Is CSR A-OK?

Is CSR A-OK?

Post Op-Ed in National Review Online
March 02, 2006

A Friday conference at the American Enterprise Institute will try to answer the question: "Is Corporate Social Responsibility (CSR) Serious Business?" And not a moment too soon.

Though CSR was labeled by free-market icon Milton Friedman as a "subversive doctrine," much of the business community has embraced it, arguing that it is simply "good for our business." Opponents of CSR have naturally argued the contrary, emphasizing the economic costs of following such a "misguided virtue" as CSR. But little attention has been paid to the actual arguments made by advocates of CSR within the business community. This is a shame, because a closer analysis of the "business case for CSR" shows that it is, indeed, based on a set of assumptions that undermine the legitimacy of the free-enterprise system.

But before examining the larger question, let us first consider the extent of support that CSR enjoys among the business community. In a 2005 survey of its membership, the U.S. Chamber of Commerce found that 81 percent of respondents agreed that "corporate citizenship needs to be a priority for companies." Similarly, KPMG's 2005 International Survey on CSR found that of the top 250 companies in the Fortune 500, 52 percent now publish separate CSR reports, alongside their annual financial reports. And, claiming it "wants to be 'one' with the consumer," McDonald's has even started a blog devoted to CSR issues.

So the business community certainly seems to like CSR—but what exactly is it?

The doctrine of CSR holds that businesses have an ethical obligation to operate in a manner that not only obeys the law but also consciously—and explicitly—adheres to societal "values." In practice, this means that managers must consider the views of "stakeholders," such as non-government organizations (NGOs) and community activists, when making business decisions, even if following these stakeholders' advice results in lost profits for stockholders. Strangely, according to business advocates of CSR, corporations that embrace CSR will benefit, in both the short and long term, through higher profits. This "business case for CSR" consists of the following elements:

  Corporate Reputation. When a consumer lacks information about a product, he will rely on the reputation of the company that makes the product to help him in his decision. It is argued that a company with a strong and favorable reputation, due to its embrace of CSR, will attract more new customers, have more loyal customers, and enjoy greater access to potential investors.

  Worker Productivity. A firm that embraces CSR will have workers that are less likely to shirk their duties, less likely to quit, and more likely to be enthusiastic about doing their work due to the more "idealistic" goals of a good "corporate citizen." Thus, it is claimed, CSR will lead to higher worker productivity and therefore higher profits.

  Market Opportunity. "Socially responsible" products and firms represent a new market. This might be due to the demands of consumers or it might be due to firms hoping to introduce consumers to a new product idea. Whatever the case may be, firms can increase profits by expanding into this market.

  Outside Pressure. To influence corporate behavior, NGOs have adopted the "corporate campaign." This involves a coordinated, negative publicity campaign that targets a particular company or industry over a short period of time. Corporations might calculate that it will cost less (and hence be more profitable) to give in to the basic NGO demands and adopt a CSR position rather than fight the NGO campaign, as CSR supporter David Vogel argues in his recent book, The Market for Virtue.

  Legislative/Regulatory Favor. By embracing CSR, a company can impress politicians and, perhaps, influence regulations to gain a competitive advantage over its rivals. Such activities need not transpire in state capitals or even in Washington, D.C. The annual meeting at Davos, Switzerland, of business leaders and U.N. bureaucrats is one example. The U.N.'s Global Compact, which brings "companies together with U.N. agencies, labor and civil society to support universal environmental and social principles," is another example. By reaching a "consensus" or engaging in "dialogue," companies may hope to co-opt the regulatory agenda and help craft more favorable laws or regulations in the future.

The first three of the above arguments, however, need not be thought of as CSR. As noted by Milton Friedman in his celebrated article on CSR, actions that are justifiable in terms of corporate self-interest (e.g. improving worker productivity, entering new markets, enhancing the marketability of the corporate brand) are often rationalized "as an exercise of 'social responsibility'". This is because, as Friedman also recognized, public opinion continues to be hostile toward the idea of capitalism. Corporations have simply adapted to this political climate and have repackaged profit maximization as the more marketable concept of CSR. Such a rationalization may be silly, cowardly, or hypocritical but, says Friedman, "if our institutions and the attitudes of the public make it in [businesses'] self-interest to cloak their actions in this way, I cannot summon much indignation to denounce them," though such actions clearly "harm the foundations of a free society." In contrast, there are some companies that adopt policies strengthening those foundations, such as the BB&T banking company's recent stance on the issue of eminent domain—and such companies deserve special praise.

The last two arguments in the "business case for CSR," however, are much more problematic. From the perspective of left-wing critics of CSR, these arguments illustrate the co-opting of social policy by business interests. But for conservative critics of CSR, these arguments demonstrate the subversive nature of CSR, in accordance with Friedman's description. This is because both of these arguments accept and encourage the politicization of the economic realm. Advocates of CSR among business managers, NGOs, and government bureaucrats all share the view that economic, social, and environmental progress is dependent upon them, the self-appointed representatives of "global civil society," who come together and jointly set policy for the citizens of the world.

In this collectivist vision of the world, all economic decisions (and environmental and social decisions) are necessarily political. Governments are either unable or unwilling to exercise their rightful power to regulate or redistribute wealth. "Stakeholders"—special interest groups—replace individual, democratically elected representatives as political agents, the main difference being that stakeholders claim legitimacy due to their political activism whereas representatives claim legitimacy due to their adherence to a constitutionally established democratic process. CSR encourages this view by suggesting that society grants corporations the right to operate, and corporations owe something back to society in return. Such a view is at odds with traditional notions of business ethics, which focus not on the claims of stakeholders, but on the responsibility of management toward shareholders (the owners).

By obscuring the inherent conflict between individualism and collectivism, the doctrine of corporate social responsibility subverts the institutions of a free society. As these institutions—including private property, the modern corporation, and the free market—are the foundations upon which business depends, business leaders do a great disservice to their own interests—and ours—when they acquiesce to the demands of a Greenpeace or to the flatteries of the anti-capitalist intellectual class.