The Responsible Corporation

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


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.


As I’ve noted previously, 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.


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’s 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. No business in which the customer isn’t king can expect to create value for investors in a long-term, sustained way.


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.


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. Ultimately, the conflict is between two very different visions of the firm. Is it:


A) a private specialized institution designed to create wealth; or
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?


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.


To avoid having their wings tied down, some companies undertake CSR efforts to maintain their “social license to operate,” or public legitimacy. But all too often, companies 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.


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—will benefit from helping foster an environment amenable to the institutions of liberty, including private property.


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.


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.


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.