In Monty Python’s classic "Hungarian Phrasebook" sketch, a Hungarian tourist walks into a British tobacconist’s shop, and, consulting a faulty phrasebook, tells the clerk, "I will not buy this record, it is scratched." The clerk, looking confused, responds, "Uh, no, no, no. This is a tobacconist’s," and says "cigarettes" as he holds up a pack. "Ya! See-ga-rets! Ya!" responds the Hungarian customer. "My hovercraft is full of eels."
What does this have to do with anything? Quite simply, the debate over corporate social responsibility (CSR) has come to resemble this exchange. The rhetorical battle has been joined, but the two sides just can’t seem to agree on what they’re fighting over. In fact, they keep talking past each other.
My organization has made the case against the CSR doctrine repeatedly (see here and here). We have sought to engage CSR’s advocates. But, unfortunately, we often seem to be speaking different tongues. (A recent Reason magazine debate on CSR between Whole Foods CEO, John Mackey; Economics Nobel Laureate, Milton Friedman; and Cypress Semiconductor CEO, T.J. Rodgers brought no one closer to agreement.)
This confusion centers on the crucial question: What exactly constitutes a corporation’s "social responsibility"? That question hovered around a recent conference on CSR, "Is Corporate Social Responsibility Serious Business," hosted by the American Enterprise Institute. Many of the presentations were insightful and informative, others less so; the discussions were lively; but in the end, there was no more agreement on that question.
Professor Elaine Sternberg of Tulane University made a solid case against CSR. She argued that, by giving a hazily defined class of "stakeholders" a say over corporate decisions, "CSR would deprive owners of their property rights." She noted that, "Business ethics is about conducting business ethically," [emphasis added] not about pursuing goals extraneous to the company’s mission. And, because business ethics derives from the very nature of business, owner value is enhanced over the long term by ethical business behavior.
Prof. David Vogel of the University of California, Berkeley, countered that "responsible" firms — as so defined by CSR advocates — do not perform any worse than do firms that ignore the CSR paradigm. The overall impact of "responsibility" on profitability is marginal, he argued, because the resources that corporations can devote to such activity are modest, due to the requirements imposed by the need to improve shareholder value.
Arguing over the effects of CSR on company performance hardly seems like a clash of worldviews. But it’s when we get to the question of whether companies should adopt CSR that the disagreement chasm widens.
For what should corporations be responsible? Even accepting corporate responsibility for certain problems, which problems are legitimate to begin with?
Vogel and some subsequent panelists emphasized the need for corporate America to tackle the alleged problem of climate change, a position that presupposes certain conclusions that are far from settled. He said that, while useful in helping tackle some social problems, "There are some cases in which CSR is simply a band aid." In such cases, government regulation becomes necessary "to change the incentives of business."
Another way to describe this strategy is for government to intentionally distort the market. And for what? The Kyoto Protocol, one such attempt to "change incentives" to address climate change, is unraveling as you read this, along with many of the scientific assumptions behind it. To argue that businesses must tackle climate change as an impending problem is specious to the point of being, well, irresponsible.
Professor Mark Cohen of Vanderbilt University said that, as globalization has increased pressures against regulation, voluntary social initiatives, in the form of CSR, have taken the place of some social welfare regulation. He also noted that CSR can bring benefits to corporations. It can enhance name recognition and can be an effective way to raise competitors’ costs. Major players can leverage suppliers to raise costs for products by labeling them "socially responsible." Cohen provides McDonald’s buying only certified fish as an example.
Sternberg responded by noting that neither Vogel nor Cohen defined corporate responsibility. The cases they cite, she argues, constitute an "external bolt-on" to the business, while responsibility is inherent to business in that it is reflected in "how you conduct your business every day, every time." She is right, but most CSR advocates reject this view as morally insufficient, since they view improving mankind as part of business’ responsibility.
So if we can’t define what constitutes "responsibility," how is this debate supposed to get anywhere? Rather than considering whether CSR is good for business or what societal problems, if any, businesses should tackle, the question that ought to be debated is:
What constitutes a corporation’s social responsibility?
Elaine Sternberg offered a good starting point. Some subsequent panelists who agreed with her put forth views consistent with hers. But many who did not simply talked past the problem of defining "responsibility," and put forth policy recommendations based on assumption businesses must address certain problems. Worse, the most often cited such "problem" was climate change, which, as noted, may not be a problem at all.
Good for Business?
One example of a company serious about climate change that was brought up was Enron, which strongly supported the Kyoto Protocol, and, as Sternberg noted, had "one of the most stringent" CSR codes. Vogel acknowledged that Enron was "embarrassing" to the CSR community, since the company "did have a very impressive record of social involvement" — which didn’t do its employees and investors any good — though he noted, "I don’t think Enron fleeced its shareholders because it was responsible, but CSR did not help, either."
Enron’s pro-Kyoto Protocol position would likely be supported by most pro-CSR advocates — ignoring the fact that for Enron, Kyoto presented a golden opportunity for rent-seeking. A global mandatory carbon emissions cap-and-trade regime would have created a huge new — artificial market — in carbon permits for Enron to take advantage of. As Cohen also noted, large companies can use CSR to leverage suppliers to raise costs for competitors. So in this regard, it’s good for certain businesses.
Of course, CSR advocates put forth a less cynical pitch to CEOs interested in their bottom line. Aron Cramer of the pro-CSR group Business for Social Responsibility, argued that corporations need a "social license to operate" within a community, and that CSR can help them obtain it. And how to do this? By listening to advocacy from so-called non-governmental organizations (NGOs). Cramer acknowledges that many activist NGOs are hostile to the market, and that "it doesn’t make sense for companies to engage" with such groups, but says that the majority of NGOs aren’t hostile to the market and that their positions are worth companies’ time to take seriously.
What Should Companies Do?
But again, this all skirts the question: Should businesses be doing any of this? NGOs are not shareholders; if their goals are consistent with shareholders’ interests, why do they need to ask companies to listen to them in the first place?
Professor Sternberg’s definition offers a good foundation for answering this question. Clive Crook of The Atlantic Monthly, whose article in The Economist, "The Good Corporation," sparked considerable debate on CSR, adds another important consideration: "Profit seeking serves the social purpose." To that I would add the corollary: By doing anything to reduce their bottom line, companies make the world poorer — and there’s nothing responsible in that.