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Good corporate citizens, and wise governments, should be wary of CORPORATE SOCIAL RESPONSIBILITY
The ethics of business
Jan 20th 2005
From The Economist print edition
Good corporate citizens, and wise governments, should be wary of CSR
RECALL that Joel Bakan, the angry law-school professor and scourge of modern corporations, argued that CSR is usually a scam. It is for governments, he says, not firms, to decide questions of social, environmental and industrial policy�and governments should know that if they fail in that duty, the psychotic corporation, quite likely hiding behind CSR, will continue to rape and pillage.
Mr Bakan and those who share his morbid fear of capitalism are wrong about that second point. Not only is competitive private enterprise already heavily regulated; it also comes with a great deal of built-in additional self-interested self-regulation, as it were. But they are quite right about the first point. It is indeed desirable to establish a clear division of duties between business and government. Governments, which are accountable to their electorates, should decide matters of public policy. Managers, who are accountable to their shareholders, should run their businesses.
Does this mean that managers need not concern themselves with ethics? Just the opposite. Managers should think much harder about business ethics than they appear to at present. It is lack of clarity about business ethics that gives rise to confusion over what managers' responsibilities are, and over where the limits of those responsibilities lie.
The crucial point is that managers of public companies do not own the businesses they run. They are employed by the firms' owners to maximise the long-term value of the owners' assets. Putting those assets to any other use is cheating the owners, and that is unethical. If a manager believes that the business he is working for is causing harm to society at large, the right thing to do is not to work for that business in the first place. Nothing obliges someone who believes that the tobacco industry is evil to work in that industry. But if someone accepts a salary to manage a tobacco business in the interests of its owners, he has an obligation to those owners. To flout that obligation is unethical.
In addition, of course, managers ought to behave ethically as they pursue the proper business goal of maximising owner value�and that puts real constraints on their actions. In most cases, acting within these constraints advances the aim of the business, just as individuals find that enlightened self-interest and ethical conduct usually sit well together. But, for firms as for people, this will not always be true. Sometimes the aims of the business and rational self-interest will clash with ethics, and when they do, those aims and interests must give way.
Much the same goes for acting within the law. In democratic societies where the rule of law is upheld, businesses and individuals should work under a strong presumption that they will obey those societies' laws. This will generally be good for business, and usually will be ethical as well�but, again, not always. Now and then, depending on the circumstances, it is wrong to obey the law. And merely following the law does not exhaust a firm's ethical responsibilities, any more than it does an individual's. Some things that are legal are unethical; and many things required by ethics are not required by law.
Managers of companies must confront these questions in running their businesses, just as individuals must in leading their everyday lives. Business ethics, in short, is not an empty box. But what exactly is in the box?
Elaine Sternberg, an academic philosopher and business consultant (and a former investment banker), persuasively argues in her book, "Just Business", that there are two main things: "ordinary decency" and "distributive justice". These need to be understood in relation to the proper goal of the firm. Without these basic values, business would not be possible.
Be decent, be just
If owner value, and ownership itself, are to mean anything, there must be respect for property rights. This excludes, Ms Sternberg points out, "lying, cheating, stealing, killing, coercion, physical violence and most illegality"; it calls instead for "honesty and fairness". Taken together, in her formulation, these constraints reflect the demands of "ordinary decency".
Some businessmen appear to believe that anything which is not outright illegal, however unethical, can be regarded as proper business conduct. But without ordinary decency (which goes a long way beyond what the law requires of firms), business could not be carried on.
Firms that lie and cheat cannot expect to stay in business very long, even if their actions are allowed by law. Dishonest companies will be unable to borrow, to obtain working capital, or to form stable business relationships with suppliers and customers. Decency in this sense is not just good for business, it is essential. When it comes to maximising long-term owner value, honesty is not just the best policy, it is the only feasible policy.
Crime doesn't pay
What about organised crime, you might ask? The mafia lasted pretty well as a profit-maximising business, did it not? Yes, but organised crime nonetheless proves the point. See what a criminal or "indecent" enterprise has to do to grow and survive: it must corrupt and intimidate, and thoroughly subvert both politics and the criminal-justice system. Some sick jurisdictions have let that happen. Where the rule of law prevails, however, those methods do not work outside a highly circumscribed and perpetually beleaguered criminal domain. Inside this zone, enterprises are small, always in hiding, and in pathological conflict with each other. Outside it, in the light, honesty and fair dealing are required if business enterprises are to prosper and survive.
Granted, some critics of business regard "the big multinationals" as little more than outposts of a mafia-like empire. In the world according to Michael Moore, such companies do systematically lie and cheat, and get away with it by corrupting and intimidating, and subverting both politics and the criminal-justice system. There is indeed little to choose, on this view, between Halliburton (or IBM, for that matter, or General Motors or GlaxoSmithKline) and the cosa nostra. Now and then executives do commit crimes, of course. Usually, they are found out and punished. That aside, if you believe that "the big multinationals" are essentially criminal enterprises getting away with murder (perhaps literally), you are beyond the reach of an article about business ethics.
What about the second component of business ethics, distributive justice? In the business context, this simply means aligning benefits within the organisation to the contribution made to achieving the aims of the firm. Pay linked to performance and promotion on merit are instances of distributive justice within the company.
Much of what was said about the role of ordinary decency applies here too. Again, these notions of what is fair are widely accepted; on the other hand, they are not, for the most part, required by law; as a practical matter, they are needed if the business is to do as well as it can; and they are also questions of ethics, and hence part of the ethics of business. To promote a friend rather than the best person for the job, or to reward a manager for incompetence or wrongdoing, is a bad way to run a business�and is also unethical.
Many writers on business ethics, and just about all advocates of CSR, argue that this way of thinking mistakes the proper purpose of the enterprise. Making money for the owners is too narrow a view of what a corporation is for. It raises ownership�"mere ownership", as they would say�too high. Owners are just one group among many kinds of different "stakeholders" in a business. It is wrong to run a business in the interest of one kind of stakeholder, ignoring the legitimate interests of all the others. Is this correct?
There is a lot of unnecessary confusion about "stakeholders". Businesses certainly need to take account of other interested parties if they are to succeed as businesses: they must satisfy their customers, get on with their suppliers, motivate their workers, and so forth. In that sense, these different groups of stakeholders will have their say and exercise their influence. But "taking account of" is not the same as "being held accountable to". Accountability refers to a much more formal and direct set of rights and obligations.
Of course it is always possible, as a matter of law, to create forms of managerial accountability to non-owners. Through the courts, you might say, managers are held accountable to society at large. Public policy can make managers accountable to regulators. Managerial accountability to workers can also be required by law: worker representation on company boards is mandated in Germany, for instance. (Whether this serves the interests of German workers, or of Germany's citizens in general, is nowadays in doubt.) But all such lines of accountability recognise owners as primary. You cannot deem stakeholders to be equal co-owners of a business without repudiating the very idea of ownership. And where the law does not create accountability to non-owners, there is none.
In many of the corporate scandals of recent years, it has seemed that managers have acted as though they were accountable to nobody�not even, and in some cases least of all, to the firms' owners. This has been rightly recognised as a problem, and a lot of time and effort has been spent on trying to make accountability to shareholders�on matters such as executive pay�more effective.
Muddled thinking on CSR, and on supposed accountability to non-owners, only makes it harder to put this right. Advocates of CSR ought to reflect on the fact that the "triple bottom line" and the bogus pay scheme which rewards bad performance with riches have something important in common: the idea that the interests of "mere owners" should not be allowed to come between managers and their personal objectives. Broken corporate governance and CSR are close relations. You often see them together.
Good companies, good government
An earlier section of this article sketched out a four-way classification of CSR: good management, borrowed virtue, pernicious CSR and delusional CSR. Does business ethics shed any more light on those categories? It does, though some of the results are a little troubling at first sight.
Good management and delusional CSR raise no new difficulties from an ethical point of view: the first, which increases profits and improves social welfare, is plainly a good thing and the second, which reduces both, is plainly not. Borrowed virtue has already been criticised on ethical grounds, even though it is assumed to advance social welfare. That verdict stands, as you would expect. A proper understanding of business ethics makes the reasoning clearer, but the main thing is still that the profits of a publicly owned company are not the managers' to give away. The remaining category is pernicious CSR, the kind that raises profits but reduces social welfare.
Is pernicious CSR also unethical? Often, paradoxically, the answer will be no. Managers cannot be criticised on ethical grounds for aiming to increase long-term owner-value: that is their job. Assuming that they have also acted within the law, the next question is whether they have violated the standards of ordinary decency and distributive justice within the organisation. If they have�if they have lied, or bribed, or coerced, for instance�then they have behaved unethically. But if they have acted in accordance with those two standards of business conduct, they are ethically in the right, even though they have acted against the public interest.
This is not as strange as it seems. Consider the case of monopoly. Managers are not to be criticised on ethical grounds for striving to drive their competitors out of business�provided that they do this by selling a better product, for instance, rather than by deception or coercion or through unlawful anti-competitive practices. And if they succeed in establishing a monopoly, it is not unethical to set a price that maximises the company's profits, or even (to the extent that the law allows it) to create business barriers to the entry of new competitors (for instance, by spending heavily on advertising). For that matter, it is not unethical for a company to lobby the government for protection from foreign competition, citing its concerns, as a good corporate citizen, for the well-being of its workers. All of these things may well be ethical�even when, from the point of view of society as a whole, they are likely to be undesirable.
This seeming paradox only underlines the point that businesses should not try to do the work of governments, just as governments should not try to do the work of businesses. The goals of business and the goals of government are different�or should be. That, by the way, is why "partnership" between those two should always arouse intense suspicion. Managers, acting in their professional capacity, ought not to concern themselves with the public good: they are not competent to do it, they lack the democratic credentials for it, and their day jobs should leave them no time even to think about it. If they merely concentrate on discharging their responsibility to the owners of their firms, acting ethically as they do so, they will usually serve the public good in any case.
The proper guardians of the public interest are governments, which are accountable to all citizens. It is the job of elected politicians to set goals for regulators, to deal with externalities, to mediate among different interests, to attend to the demands of social justice, to provide public goods and collect the taxes to pay for them, to establish collective priorities where that is necessary and appropriate, and to organise resources accordingly.
The proper business of business is business. No apology required.
More on Corporate social responsibility from the Economist:
What does corporate social responsibility really mean?
Corporate social responsibility (CSR) blossoms as an idea
Corporations need to be socially responsible to build their "reputational capital"
Corporate social responsibility is all the rage - does it mean anything?
Anglo-Saxon corporation: case study for Corporate social responsibility
Reebok: case study for Corporate social responsibility
CORPORATE SOCIAL RESPONSIBILITY (CSR) Policies
The world according to CSR
Companies that merely compete and prosper make society better off
Good corporate citizens, and wise governments, should be wary of CORPORATE SOCIAL RESPONSIBILITY
Source: The Economist
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