Recently I was in the audience for an interesting panel discussion, hosted by the Federalist Society (video below), on corporate social responsibility. Should corporate managers only work to increase profit and shareholder value, the panel considered, or should they also work to benefit a broader group of stakeholders adjacent to the firm?
While this question has become increasingly popular in the last couple of decades, the debate is actually quite old, as former business school professor James O’Toole details in his recent book “The Enlightened Capitalists: Cautionary Tales of Business Pioneers Who Tried to Do Well by Doing Good.” O’Toole profiles business leaders like Robert Owen who intentionally sacrificed shareholder value to provide educational and health benefits for workers that were wildly generous for his time (the 1820s). While managers in every era can justify some provision of job benefits as a smart investment in worker productivity and loyalty, Owen-level perks clearly crossed the line in the minds of his contemporaries into outright giveaways that were unlikely to ever be recouped through higher productivity.
The other shareholders of the company Owen managed eventually tired of his utopian social theorizing and fired him, returning their textile operation to a more mainstream, and therefore less generous, standard of employment. O’Toole clearly laments what he considers the short-sightedness of Owen’s partners, but were they wrong, on principle, to object to expansive (and at times paternalistic) worker benefits being paid for out of their dividends? Much of the discussion at the recent Federalist Society event, as well as previous work done by my Competitive Enterprise Institute colleagues, suggests they were not.
The most obvious practical objection to corporations taking on a laundry list of social welfare projects is that different goals demand different institutions and strategies in order to be successful. The firm is designed to generate profit, so corporate managers should stick to what they’re best at. There are plenty of nonprofit entities working on feeding the homeless, cleaning up the oceans, and reforming the criminal justice system—those groups should focus on those goals. If the shareholders of the firm, who have profited by its successful operation, wish to donate their own money to one or more such deserving organizations, they are free to do so.
When he decided to step down from active management of Microsoft and enter the world of philanthropy, Bill Gates did not order his company’s software engineers to become tropical disease specialists or drug researchers. He took the profits from his business career and rolled most of them into a charitable foundation. And even that foundation largely only oversees the work of its grant recipients, rather than, say, operating its own factory to make insecticide-treated bed nets to combat malaria. Just like particular firms specialize in making specific products and services, particular charitable organizations specialize in achieving an array of other goals. Why dilute the management focus of a for-profit widget maker in order to make them a second-best, part-time charity?
Taking one’s eye off the ball in a business organization can also be worse that simply becoming slightly less competitive. It’s not self-evident that the “socially responsible” actions that anti-corporate activists demand will yield the benefits they claim. Consider the mortgage crisis and resulting Great Recession, which were fueled, in part, by the policy goal of dramatically expanding home ownership in the U.S. Driven by political pressure to make increasingly risky loans, the market wound up with a mountain of toxic debt that sound lending standards alone would never have generated. Poor (but allegedly well-intentioned) decision-making by Congress and federal lending institutions set the stage for a meltdown that did far more harm that the supposedly too-low levels of home ownership that preceded the crisis.
CEI founder Fred Smith addressed this situation several years ago, when he wrote:
Congress should study the confusion created in the market by mixing the welfare (wealth redistribution) elements of politics with the innovative (wealth creation) aspects of the market. The current financial crisis stems in large part from this entanglement of private profit goals with political guarantees and subsidies. Congress should examine the problems inherent in a “mixed economy” and seek ways to ensure that the relative responsibilities of all parties are clearly delineated, that the boundary lines between the private and the political spheres are understood and honored
Congress should critically appraise corporate social responsibility (CSR). Too often, CSR blurs those distinctions, transforming wealth-creating firms into wealth-redistributing rent seekers. Congress should also reconsider government-sponsored enterprises—nominally private firms, which are given special privileges in return for advancing various welfare goals. An example of this are the financial guarantees granted to Freddie Mac and Fannie Mae in exchange for their extending homeownership opportunities to high credit-risk individuals. Fannie and Freddie were widely regarded as ideal examples of CSR.
There are more angles to the CSR debate, of course, and I look forward to reading the rest of O’Toole’s impressive, 500+ page history of “enlightened” capitalists to work through them.