Retro Review: The Social Responsibilities of Business (1970)

The Biblical book of Ecclesiastes reminds us that “there is no new thing under the sun.” Even centuries before the modern era, our ancestors realized that original insights and truly new phenomena were rare indeed. The same might be said about the current vogue in the business world for things like responsible investing, stakeholder capitalism, and environmental, social, and governance (ESG) theory.

Legal experts inform us that ESG is a “new must-have” for corporate managers, and that while “the 2010s laid the groundwork,” only in this decade will we actually put ESG into action. The narrative that we are dealing with an infant concept that is still in its teething stage is frequently deployed to fend off charges that current responsible investing frameworks are half-baked flops. Give them a chance, supporters tell us, we’re still dealing with a brand-new concept!

A look back into corporate history will quickly disabuse anybody of that notion. Take the case of the late Morrell Heald, once a historian at Case Western Reserve University, who in 1970 published a book on the history of corporate social responsibility, going back the early 20^th century. Revised in 1988 and republished in paperback in 2005, The Social Responsibilities of Business: Company and Community, 1900-1960 shows that business leaders, academics, activists, and politicians have been wrestling with “more than just profit” expectations of corporations since the days before radio.

Heald found that among U.S. corporations, “the drift toward a broader conception of social responsibility is unmistakable.” But that drift occurred during the first half of the 20^th century, not the past 10 years, as some finance gurus today would suggest. Moreover, the vague definitions and expansive mandate of being “socially responsible” had begun to confuse and annoy people in the business world while John F. Kennedy was still president. Heald warns us that, “Indeed, even in the 1960s business leaders have been finding it increasingly difficult to define the limits of the doctrine to which, over the years, they have largely committed themselves.”

Heald describes the origins of that process, influenced by people like the engineer Frederick Winslow Taylor (1856-1915), a pioneer of industrial efficiency and what came to be called industrial welfare. He is chiefly remembered for contributions to systemizing and streamlining factory processes, enabling greater and more uniform output. But his work was also applied in ways that improved working conditions and decreased worker injuries and accidents—a classic case of corporate investments that benefited both shareholders and workers.

Well before World War I, the National Association of Manufacturers (in part to compete with labor unions for the allegiance of workers) created its “Industrial Betterment” program, which offered employees educational opportunities and worked to improve plant safety. The National Civic Federation, founded in 1900, also created an Industrial Welfare Department, which consisted of employers committed to improving working conditions and peacefully negotiating labor disputes in an era when they frequently turned violent.

Corporations large and small were also major donors to social service charities in the first half of the 20^th century, funding activities by the YMCA, orphanages and hospitals, and what was then called the Community Chest movement. Now mostly remembered as a series of spaces and cards on the Monopoly game board, community chests were what are known today as local community foundations, which pool donations from a variety of sources and make grants to local nonprofit organizations. Many of the city-based community chests founded in the 1910s and 1920s later combined to form what is today the second largest non-profit organization in the U.S., the United Way.      

But while corporate commitment to worker welfare and charitable stewardship was burgeoning, business theories about the role of corporations in society were evolving. The increasing size of the largest firms, dispersed ownership, and geographical spread into multiple communities led some writers to emphasize that corporation managers could not just be concerned with profits, but must recognize the responsibilities to constituencies beyond shareholders.

Heald, for example, cites the book The Modern Corporation and Private Property by Adolf Berle and Gardiner Means. According to the authors, the new social role exercised by modern corporations meant that control could no longer be entirely in the hands of the owners and their hired managers. On the contrary “the claims of a group far wider than either the owners or the control groups”—that is, managers—would have to be taken into consideration. This all sounds quite modern and consistent with the latest rhetoric on ESG and stakeholder capitalism. But Berle and Means published their book in 1932. And according to Heald, their thesis “climaxed several decades of growing interest in the evolution of the business corporation.”

This shows that the progressive-minded view that “society” should exercise some (increasing) control over corporate decision-making is very old indeed. Later theorists, and some business leaders themselves, emphasized that corporate managers should give greater consideration to employee relations and consider their firms less of a “machine” and more of an “organism.” Editorials in Forbes in the late 1910s promoted adding worker representatives to corporate boards—a proposal more closely identified today with democratic socialist corporate gadfly Sen. Bernie Sanders (I-VT) than the magazine’s current namesake editor-in-chief. A 1940 publication by the University of Chicago’s business school even quoted Leverett S. Lyon of the Chicago Association of Industry and Commerce as insisting that “business does not exist for itself but it a device which society uses and modifies for the accomplishment of social purposes.” Not exactly a traditional defense of property rights and shareholder primacy.

Thus, for well over a century the corporate world has been reacting to—and often itself promulgating— the idea that corporations have an important relationship with, and responsibilities to, the rest of society. U.S. corporations have a laudable history of improving wages and benefits, increasing worker safety, and contributing to charitable causes in their communities. But their critics have always faulted them for not doing enough. During that same period of time, progressive critics have attempted, and failed, to create some sort of universal or legally binding framework of business ethics to (in a way Frederick Winslow Taylor might recognize) systematize these responsibilities .

The reason for that failure should be obvious by now. There is no more a single set of “correct” business practices than there is a single set of ethical guidelines for being a citizen, a parent, or a spouse. We have laws against force and fraud, and individuals who engage in those behaviors are subject to legal punishment. But beyond that, we have no choice in a free society but to allow our fellow Americans to administer their business affairs as they see fit. Some will be generous and some will be more narrowly focused. But shareholders either own their shares or they don’t. If ownership is real, then they are entitled to the discretion that goes with being an owner. If they don’t, they will be much less inclined to invest in the class of enterprises that is now controlled by “society” instead.

Even if we wanted to compel shareholders and corporate directors to be somehow more “public spirited,” what parts of the public should they benefit? Labor unions would insist that an old, inefficient factory be kept open and producing, lest their members lose their jobs. But a local environmental group would insist that it be shut down immediately, and the local environment spared any further impact. But what about the local performing arts council that depends on corporate donations financed by the plant’s production? Would tearing down the old plant make room for a newer, more efficient industrial facility? Or maybe a public park? What about the plant’s suppliers, who will go out of business without its orders? Could the aging factory be retooled for more sophisticated methods with the help of an accelerated expensing tax credit? But wouldn’t that be considered corporate welfare at the disadvantage of individual taxpayers? 

The answers to these questions are not simple or obvious, and no responsible investing flow chart or materiality map can make them so, unless we propose to throw out human judgment entirely. We’ve had over 100 years of theory upon theory, including corporate social responsibility, corporate social performance, socially responsible investing, stakeholder capitalism, shared value creation, the triple bottom line, impact investing, ESG, and many others. All of them have tried to imply, to varying degrees, not just that corporations should do things other than produce profits, but that someone other than shareholders and directors should decide what that is. Fortunately, so far, they have been mostly unsuccessful. Unfortunately, that record of failure has not dampened the enthusiasm for further efforts.

Read more posts in the Retro Review series at the project’s main page.