Fraters Libertas

The Business of Business Is Business

A couple of weeks ago I received an e-mail from Nathan questioning whether it was appropriate for the US government and corporations to be providing assistance to the victims of the Asian tsunami. In reply I laid out what I thought was a pretty convincing argument for the US government to play a role, citing our interest in stability in the region and the simple fact that no one else had the ability to project the power required. How many aircraft carriers does the UN have?

But my answer on whether it was appropriate for corporations to donate money for tsunami relief efforts left much to be desired. Despite the fact that I've expressed my reservations about corporate philanthropy in the past, this time around I fell into the trap of unquestioning acceptance. How could corporations doing the "right thing" be wrong?

This week's Economist contains a survey of Corporate Social Responsibility (CSR). Most of the survey is available on the internet for subscribers only (yet another reason why you should get the mag). However, the introduction is available to all and it lays out the case against CSR:

Capitalism does not need the fundamental reform that many CSR advocates wish for. If CSR really were altering the bones behind the face of capitalism--sawing its jaws, removing its teeth and reducing its bite--that would be bad: not just for the owners of capital, who collect the company's profits, but, as this survey will argue, also for society at large. Better that CSR be undertaken as a cosmetic exercise than as serious surgery to fix what doesn't need fixing.

Other parts of the survey further the argument that most CSR activity is not only not appropriate for corporations, but that it can actually prove counter-productive for society at large. I've included links to the various parts of the survey that you can access if you're an Economist subscriber and excerpts from them.

The first section (subscription required) examines the way that corporations serve the public good by doing what they do best; make profits.

Simply put, advocates of CSR work from the premise that unadorned capitalism fails to serve the public interest. The search for profit, they argue, may be a regrettable necessity in the modern world, a sad fact of life if there is to be any private enterprise. But the problem is that the profits of private enterprise go exclusively to shareholders. What about the public good? Only if corporations recognise their obligations to society--to "stakeholders" other than the owners of the business--will that broader social interest be advanced. Often, governments can force such obligations on companies, through taxes and regulation. But that does not fully discharge the enlightened company's debt to society. For that, one requires CSR.

This is wrong. The goal of a well-run company may be to make profits for its shareholders, but merely in doing that--provided it faces competition in its markets, behaves honestly and obeys the law--the company, without even trying, is doing good works. Its employees willingly work for the company in exchange for wages; the transaction makes them better off. Its customers willingly pay for the company's products; the transaction makes them better off also. All the while, for strictly selfish reasons, well-run companies will strive for friendly long-term relations with employees, suppliers and customers. There is no need for selfless sacrifice when it comes to stakeholders. It goes with the territory.

Thus, the selfish pursuit of profit serves a social purpose. And this is putting it mildly. The standard of living people in the West enjoy today is due to little else but the selfish pursuit of profit. It is a point that Adam Smith emphasised in "The Wealth of Nations": "It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest." This is not the fatal defect of capitalism, as CSR-advocates appear to believe; it is the very reason capitalism works.

The next part of the survey (subscription) specifically addresses donations to charities by corporations and concludes that giving away other people's money is not real philanthropy.

A question to ask of all outbreaks of corporate goodness is, who is paying? Following the Indian Ocean tsunami, many companies made generous donations to charities helping the victims. There could be no worthier cause--but keep in mind that, in the case of public companies, the managers authorising those donations were giving other people's money, not their own. Philanthropy at others' expense, even in a cause as good as that one, is not quite the real thing.

It also looks at recycling:

By and large, the world is not running out of resources; where it is, prices reflect that fact. As a result, the ordinary pursuit of profits is an excellent guide to companies on whether to recycle. There is no need to anoint recycling as a kind of moral standard of responsible behaviour. And if doing so succeeds in deflecting companies from thinking hard about their costs, actual social harm results. Use of materials is an area where private and social benefits are typically well-aligned.

And the true state of the environment:

So far as environmental externalities are concerned, most leading advocates of CSR seem to be in the grip of a grossly exaggerated environmental pessimism. The claim that economic growth is necessarily bad for the environment is an article of faith in the CSR movement. But this idea is simply wrong.

Natural resources are not running out, if you measure effective supply in relation to demand. The reason is that scarcity raises prices, which spurs innovation: new sources are found, the efficiency of extraction goes up, existing supplies are used more economically, and substitutes are invented.

Whenever people portray corporations as bastions of conservative, free market thinkers I chuckle. Most corporations would like nothing more than to choke their competitors in a sea of government regulation. And they often use the guise of CSR to achieve this end.

This danger is compounded when CSR leaders campaign for the introduction of codes that impose such standards on all firms. This too may be fine for profits, which is why so many companies have begun to endorse this policy. It is a good idea for a business to hobble its competition if possible--which is what mandatory labour standards of the sort demanded of the WTO tend to do. How much better if grasping this commercial advantage can be disguised as acting the good corporate citizen. But hobbling the competition is bad for the public at large. Again, by depriving them of investment, such perverted virtue especially harms the economic prospects of developing countries.

Although it is true that many business leaders mean what they say about good corporate citizenship, and speak up for CSR in good faith, CSR is nonetheless far more often invoked as a rationale for anti-competitive practices than as a reason to bolster competition. Incumbent firms or professions seem to find it easier to comply with burdensome regulations if they know that those rules are deterring new entrants. That is why, often in the name of CSR, incumbent businesses are so given to calling for rules and standards to be harmonised and extended, both at home and abroad.

The survey makes (subscription) an important distinction between greed and self-interest:

Does this mean that Gordon Gekko, the odious protagonist of the movie, "Wall Street", was right to say that "greed is good"? No: greed and self-interest are not the same thing, as Mr Gekko discovered in that movie. Greed, in the ordinary meaning of the word, is not rational or calculating. Freely indulged, it makes you fat and drives you into bankruptcy. The kind of self-interest that advances the public good is rational and enlightened. Rational, calculating self-interest makes a person, or a firm, worry about its reputation for honesty and fair dealing, for paying debts and honouring agreements. It looks beyond the short term and plans ahead. It considers sacrifices today for the sake of gains tomorrow, or five years from now. It makes good neighbours.

Morally, also, there is a world of difference between greed and self-interest. The first, even if it were not self-defeating, would still be a gross perversion of the second. Failing to see this distinction, and thus concluding without further thought that private enterprise is tainted, is a kind of ethical stupidity. Greed is ugly. There is nothing ignoble, in contrast, about a calm and moderate desire to advance one's own welfare, married (as it is in most people) to a sympathetic regard for the well-being of others. And, as Smith pointed out, rational self-interest also happens to make the world go round.

The summary (subscription) drives home the idea that giving away other people's money is not philanthropy:

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.

And it concludes with an unapologetic defense of the role of corporations:

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.

Is it too late to change my answer Nathan?