The Responsible Corporation

The Responsible Corporation

August 23, 2006

Does anybody believe that companies should be socially irresponsible? I don’t think so. The problem is that few people can seem to agree on what corporate social responsibility actually means.

Whether companies should address societal problems is contentious enough. But even if you get agreement on that, you then need to contend with the question of which are legitimate problems for companies to address—and whether companies can do much about them.

A Question of Definition

A lot of the debate over corporate social responsibility (CSR) comes down to several definitions—of a corporation’s core mission, of responsible corporate behavior, and of the components of that behavior.

Much of the debate over CSR has come to resemble Monty Python’s “Hungarian Phrasebook” sketch, in which a Hungarian tourist walks into a tobacconist’s shop to buy cigarettes, consults a faulty phrasebook, and tells the clerk, “I will not buy this record, it is scratched.” Like the Hungarian tourist and the tobacconist, the parties in this debate have been speaking past each other.

A good example of this is the now-famous Reason magazine debate on CSR between Milton Friedman; John Mackey, the CEO and founder Whole Foods; and T.J. Rodgers,CEO and founder of Cypress Semiconductor. (Available online.)

Mackey lays out his vision of a “new form of capitalism” that seeks to create value not just for investors, but for other “stakeholders”—which he lists as customers, employees, vendors, communities, and the environment. Milton Friedman responds that, “The differences between John Mackey and me regarding the social responsibility of business are for the most part rhetorical.”

Some differences are indeed largely rhetorical, and of little consequence in practice. For example, Mackey argues that Whole Foods puts its customers first—ahead of investors. This is a peculiar distinction, since the best way to create value for investors is to put customers first, since customers are the ones who drive the business.

One could argue that Mackey’s philosophy includes seeing customer satisfaction as more than a means to the end of increasing profits, but in practice that difference is moot. No business in which the customer isn’t king can expect to create value for investors in a long-term, sustained way. And business, whatever an individual company’s model, is not about philosophy, but about results in creating such value.

However, raising the status of “stakeholders” such as suppliers, employees, and neighbors beyond their traditional role—that is, one of respect and mutual cooperation—carries risks that businesses would be wise to avoid.

“Stakeholders”

Much CSR advocacy is premised on the idea that all “stakeholders” should have some input into how a company operates. “Stakeholders” make up a different and much broader class of people than a company’s shareholders, who own stock and are therefore part owners of the enterprise. “Stakeholders” include anybody who might be affected in some way by the company’s actions. This presents serious problems.

Once an enterprise starts bringing more and more people into the sphere of who may influence its actions, there is little to guide it on when to stop. The central conflict here is between two very different visions of the firm. Is it:

A) a private specialized institution designed to create wealth;

B) a social institution given special privileges by the state, which in turn gives the firm the duty to help solve some of society’s problems?

In the past, this duty has been enforced through state mandates. Today, many CSR advocates envision that directing carried out by non-governmental organizations, shareholder activists, and a variety of pressure groups.

And how do these groups do this? Though a strategy called the corporate campaign, which has in recent years become widely used by organized labor and environmental and other activist groups. Corporate campaigns are multi-faceted political and public relations campaigns that target a specific employer or group of employers. Tactics include feeding allegations of company wrongdoing to the news media, contacting stockholders to deride management and the company’s financial health, filing complaints with regulatory agencies, and good old-fashioned picketing.

One example of a major successful corporate campaign is the Rainforest Action Network’s (RAN) onslaught against Citibank, which led Citibank to agree not to finance projects in developing countries that RAN doesn’t like.

Ultimately, giving a say over company operations to anybody who interacts with it renders that company the proverbial butterfly whose every wing flap needs approval from those it might affect, lest that wing flap ultimately cause a typhoon.

As Professor Elaine Sternberg of Tulane University has noted, by giving a hazily defined class of “stakeholders” a say over corporate decisions: “CSR would deprive owners of their property rights. Business ethics is about conducting business ethically.” [Emphasis added.] And over the long term ethical business behavior enhances owner value.

Communicating for Legitimacy

A phrase that pops up often in the CSR literature is a company’s “social license to operate.” This could be summed up as a company’s need to gain public legitimacy. But all too often, companies try to do this by apologizing for supposed faults.

A better approach is that of Nestlé CEO Peter Brabeck-Letmathe, who defines social responsibility as furthering business’ “unique capacity to create wealth and benefit society through long-term value creation.” As he recently told an audience in Boston: “What the hell have we taken away from society by being a successful company that employs people?”

He also rightly notes: “The most important social responsibility that the CEO of a company has…is to be sure that this company will continue to exist in 100 years from now.” Without that long term view, there will be no company from which groups of stakeholders—however defined—can demand “responsible” behavior.

The only sustainable firm is one that remains profitable over time—and the only way that can be achieved is by continuing to add value to its extended shareholders while ensuring that it gains and retains legitimacy in the political arena. Loss of legitimacy leaves the firm exposed to political predation, predation often advocated by the same NGO critics who demand that the firm endorse their agenda.

Real CSR

None of this is to say that companies cannot or should not adopt policies that have little bearing on the immediate bottom line, if those policy decisions bolster the foundations of free enterprise.

A good example of this is BB&T bank’s recent decision to not finance projects on land acquired through eminent domain. While it’s true that BB&T’s no-eminent domain policy may keep it from profiting from certain projects, in the long run, it—and all other businesses and citizens—will benefit from helping foster an environment amenable to the institutions of liberty, including private property.

Conclusion

Should companies address societal problems? Yes. Companies do this when they do what they do best: create wealth and legitimize their operations before the public.

Corporations are not perfect, but no amount of state intervention or activist guidance will make them better. On the contrary, history offers hope of improving corporate behavior. In their 2003 book, The Company: A Short History of a Revolutionary Idea, John Micklethwait and Adrian Wooldridge, of The Economist, outline some central themes crucial to this discussion:

First, the company’s past is often more dramatic than its present…early businessmen took risks with their lives as well as their fortunes. Send a fleet to the Spice Islands at the beginning of the seventeenth century, and you might be lucky if a third of the men came back alive. This was a time when competitive advantage meant blowing your opponents out of the water…and when your suppliers might put your head on a stick.

[S]econd…In general, companies have become more ethical: more honest, more humane, more socially responsible. The early history of companies was often one of imperialism and speculation, of appalling rip-offs and even massacres. People who now protest about the new evil of global commerce plainly have not read much about slavery or opium.

To Micklethwait and Wooldridge’s points I would another: Corporate misbehavior does not arise from any inherent quality in the structure of companies, but from the inherent qualities of a society. Improvements in corporate behavior owe much to the profit-making company’s innate need to please the public. This requires them to respond to evolving social standards such as the growing unacceptability of racial discrimination and pollution.

Finally, Micklethwait and Wooldridge note: “The company has been one of the West’s great competitive advantages…The idea that the company itself was an enabling technology is something that liberal thinkers once understood instinctively.”

Indeed, the corporation has been and still is a greatly effective means for individuals to come together to achieve common goals. To undermine its vitality by distorting its mission would leave our society—and thus the whole world—poorer.