may be. This is something
that CSR advocates emphasise—they talk of a “licence to operate”—
and they are quite right. But the informed consent of electorates,
and an appropriately designed economic infrastructure, in turn
require an understanding of how capitalism best works to serve the
public good. The thinking behind CSR gives an account of this which
is muddled and, in some important ways, downright false.
There is another danger too: namely, that CSR will distract
attention from genuine problems of business ethics that do need to
be addressed. These are not in short supply. To say that CSR
reflects a mistaken analysis of how capitalism serves society is
certainly not to say that managers can be left to do as they please,
nor to say that the behaviour of firms is nobody's concern but their
own. There is indeed such a thing as “business ethics”: managers
need to be clear about that, and to comprehend what it implies for
their actions.
Also, private enterprise serves the public good only if certain
stringent conditions are met. As a result, getting the most out of
capitalism requires public intervention of various kinds, and a lot of
it: taxes, public spending, regulation in many different areas of
business activity. It also requires corporate executives to be
accountable—but to the right people and in the right way.
CSR cannot be a substitute for wise policies in these areas. In
several little-noticed respects, it is already a hindrance to them. If
left unchallenged, it could well become more so. To improve
capitalism, you first need to understand it. The thinking behind CSR
does not meet that test.
THE WORLD ACCORDING TO CSR
Jan 20th 2005
From The Economist print edition
Good corporate citizens believe that capitalism is
wicked but redeemable
OVER the past century or so, and especially in the past 50 years,
the western industrial democracies have experienced what can only
be described as an economic miracle. Living standards and the
quality of life have risen at a pace, and to a level, that would have
been impossible to imagine in earlier times.
This improvement in people's lives, staggering by any historical
standard, is not measured solely in terms of material consumption—
important though it is, for instance, to have enough to eat, to keep
warm in winter, to be entertained and educated and to be able to
travel. In addition to material gains such as these, and to all the
other blessings of western “consumer society”, broader measures of
well-being have raced upward as well: infant mortality has
plummeted, life expectancy has soared, and the quality of those
extended years of life, in terms of freedom from chronic sickness
and pain, is better than earlier generations ever dreamed it could
be.
All this has been bestowed not just on an elite, but on the broad
mass of people. In the West today the poor live better lives than all
but the nobility enjoyed throughout the course of modern history
before capitalism. Capitalism, plainly, has been the driving force
behind this unparalleled economic and social progress. Yet today it
is suspected, feared and deplored—and not just by the kind of
energetic anti-capitalists who now and then put bricks through the
windows of McDonald's.
According even to middle-of-the-road popular opinion, capitalism is
at best a regrettable necessity, a useful monster that needs to be
bound, drugged and muzzled if it is not to go on the rampage.
Stranger still, this view seems to be shared by a good proportion of
business leaders. Capitalism, if guided by nothing but their own
unchecked intentions, would be wicked, destructive and
exploitative, they apparently believe—bent on raping the planet and
intent on keeping the poor outside the capitalist West in poverty.
In a much-discussed recent book, “The Corporation: The
Pathological Pursuit of Profit and Power”, Joel Bakan, a law
professor at the University of British Columbia, lays bare the
danger. His themes were further developed and illustrated in a film
of the same title, which was also successful and well reviewed.
The corporation's legally defined mandate is to pursue relentlessly
and without exception its own economic self-interest, regardless of
the harmful consequences it might cause to others...Today,
corporations govern our lives. They determine what we eat, what
we watch, what we wear, where we work and what we do. We are
inescapably surrounded by their culture, iconography and ideology.
And, like the church and the monarchy in other times, they posture
as infallible and omnipotent, glorifying themselves in imposing
buildings and elaborate displays. Increasingly, corporations dictate
the decisions of their supposed overseers in government and control
domains of society once firmly embedded in the public sphere.
Corporations now govern society, perhaps more than governments
themselves do; yet ironically it is their very power, much of which
they have gained through economic globalisation, that makes them
vulnerable. As is true of any ruling institution, the corporation now
attracts mistrust, fear and demands for accountability from an
increasingly anxious public. Today's corporate leaders understand,
as did their predecessors, that work is needed to regain and
maintain the public's trust. And they, like their predecessors, are
seeking to soften the corporation's image by presenting it as
human, benevolent and socially responsible.
In Mr Bakan's view, CSR is mostly a fraud. Companies, after all, are
in “pathological pursuit of profit and power”. CSR is merely a means
to those ends, a way to ingratiate capitalism to a rightly suspecting
public. The book's jacket has blurbs of generous praise not just, as
you might expect, from Noam Chomsky but also from an
investment-fund manager and a CEO, who says it is holding up “a
mirror for [corporations] to see their destructive selves as others
see them”.
Many businessmen do seem to recognise themselves in that mirror.
And popular culture has the corporate psycho in plain view—which
is remarkable, given the corporation's suffocating grip on all
thoughts and deeds. What is the capitalist ethos according to
Hollywood? “Greed is good,” as Gordon Gekko explained in “Wall
Street”. From “RoboCop” (the military-industrial complex) to “Super
Size Me” (fast-food tyrants) and back again, the brave unequal war
against corporate dominion is waged.
This paranoid fear of capitalism, shared by so many of its leading
practitioners, boils down to two main ideas. First, profit in its own
right has nothing to do with the public good. A company in pursuit
of profit is seeking a purely private gain. If the pursuit of profit is to
yield an advance in social welfare, then something else, acting with
deliberation and intelligence from outside the corporation, must
intervene. Second, in their mad pursuit of private gain, companies
are driven by the logic of their quest to place crippling burdens on
society and on the environment.
So far as society at large is concerned, in other words, the
untrammelled pursuit of profit yields nothing, but costs plenty.
Unless it is checked either by CSR or (as Mr Bakan would prefer, if
only as a first step) by double-strength government regulation,
private enterprise makes losers of everyone but itself.
Private profit, public interest
The perceived tension between private profit and public interest
pervades the CSR literature. Yet the idea is never examined. It is
always regarded as self-evident.
The top executives at Royal Dutch/Shell have lately been acting as
CSR thought-leaders—and they are CSR champions in other ways
as well (through the activities of the generously supported
charitable activities of the Shell Foundation, for instance). Shell has
a lot of popular suspicion to live down, following the scandal over its
operations in Nigeria, for instance, and the controversy surrounding
its plans for the disposal of the Brent Spar oil-drilling platform in the
North Sea. Its senior executives have done their best. In a leaflet
explaining why the company had embraced CSR, Sir Mark Moody-
Stuart, who was chairman between 1998 and 2001, and before that
managing director, wrote:
[M]y colleagues and I on the committee of managing directors are
totally committed to a business strategy that generates profits while
contributing to the well-being of the planet and its people.
That seems entirely unobjectionable, you might think: a
commitment to motherhood and apple pie. But the clear
implication—and Sir Mark, to judge by other speeches and articles,
buys it wholesale—is that if Shell simply made profits for its owners,
that would in itself contribute nothing to “the planet and its people”.
From this it follows that if Shell is to justify its activities to society at
large, it has to do more than just make money for its owners.
Therein lies the case for CSR. But is the premise actually true? True
or false, it is never challenged.
One of the world's foremost CSR networks and organisations is the
World Business Council for Sustainable Development. Its
membership is made up of 175 big multinationals, including Shell,
alongside firms such as ABB, Dow Chemical, Ford, General Motors,
Procter & Gamble, Time Warner and so on. One of the council's
publications begins:
Although the rationale for the very existence of business at law and
in other respects is to generate acceptable returns for its
shareholders and investors, business and business leaders have,
over the centuries, made significant contributions to the societies of
which they form part.
Why yes. If you compare people's lives in the West today with those
of people living, say, a century ago, or two centuries ago, it would
be right, if perhaps a little miserly, to concede that business has
made some “significant contributions”. But in the council's opinion
these moderately important benefits did not arise because
businesses generated acceptable returns for their owners; they
arose despite that fact. Profit, unfortunately, is necessary, as the
council sadly notes: otherwise you cannot have business, along with
the possibility of those quite useful contributions. But those
contributions have to be separately willed. It is simply not in the
nature of business as such to contribute. That is an add-on, a
responsibility that business may choose to discharge or not
discharge, as it sees fit.
So, anti-capitalists believe this; angry law-school professors (whose
own significant contributions cannot be in doubt) believe it; and the
leaders of international big business believe it. For good measure,
many industrial-country governments, acting singly or in concert,
believe it as well. Britain is just one of many countries to have
designated a minister responsible for encouraging CSR initiatives. In
2001 the European Commission published a consultative paper
entitled, “Promoting a European Framework for Corporate Social
Responsibility”. The aim is “to launch a wide debate on how the
European Union could promote corporate social responsibility at
both the European and international level”. Values, it says, “need to
be translated into action”.
Leading international institutions such as the World Bank, the
United Nations, the Organisation of Economic Co-operation and
Development, and indeed more or less any outfit of that sort you
care to name, endorse the view that profit serves an exclusively
private interest, and that blind pursuit of profit is therefore likely to
prove socially harmful.
The United Nations is especially keen on CSR, as part of a broad
new approach to global governance. It continues to promote its
“Global Compact”, launched at the World Economic Forum in 1999.
This initiative aims to draw together businesses and business
organisations, NGOs, and UN and other international agencies. The
goal of this new “tripartism”—an ongoing discussion among
governments, companies and civil society (which is how the UN
refers to NGOs)—is to find ways to “underpin the free and open
market system with stable and just societies”.
It is one thing to believe that profit-seeking serves no public
interest directly. It is another to believe that profit-seeking, unless
tempered and channelled by CSR or in some other way, actually
works against the public interest. This second idea, already noted,
is an extension of the first. And this is where “sustainable
development” comes in.
The concept of sustainable development puts flesh on the idea that
business left to its own devices is dangerous. Untamed profit-
seeking, it is argued, puts strain on the environment and exploits
workers. At the same time the goal of sustainable development
points to a more concrete agenda for CSR: while pursuing profit,
enlightened companies should take care to protect the environment
and uphold the rights of workers (and others) as well. Hence the
“triple bottom line” which thought-leaders on CSR (including the
United Nations and the European Commission) want companies to
monitor and report: don't just aim to make money, but protect the
environment and fight for social justice as well.
Unsustainable
One problem with the triple bottom line is quickly apparent.
Measuring profits is fairly straightforward; measuring environmental
protection and social justice is not. The difficulty is partly that there
is no single yardstick for measuring progress in those areas. How is
any given success for environmental action to be weighed against
any given advance in social justice—or, for that matter, against any
given change in profits? And how are the three to be traded off
against each other? (CSR advocates who emphasise sustainable
development implicitly insist that there must be such a trade-off, at
least when it comes to weighing profit against either of the other
two.) Measuring profits—the good old single bottom line—offers a
pretty clear test of business success. The triple bottom line does
not.
The problem is not just that there is no one yardstick allowing the
three measures to be compared with each other. It is also that
there is no agreement on what progress on the environment, or
progress in the social sphere, actually mean—not, at least, if you
are trying to be precise about it. In other words, there are no
yardsticks by which different aspects of environmental protection
can be compared even with each other, let alone with other criteria.
And the same goes for social justice.
One company reduces its emissions of greenhouse gases. One
increases its spending on recycling. Another provides free child-care
facilities for its workers. Another raises the wages of its lowest-paid
workers. All of these things cost money: suppose, for the sake of
argument, that all four have reduced profit by the same amount.
Which company has done most to protect the environment? Which
has done most to advance social progress? Overall, how far has
each company improved its triple bottom line? Bearing in mind the
cost, can you even say that any of them have done so?
The great virtue of the single bottom line is that it holds managers
to account for something. The triple bottom line does not. It is not
so much a licence to operate as a licence to obfuscate.
CSR advocates could reply that this misses the point. The idea of
the triple bottom line is not that the three-dimensional performance
of business can ever be judged as precisely as its orthodox one-
dimensional performance. The triple bottom line is just shorthand
for saying: take other things into account, acknowledge that profit
isn't everything, and don't pursue profit relentlessly, as you would
otherwise be inclined to, even at the expense of damage to the
environment and infringements of the rights of workers and other
stakeholders. You cannot be precise about these things, but at least
you can recognise the social and environmental peril of too narrow
a focus on profit.
That is a perfectly reasonable line of argument—or it would be, if a
narrow focus on profit really did endanger the environment,
systematically infringe the rights of workers and stakeholders, and
in general fail to serve the public interest. That is the world
according to CSR, but is the world really like that? The short answer
is no. For a slightly longer answer, read on.
PROFIT AND THE PUBLIC GOOD
Jan 20th 2005
From The Economist print edition
Companies that merely compete and prosper make
society better off
ADAM SMITH, you might say, wrote the book on corporate social
responsibility. It is entitled, “Wealth of Nations”.
Every individual necessarily labours to render the annual revenue of
the society as great as he can. He generally, indeed, neither intends
to promote the public interest, nor knows how much he is
promoting it...he intends only his own gain, and he is in this, as in
many other cases, led by an invisible hand to promote an end which
was no part of his intention. Nor is it always the worse for the
society that it was no part of it. By pursuing his own interest he
frequently promotes that of the society more effectually than when
he really intends to promote it. I have never known much good
done by those who affected to trade for the public good.
It is not from the benevolence of the butcher, the brewer, or the
baker, that we expect our dinner, but from their regard to their own
interest. We address ourselves, not to their humanity but to their
self-love, and never talk to them of our own necessities but of their
advantages.
Smith did not worship selfishness. He regarded benevolence as
admirable, as a great virtue, and he saw the instinct for sympathy
towards one's fellow man as the foundation on which civilised
conduct is built (he wrote another book about this: “The Theory of
Moral Sentiments”). But his greatest economic insight—and indeed
the greatest single insight yielded by the discipline of economics—
was that benevolence was not in fact necessary to advance the
public interest, so long as people were free to engage with each
other in voluntary economic interaction. That is fortunate, he
pointed out, since benevolence is often in short supply. Self-
interest, on the other hand, is not.
If self-interest, guided as though by an invisible hand, inadvertently
serves the public good, then it is easy to see why society can
prosper even if people are not always driven by benevolence. It is
because Smith was right about self-interest and the public interest
that communism failed and capitalism worked.
Most advocates of CSR, especially those who run giant international
corporations, have probably read some economics in their time.
Many of the officials at the United Nations, World Bank and OECD
who argue in favour of CSR have advanced degrees in the subject
from the best universities. Yet they have apparently failed to grasp
this most basic and necessary insight of the entire discipline.
Through the action of Smith's invisible hand, the private search for
profit does advance the public interest. There is no need for
thought-leaders in CSR armed with initiatives and compacts to bring
this about.
Smith was a genius because this harmony of private interest and
public interest is not at all obvious—and yet, at the same time, once
it is pointed out, the idea is instantly simple and plausible. This is
especially so if you think not about self-interested individuals but
about profit-seeking companies. The value that people attach to the
goods and services they buy from companies is shown by what they
are willing to pay for them. The costs of producing those goods and
services are a measure of what society has to surrender to consume
those things. If what people pay exceeds the cost, society has
gained—and the company has turned a profit. The bigger the gain
for society, the bigger the profit. So profits are a guide (by no
means a perfect one, but a guide nonetheless) to the value that
companies create for society.
Does this mean that Gordon Gekko, the odious protagonist of the
movie, “Wall Street”, was right to say that “greed is good”? No:
greed and self-interest are not the same thing, as Mr Gekko
discovered in that movie. Greed, in the ordinary meaning of the
word, is not rational or calculating. Freely indulged, it makes you fat
and drives you into bankruptcy. The kind of self-interest that
advances the public good is rational and enlightened. Rational,
calculating self-interest makes a person, or a firm, worry about its
reputation for honesty and fair dealing, for paying debts and
honouring agreements. It looks beyond the short term and plans
ahead. It considers sacrifices today for the sake of gains tomorrow,
or five years from now. It makes good neighbours.
Morally, also, there is a world of difference between greed and self-
interest. The first, even if it were not self-defeating, would still be a
gross perversion of the second. Failing to see this distinction, and
thus concluding without further thought that private enterprise is
tainted, is a kind of ethical stupidity. Greed is ugly. There is nothing
ignoble, in contrast, about a calm and moderate desire to advance
one's own welfare, married (as it is in most people) to a
sympathetic regard for the well-being of others. And, as Smith
pointed out, rational self-interest also happens to make the world
go round.
Faulty premise
The premise that CSR advocates never question is in fact wrong. It
is an error to suppose that profit-seeking, as such, fails to advance
the public good, and that special efforts to give something back to
society are needed to redeem it.
However, as already noted, profit succeeds as an indicator of value
creation, and as a signal that draws new investment to socially
useful purposes, only under certain circumstances. It cannot be
taken for granted that these conditions will always be satisfied.
One main requirement is that firms are in competition with each
other. The profits that a monopoly can extract from the economy
are a measure of market power, not social gain. And monopoly
profits may not serve as an effective signal for new investment if
economic barriers of one kind or another hamper competition by
keeping new entrants off the monopolist's turf.
Oddly enough, business leaders who voice their commitment to
good corporate citizenship rarely demand the removal of barriers to
competition in their industries—a measure that would almost
invariably serve the public interest. Manufacturers are far more
likely to call for import barriers to be raised against their foreign
competitors than they are to call for existing tariffs or other barriers
to come down. Producers of all manner of goods and services are
more likely to call for the introduction of licences and controls to
protect their existing positions in their markets than to demand that
newcomers should be permitted and even encouraged to contest
those markets.
And CSR often helps them in this. Although it is true that many
business leaders mean what they say about good corporate
citizenship, and speak up for CSR in good faith, CSR is nonetheless
far more often invoked as a rationale for anti-competitive practices
than as a reason to bolster competition. Incumbent firms or
professions seem to find it easier to comply with burdensome
regulations if they know that those rules are deterring new
entrants. That is why, often in the name of CSR, incumbent
businesses are so given to calling for rules and standards to be
harmonised and extended, both at home and abroad.
For the good of the public, you understand, barristers are opposed
to reforms that would allow solicitors to appear more often as
advocates in English courts (their training just isn't up to it). For the
safety of the consumer, American pharmaceutical companies insist,
extraordinary precautions must be taken before drugs can be
imported from Canada (heaven knows what the Canadians, a devil-
may-care sort of people, put into those pills). For the good of the
world's poor, industrial-country manufacturers believe, goods
should not be imported from countries where employees have to
work long hours for low pay and without statutory vacations (that is
unfair trade).
A great deal of economic regulation makes sense for one reason or
another. But it is striking that business leaders—especially, it
seems, those who speak up most enthusiastically for CSR—call for
regulation that restricts competition far more often than they call
for regulation that strengthens it. This prompts the thought that the
design of economic regulation is best left to governments, rather
than to corporate citizens, however enlightened.
Social prices
A second condition must be met before one can be sure that private
enterprise in competitive markets is advancing the public good.
Prices need to reflect true social costs and benefits. Many
transactions, however, have side-effects—externalities, as they are
called. Where they do, private costs and benefits diverge from
public costs and benefits. Sometimes externalities are positive. If
your neighbour repaints his house, that may increase the value of
yours; since he fails to capture all the gains created by his
spending, he may repaint his house less frequently than would be
best for society at large—or, in this case, for your end of the street.
Markets tend to undersupply goods that involve positive
externalities.
Externalities can also be negative. The classic instance is a polluting
factory. The owners of the factory and the customers for its goods
do not have to bear the full costs of the pollution that comes out of
its smokestacks. Failing to take that into account, the market sets
the price of the factory's goods too low. Demand for the product is
stronger than it should be. Goods that involve negative externalities
tend to be oversupplied.
This kind of argument is invoked to make sense of “sustainable
development” and the claims pressed on business by that idea.
Prices are wrong, the argument goes, so markets are failing.
Pollution, including the accumulation of greenhouse gases, is not
priced into the market, so there is too much of it. Impending
shortages of natural resources are not priced into the market, so
those resources are consumed too rapidly. The value of wilderness,
either for its beauty or for its stocks of endangered species, is not
priced into the market, so too much of it gets cemented over.
Whether the pattern of consumption based on these false prices is
sustainable is really beside the point. Some patterns of consumption
could be indefinitely sustained but still be wrong, causing mounting
damage as far ahead as one can see. Others might indeed be
unsustainable, meaning bound to be halted at some point, yet not
be wrong, as when the approaching exhaustion of a raw material
leads to the invention of a substitute. “Sustainability” has a nice
ring to it, but it is not the issue. The question is whether false prices
are causing big economic mistakes—and, if so, what might be done
about that.
Many market prices do diverge from the corresponding “shadow
prices” that would direct resources to their socially best uses. In
many cases, the divergence is big enough to warrant government
action—a point which all governments have taken on board,
sometimes to a fault. All industrial-country governments intervene
in their economies. In principle, much of this intervention aims to
mitigate the misallocation of resources caused by externalities and
other kinds of market failure. But it is important to keep a sense of
proportion about the supposed unreliability of market signals.
So far as environmental externalities are concerned, most leading
advocates of CSR seem to be in the grip of a grossly exaggerated
environmental pessimism. The claim that economic growth is
necessarily bad for the environment is an article of faith in the CSR
movement. But this idea is simply wrong.
Natural resources are not running out, if you measure effective
supply in relation to demand. The reason is that scarcity raises
prices, which spurs innovation: new sources are found, the
efficiency of extraction goes up, existing supplies are used more
economically, and substitutes are invented. In 1970, global reserves
of copper were estimated at 280m tonnes; during the next 30 years
about 270m tonnes were consumed. Where did estimated reserves
of copper stand at the turn of the century? Not at 10m tonnes, but
at 340m. Available supplies have surged, and, it so happens,
demand per unit of economic activity has been falling: copper is
being replaced in many of its main industrial applications by other
materials (notably, fibre-optic cable instead of copper wire for
telecommunications).
Copper, therefore, is unlikely ever to run out—and if it did, in some
very distant future, it would be unlikely by then to matter. The
same is true for other key minerals. Reserves of bauxite in 1970
were 5.3 billion tonnes; the amount consumed between 1970 and
2000 was around 3 billion tonnes; reserves by the end of the
century stood at 25 billion tonnes. Or take energy. Oil reserves in
1970: 580 billion barrels. Oil consumed between 1970 and the turn
of the century: 690 billion barrels. Oil reserves in 2000: 1,050
billion barrels. And so on.
The colour of gloom
What about pollution? On the whole, rich countries are less polluted
than poor countries, not more. The reason is that wealth increases
both the demand for a healthier environment and the means to
bring it about. Environmental regulation has been necessary to
achieve this, to be sure, because pollution is indeed an externality.
But it is not true that the problem has been left unattended in the
rich world, that things are therefore getting worse, and that CSR
initiatives have to rise to the challenge of dealing with this neglect.
Strong environmental protection is already in place in Europe and
the United States. In some cases, no doubt, it needs to be
strengthened further. In some other cases, most likely, it is already
too strong. Overall, the evidence fails to show systematic neglect,
or any tendency, once government regulation is taken into account,
for economic growth to make things worse.
How much of an exception to this is global warming? Potentially, as
many CSR advocates say, a very important one. Emissions of
greenhouse gases are causing stocks of carbon in the atmosphere
to grow rapidly. Almost all climate scientists expect this to raise
temperatures to some unknown extent during the coming decades.
If temperatures rise towards the upper end of current projections,
the environmental damage will be great.
Yet the world still lacks an effective regime for global carbon
abatement. This is not so much because the United States has
refused to support the Kyoto agreement as because that agreement
is deeply flawed in any case—but this is beside the point. Global
warming is a potentially very significant externality that
governments up to now have failed to address properly.
Another such case is excessive encroachment on wilderness areas.
Once a wilderness has been lost, it cannot be replaced—and, unlike
for copper or oil, there will never be a substitute. Governments in
many rich and poor countries are neglecting this issue.
But on questions such as these, where governments are, it seems,
leaving significant market failures unaddressed, the question for
businesses is whether CSR can do anything useful to bridge the
gap. Many companies at the forefront of the CSR movement have
embarked on initiatives of their own, aimed, for example, at
reducing greenhouse-gas emissions or at protecting wilderness
areas.
These would need to be judged case by case, to see whether
particular policies were instances of “good management” (as when
an oil company invests profitably in alternative fuels, anticipating
both shifts in consumer demand and forthcoming taxes on carbon),
“borrowed virtue”, (for example, creating private wilderness
reserves at shareholders' expense), “pernicious CSR” (blocking
competition in the name of specious environmental goals) or
“delusional CSR” (increasing emissions of greenhouse gases in order
to conserve raw materials that are not in diminishing supply).
There will be good and bad. As a general rule, however, correcting
market failures is best left to government. Businesses cannot be
trusted to get it right, partly because they lack the wherewithal to
frame intelligent policy in these areas. Aside from the implausibility
of expecting the unco-ordinated actions of thousands of private
firms to yield a coherent optimising policy on global warming, say,
there is also what you might call the constitutional issue. The right
policy on global warming is not clear-cut even at the global level, to
say nothing of the national level or the level of the individual firm or
consumer. Devising such a policy, and sharing the costs equitably,
is a political challenge of the first order. Settling such questions
exceeds both the competence and the proper remit of private
enterprise.
THE ETHICS OF BUSINESS
Jan 20th 2005
From The Economist print edition
Good corporate citizens, and wise governments,
should be wary of CSR
RECALL that Joel Bakan, the angry law-school professor and
scourge of modern corporations, argued that CSR is usually a scam.
It is for governments, he says, not firms, to decide questions of
social, environmental and industrial policy—and governments
should know that if they fail in that duty, the psychotic corporation,
quite likely hiding behind CSR, will continue to rape and pillage.
Mr Bakan and those who share his morbid fear of capitalism are
wrong about that second point. Not only is competitive private
enterprise already heavily regulated; it also comes with a great deal
of built-in additional self-interested self-regulation, as it were. But
they are quite right about the first point. It is indeed desirable to
establish a clear division of duties between business and
government. Governments, which are accountable to their
electorates, should decide matters of public policy. Managers, who
are accountable to their shareholders, should run their businesses.
Does this mean that managers need not concern themselves with
ethics? Just the opposite. Managers should think much harder about
business ethics than they appear to at present. It is lack of clarity
about business ethics that gives rise to confusion over what
managers' responsibilities are, and over where the limits of those
responsibilities lie.
The crucial point is that managers of public companies do not own
the businesses they run. They are employed by the firms' owners to
maximise the long-term value of the owners' assets. Putting those
assets to any other use is cheating the owners, and that is
unethical. If a manager believes that the business he is working for
is causing harm to society at large, the right thing to do is not to
work for that business in the first place. Nothing obliges someone
who believes that the tobacco industry is evil to work in that
industry. But if someone accepts a salary to manage a tobacco
business in the interests of its owners, he has an obligation to those
owners. To flout that obligation is unethical.
In addition, of course, managers ought to behave ethically as they
pursue the proper business goal of maximising owner value—and
that puts real constraints on their actions. In most cases, acting
within these constraints advances the aim of the business, just as
individuals find that enlightened self-interest and ethical conduct
usually sit well together. But, for firms as for people, this will not
always be true. Sometimes the aims of the business and rational
self-interest will clash with ethics, and when they do, those aims
and interests must give way.
Much the same goes for acting within the law. In democratic
societies where the rule of law is upheld, businesses and individuals
should work under a strong presumption that they will obey those
societies' laws. This will generally be good for business, and usually
will be ethical as well—but, again, not always. Now and then,
depending on the circumstances, it is wrong to obey the law. And
merely following the law does not exhaust a firm's ethical
responsibilities, any more than it does an individual's. Some things
that are legal are unethical; and many things required by ethics are
not required by law.
Managers of companies must confront these questions in running
their businesses, just as individuals must in leading their everyday
lives. Business ethics, in short, is not an empty box. But what
exactly is in the box?
Elaine Sternberg, an academic philosopher and business consultant
(and a former investment banker), persuasively argues in her book,
“Just Business”, that there are two main things: “ordinary decency”
and “distributive justice”. These need to be understood in relation to
the proper goal of the firm. Without these basic values, business
would not be possible.
Be decent, be just
If owner value, and ownership itself, are to mean anything, there
must be respect for property rights. This excludes, Ms Sternberg
points out, “lying, cheating, stealing, killing, coercion, physical
violence and most illegality”; it calls instead for “honesty and
fairness”. Taken together, in her formulation, these constraints
reflect the demands of “ordinary decency”.
Some businessmen appear to believe that anything which is not
outright illegal, however unethical, can be regarded as proper
business conduct. But without ordinary decency (which goes a long
way beyond what the law requires of firms), business could not be
carried on.
Firms that lie and cheat cannot expect to stay in business very long,
even if their actions are allowed by law. Dishonest companies will
be unable to borrow, to obtain working capital, or to form stable
business relationships with suppliers and customers. Decency in this
sense is not just good for business, it is essential. When it comes to
maximising long-term owner value, honesty is not just the best
policy, it is the only feasible policy.
Crime doesn't pay
What about organised crime, you might ask? The mafia lasted
pretty well as a profit-maximising business, did it not? Yes, but
organised crime nonetheless proves the point. See what a criminal
or “indecent” enterprise has to do to grow and survive: it must
corrupt and intimidate, and thoroughly subvert both politics and the
criminal-justice system. Some sick jurisdictions have let that
happen. Where the rule of law prevails, however, those methods do
not work outside a highly circumscribed and perpetually
beleaguered criminal domain. Inside this zone, enterprises are
small, always in hiding, and in pathological conflict with each other.
Outside it, in the light, honesty and fair dealing are required if
business enterprises are to prosper and survive.
Granted, some critics of business regard “the big multinationals” as
little more than outposts of a mafia-like empire. In the world
according to Michael Moore, such companies do systematically lie
and cheat, and get away with it by corrupting and intimidating, and
subverting both politics and the criminal-justice system. There is
indeed little to choose, on this view, between Halliburton (or IBM,
for that matter, or General Motors or GlaxoSmithKline) and the cosa
nostra. Now and then executives do commit crimes, of course.
Usually, they are found out and punished. That aside, if you believe
that “the big multinationals” are essentially criminal enterprises
getting away with murder (perhaps literally), you are beyond the
reach of an article about business ethics.
What about the second component of business ethics, distributive
justice? In the business context, this simply means aligning benefits
within the organisation to the contribution made to achieving the
aims of the firm. Pay linked to performance and promotion on merit
are instances of distributive justice within the company.
Much of what was said about the role of ordinary decency applies
here too. Again, these notions of what is fair are widely accepted;
on the other hand, they are not, for the most part, required by law;
as a practical matter, they are needed if the business is to do as
well as it can; and they are also questions of ethics, and hence part
of the ethics of business. To promote a friend rather than the best
person for the job, or to reward a manager for incompetence or
wrongdoing, is a bad way to run a business—and is also unethical.
Many writers on business ethics, and just about all advocates of
CSR, argue that this way of thinking mistakes the proper purpose of
the enterprise. Making money for the owners is too narrow a view
of what a corporation is for. It raises ownership—“mere ownership”,
as they would say—too high. Owners are just one group among
many kinds of different “stakeholders” in a business. It is wrong to
run a business in the interest of one kind of stakeholder, ignoring
the legitimate interests of all the others. Is this correct?
There is a lot of unnecessary confusion about “stakeholders”.
Businesses certainly need to take account of other interested
parties if they are to succeed as businesses: they must satisfy their
customers, get on with their suppliers, motivate their workers, and
so forth. In that sense, these different groups of stakeholders will
have their say and exercise their influence. But “taking account of”
is not the same as “being held accountable to”. Accountability refers
to a much more formal and direct set of rights and obligations.
Of course it is always possible, as a matter of law, to create forms
of managerial accountability to non-owners. Through the courts,
you might say, managers are held accountable to society at large.
Public policy can make managers accountable to regulators.
Managerial accountability to workers can also be required by law:
worker representation on company boards is mandated in Germany,
for instance. (Whether this serves the interests of German workers,
or of Germany's citizens in general, is nowadays in doubt.) But all
such lines of accountability recognise owners as primary. You
cannot deem stakeholders to be equal co-owners of a business
without repudiating the very idea of ownership. And where the law
does not create accountability to non-owners, there is none.
In many of the corporate scandals of recent years, it has seemed
that managers have acted as though they were accountable to
nobody—not even, and in some cases least of all, to the firms'
owners. This has been rightly recognised as a problem, and a lot of
time and effort has been spent on trying to make accountability to
shareholders—on matters such as executive pay—more effective.
Muddled thinking on CSR, and on supposed accountability to non-
owners, only makes it harder to put this right. Advocates of CSR
ought to reflect on the fact that the “triple bottom line” and the
bogus pay scheme which rewards bad performance with riches have
something important in common: the idea that the interests of
“mere owners” should not be allowed to come between managers
and their personal objectives. Broken corporate governance and
CSR are close relations. You often see them together.
Good companies, good government
An earlier section of this article sketched out a four-way
classification of CSR: good management, borrowed virtue,
pernicious CSR and delusional CSR. Does business ethics shed any
more light on those categories? It does, though some of the results
are a little troubling at first sight.
Good management and delusional CSR raise no new difficulties from
an ethical point of view: the first, which increases profits and
improves social welfare, is plainly a good thing and the second,
which reduces both, is plainly not. Borrowed virtue has already
been criticised on ethical grounds, even though it is assumed to
advance social welfare. That verdict stands, as you would expect. A
proper understanding of business ethics makes the reasoning
clearer, but the main thing is still that the profits of a publicly
owned company are not the managers' to give away. The remaining
category is pernicious CSR, the kind that raises profits but reduces
social welfare.
Is pernicious CSR also unethical? Often, paradoxically, the answer
will be no. Managers cannot be criticised on ethical grounds for
aiming to increase long-term owner-value: that is their job.
Assuming that they have also acted within the law, the next
question is whether they have violated the standards of ordinary
decency and distributive justice within the organisation. If they
have—if they have lied, or bribed, or coerced, for instance—then
they have behaved unethically. But if they have acted in accordance
with those two standards of business conduct, they are ethically in
the right, even though they have acted against the public interest.
This is not as strange as it seems. Consider the case of monopoly.
Managers are not to be criticised on ethical grounds for striving to
drive their competitors out of business—provided that they do this
by selling a better product, for instance, rather than by deception or
coercion or through unlawful anti-competitive practices. And if they
succeed in establishing a monopoly, it is not unethical to set a price
that maximises the company's profits, or even (to the extent that
the law allows it) to create business barriers to the entry of new
competitors (for instance, by spending heavily on advertising). For
that matter, it is not unethical for a company to lobby the
government for protection from foreign competition, citing its
concerns, as a good corporate citizen, for the well-being of its
workers. All of these things may well be ethical—even when, from
the point of view of society as a whole, they are likely to be
undesirable.
This seeming paradox only underlines the point that businesses
should not try to do the work of governments, just as governments
should not try to do the work of businesses. The goals of business
and the goals of government are different—or should be. That, by
the way, is why “partnership” between those two should always
arouse intense suspicion. Managers, acting in their professional
capacity, ought not to concern themselves with the public good:
they are not competent to do it, they lack the democratic
credentials for it, and their day jobs should leave them no time
even to think about it. If they merely concentrate on discharging
their responsibility to the owners of their firms, acting ethically as
they do so, they will usually serve the public good in any case.
The proper guardians of the public interest are governments, which
are accountable to all citizens. It is the job of elected politicians to
set goals for regulators, to deal with externalities, to mediate
among different interests, to attend to the demands of social
justice, to provide public goods and collect the taxes to pay for
them, to establish collective priorities where that is necessary and
appropriate, and to organise resources accordingly.
The proper business of business is business. No apology required.
Vastaukset 3
Vanhimmat
Paljonko maksat?
Siksi toiseksi tämä on ihan väärä palsta. Oikea pasta olisi Kielet ja käännökset
http://keskustelu.suomi24.fi/show.fcgi?category=2000000000000020&conference=1500000000000154&subcat=741
mutta tuskin sieltäkään löydät ketään, joka ilmaiseksi palvelisi sinua. Ja jos niin tekisikin, niin käännös olisi sitten sen "arvoinen".
tasan 900, jos maksat pimeänä.
Toimeksiantona 2500, työsuhteessa mulle 1500.
Mikä idiootti, tajuatko että tuossa on 4 päivän työ?
Provo mikä provo....