The Case Against Corporate Social Responsibility

21 October 2008 at 1:36 pm 9 comments

| Dick Langlois |

Another sign of the Apocalypse: Robert Reich channels Milton Friedman.

Entry filed under: - Langlois -, Corporate Governance, Papers, Public Policy / Political Economy.

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9 Comments Add your own

  • 1. Andrew  |  22 October 2008 at 6:09 am

    Broadly speaking, there are three common objections to the notion that corporations should seek to behave in a socially responsible fashion. These are that:

    (1) Social responsibility is the function of government, not business.

    (2) CSR distracts management from the core business operations of the firm; and

    (3) Managers, who are employed by shareholders, should not expend corporate funds or resources (which belong to shareholders) on social projects unless such projects can be justified by business case considerations.

    I feel that point (2) and (3) are fair arguments.

    However, I also believe that companies do have an obligation to act in a socially and environmentally responsible fashion. Decisions which companies make can have a big impact upon the communities in which they operate. This type of impact gives the company power, and with power comes responsibility.

    Companies have the power to impact the communities in which they operate. To a reasonable degree, they also have a responsibility to ensure that this impact is as constructive as possible.

  • 2. Mallen Baker  |  22 October 2008 at 3:51 pm

    1. The social responsibility of business is different to the social responsibility of governments – governments are tasked with making decisions to achieve social benefit, companies have to take decisions with due care to the social consequences of those decisions, and to manage relationships with people who can affect the business. They may bear the same label, but they are different and appropriate to each.

    2. If you think that the role of management is purely short term profit maximisation, then maybe. But most companies believe in creating long term profits through adding value to society through goods and services. In this case, being careless as to the social impact of your operations, or the long term ecological impact, or the integrity of how you do business – all these things are part and parcel of your core business operations, not a distraction.

    3. Managers are employed by shareholders to run the businesses in the way that increases long term shareholder value. They get licence to decide how money should be spent on marketing, on HR and recruitment, on research and development … and also on managing non-financial risks and building beneficial relationships with key stakeholders. Shareholders (especially the speculators) are not positioned to micro-manage how the firm spends its money. CSR is not about giving money away – this case is made by people who think it’s all about philanthropy to satisfy the soul of the CEO. That is not what has been driving CSR for the last ten years.

  • 3. spostrel  |  22 October 2008 at 7:13 pm

    The view expressed above is inconsistent.

    If the managers are the agents of the owners and the owners want the managers to maximize the value of the firm subject to legal and ethical constraints, then it is hard to argue that breaching that duty is a good thing.

    If some charitable activity by a firm actually were to raise the value of the firm by building brand equity or through some other mechanism, then there would be no need to describe CSR as some special separate thing–it would simply be marketing or PR or human resource policy in the service of value maximization. No one of the Friedman persuasion objects to such actions per se, as they are part of the normal allocative process of the firm.

    CSR is only interesting as a distinct phenomenon in two cases–1) if it represents a breach of the managers’ fiduciary duties (“satisfying the CEO’s soul,” or more likely, seeking status with a non-business reference group) or 2) if the owners of the company want to trade off firm profits against social value. In the latter case, firm value may be enhanced by giving up some long-term profits, as Mackey, Mackey, and Barney show in “Corporate Social Responsibility and Firm Performance: Investor Preferences and Corporate Strategies,”AMR 2007.

  • 5. Steven  |  28 October 2008 at 9:10 pm

    the social responsibility of business is only in the sense that it is likely to increase revenues for the firm. For example; if a firm cares for the environment then it is able to make more sales to customers who choose to buy from a firm that cares about the environment. The same applies to other social responsibility aspects such as sponsoring a outreach programme etc, or anything. If the company doesn’t do this then its customers will switch to a firm who does do it.

    There is nothing else to it, firms participate in social responsibility solely because their customers care about issues and the company must care about the same issues in order to increase shareholder wealth (as this is the goal of any corporation).

    That’s it… simple.

  • 6. David Hoopes  |  14 December 2008 at 12:47 am

    I think this argument has many of the frustrating characteristics of other discussions where the parties are seeing, discussing, arguing about two different things.

    “Corporate Social Responsibility” as usually considered is inefficient. I think it is good for individuals that are in corporations to be socially responsible (don’t dump nuclear waste into the ocean). But, investing in “Causes” is probably not a capability we need our firms to spend time on. Think of it as being like diversification (it is really quite similar). A company is good at something and has some extra cash. Why not: get into an unrelated field and diversify risk; grow the company by getting in to high growth industries; donate the money to good causes.

    In each case, investors can accomplish the goals far easier than the corporation. It might look nice when a company gives a big wad of cash to some charity (making it seem better than leaving it to shareholders). Yet, you are simply taking the decision away from one group and putting it in the hands of another.

    Investors can diversify cheaper and more efficiently and effectively than companies.
    Investors can put their money into unrelated high growth industries more efficiently than companies.
    Individuals can pick their ideal social causes better than corporations can do it for them.

    Ben and Jerry’s could have donated FAR more money if they had run their business for profit and spent their personal financial gains at their favorite charity. Suffocating their firm under a plethora of “causes” just reduced the amount they could donate.

    If it’s good for business, fine. But, other than that money is just being wasted. More money can go to charity if everyone sticks to their own skill set.

    Gasp for air

  • 7. David Hoopes  |  14 December 2008 at 12:49 am

    I guess I’m preaching to the Divinity School.

  • 8. jennifer  |  26 May 2009 at 9:14 pm

    While ‘Ben & Jerry’ may have had more $ to donate if they didn’t focus on the causes so much, if every company focused on causes more than $ perhaps there wouldn’t be as many ’causes’ needing $. For exampe, being socially conscious would make environmental causes less ‘in need’ in the first place. If companies would care more about the illnesses their products cause and the impact their manufacturing plant has on the environment, these wouldn’t be ’causes’ in the first place. Wake up!

  • 9. David G. Hoopes  |  31 May 2009 at 1:40 am

    We’re talking about two different things. I think everyone should be responsible for their actions. So, if some company is imposing some externality on its community (dumping sewage into a river) I think they should certainly pay for it. I’m not saying organizations should exploit legal immoral activities (lousy working conditions in countries with few regulations).

    I’m saying that firms should not spend money on social causes when at least half of their shareholders and employees probably disagree with the cause. More to the point, a company shouldn’t run itself down with poor business practices donating money to said social causes. The company should do its best to pay its employees, offer value to its customers, and earn a return to its shareholders. Each of them can donate to charities and social causes as they choose.

    If Ben and Jerry focused more on their business they could have made more money and then spent that money on their favorite causes.

    I’ll try to remain alert.

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