The good company A survey of corporate social responsibility January 22nd 2005
Republication, copying or redistribution by any means is expressly prohibited without the prior written permission of The Economist The Economist January 22nd 2005 A survey of corporate social responsibility 1
The good company Also in this section The union of concerned executives CSR as practised means many di erent things. Page 6
The world according to CSR Good corporate citizens believe that capital- ism is wicked but redeemable. Page 10
Pro t and the public good Companies that merely compete and prosper make society better o . Page 13
The ethics of business Good corporate citizens, and wise govern- ments, should be wary of CSR. Page 16 The movement for corporate social responsibility has won the battle of ideas. That is a pity, argues Clive Crook
VER the past ten years or so, corporate much higher up the corporate agenda. Osocial responsibility (CSR) has blos- In public-relations terms, their victory somed as an idea, if not as a coherent prac- is total. In fact, their opponents never tical programme. CSR commands the at- turned up. Unopposed, the CSR move- tention of executives everywhere if their ment has distilled a widespread suspicion public statements are to be believed and of capitalism into a set of demands for ac- especially that of the managers of multi- tion. As its champions would say, they national companies headquartered in Eu- have held companies to account, by rope or the United States. Today corporate embarrassing the ones that especially of- social responsibility, if it is nothing else, is fend against the principles of CSR, and by the tribute that capitalism everywhere mobilising public sentiment and an al- pays to virtue. most universally sympathetic press It would be a challenge to nd a recent against them. Intellectually, at least, the annual report of any big international corporate world has surrendered and gone company that justi es the rm’s existence over to the other side. merely in terms of pro t, rather than ser- The signs of the victory are not just in vice to the community . Such reports often the speeches of top executives or the dili- talk proudly of e orts to improve society gent reporting of CSR e orts in their pub- and safeguard the environment by re- lished accounts. Corporate social respon- stricting emissions of greenhouse gases sibility is now an industry in its own right, from the sta kitchen, say, or recycling of- and a ourishing profession as well. Con- ce stationery before turning hesitantly sultancies have sprung up to advise com- to less important matters, such as pro ts. panies on how to do CSR, and how to let it Big rms nowadays are called upon to be be known that they are doing it. The big au- good corporate citizens, and they all want diting and general-practice consulting rms o er clients CSR advice (while con- Acknowledgments to show that they are. This survey owes a lot to Misguided Virtue by David On the face of it, this marks a signi cant spicuously striving to be exemplary cor- Henderson, published by the Institute of Economic A airs victory in the battle of ideas. The winners porate citizens themselves). in London and the Competitive Enterprise Institute in Most multinationals now have a senior Washington, DC; A Poverty of Reason by Wilfred are the charities, non-government orga- Beckerman, published by the Independent Institute; and nisations and other elements of what is executive, often with a sta at his disposal, Just Business by Elaine Sternberg, published by Oxford called civil society that pushed for CSR in explicitly charged with developing and co- University Press. This is not to say that these authors would ordinating the CSR function. In some agree with each other, or with this survey, about all of the the rst place. These well-intentioned issues discussed. groups certainly did not invent the idea of cases, these executives have been re- good corporate citizenship, which goes cruited from NGOs. There are executive- An audio interview with the author is at back a long way. But they dressed the no- education programmes in CSR, business- www.economist.com/audio tion in its new CSR garb and moved it school chairs in CSR, CSR professional 1 2 A survey of corporate social responsibility The Economist January 22nd 2005
2 organisations, CSR websites, CSR newslet- ven by many di erent motives. But the would be bad: not just for the owners of ters and much, much more. short answer must be yes: for most compa- capital, who collect the company’s pro ts, But what does it all amount to, really? nies, CSR does not go very deep. There are but, as this survey will argue, also for soci- The winners, oddly enough, are disap- many interesting exceptions companies ety at large. Better that CSR be undertaken pointed. They are starting to suspect that that have modelled themselves in ways as a cosmetic exercise than as serious sur- they have been conned. Civil-society ad- di erent from the norm; quite often, par- gery to x what doesn’t need xing. vocates of CSR increasingly accuse rms ticular practices that work well enough in of merely paying lip-service to the idea of business terms to be genuinely embraced; We are an equal-opportunity employer good corporate citizenship. Firms are still charitable endeavours that happen to be But this is not the end of the matter. Par- mainly interested in making money, they doing real good, and on a meaningful ticular CSR initiatives may do good, or note disapprovingly, whatever the CEO scale. But for most conventionally organ- harm, or make no di erence one way or may say in the annual report. When com- ised public companies which means al- the other, but it is important to resist the mercial interests and broader social wel- most all of the big ones CSR is little more success of the CSR idea that is, the almost fare collide, pro t comes rst. Judge rms than a cosmetic treatment. The human universal acceptance of its premises and and their CSR e orts by what the compa- face that CSR applies to capitalism goes on main lines of argument. Otherwise bones nies do, charities such as Christian Aid (a each morning, gets increasingly smeared may indeed begin to snap and CSR may CSR pioneer) now insist, not by what they by day and washes o at night. encroach on corporate decision-making in say and prepare to be unimpressed. Under pressure, big multinationals ask ways that seriously reduce welfare. By all means, judge companies by their their critics to judge them by CSR criteria, Private enterprise requires a supporting actions. And, applying that sound mea- and then, as the critics charge, mostly fail infrastructure of laws and permissions, sure, CSR enthusiasts are bound to be dis- to follow through. Their e orts may be and more generally the consent of elector- appointed. This year’s Giving List, pub- enough to convince the public that what ates, to pursue its business goals, whatever lished by Britain’s Guardian newspaper, they see is pretty, and in many cases this they may be. This is something that CSR showed that the charitable contributions may be all they are ever intended to advocates emphasise they talk of a li- of FTSE 100 companies (including gifts in achieve. But by and large CSR is at best a cence to operate and they are quite right. kind, sta time devoted to charitable gloss on capitalism, not the deep systemic But the informed consent of electorates, causes and related management costs) av- reform that its champions deem desirable. and an appropriately designed economic eraged just 0.97% of pre-tax pro ts. A few Does this give cause for concern? On infrastructure, in turn require an under- give more; many give almost nothing the whole, no, for a simple reason. Capital- standing of how capitalism best works to (though every one of them records some ism does not need the fundamental reform serve the public good. The thinking be- sort of charitable contribution). The total is that many CSR advocates wish for. If CSR hind CSR gives an account of this which is not exactly startling. The gures for Ameri- really were altering the bones behind the muddled and, in some important ways, can corporate philanthropy are bigger, but face of capitalism sawing its jaws, remov- downright false. the numbers are unlikely to impress many ing its teeth and reducing its bite that There is another danger too: namely, CSR advocates. that CSR will distract attention from genu- Still, you might say, CSR was always in- ine problems of business ethics that do tended to be more about how companies need to be addressed. These are not in conduct themselves in relation to stake- short supply. To say that CSR re ects a mis- holders (such as workers, consumers, the taken analysis of how capitalism serves broader society in which rms operate society is certainly not to say that manag- and, as is often argued, future generations) ers can be left to do as they please, nor to than about straightforward gifts to charity. say that the behaviour of rms is nobody’s Seen that way, donations, large or small, concern but their own. There is indeed are not the main thing. such a thing as business ethics : manag- Setting gifts aside, then, what about the ers need to be clear about that, and to com- many other CSR initiatives and activities prehend what it implies for their actions. undertaken by big multinational compa- Also, private enterprise serves the pub- nies? Many of these are expressly in- lic good only if certain stringent conditions tended to help pro ts as well as do good. It are met. As a result, getting the most out of is unclear whether this kind of CSR quite capitalism requires public intervention of counts. Some regard it as win-win , and various kinds, and a lot of it: taxes, public something to celebrate; others view it as a spending, regulation in many di erent ar- sham, the same old tainted pro t motive eas of business activity. It also requires masquerading as altruism. And, even to corporate executives to be accountable the most innocent observer, plenty of CSR but to the right people and in the right way. policies smack of tokenism and political CSR cannot be a substitute for wise correctness more than of a genuine con- policies in these areas. In several little-no- cern to give back to the community , as ticed respects, it is already a hindrance to the Giving List puts it. Is CSR then mostly them. If left unchallenged, it could well be- for show? come more so. To improve capitalism, you It is hazardous to generalise, because rst need to understand it. The thinking be- CSR takes many di erent forms and is dri- hind CSR does not meet that test. 7 The Economist January 22nd 2005 A survey of corporate social responsibility 3
The union of concerned executives
CSR as practised means many di erent things
N THE face of it, questioning the ef- necessary in any case if managers are to small a test of their talents. Yet whatever Oforts of companies to behave respon- run a successful business. The issue here is the variations, one thing is constant: the sibly is an odd thing to do unless you are not whether the activities themselves weight given to specious arguments about accusing them of faking it, or of falling be- make sense, but whether they deserve to what businesses must do to justify their low some commonly agreed minimum be digni ed by the term corporate social existence and pay their way in society. standard. How could a company ever be- responsibility that is, whether they de- Putting those arguments about the du- have too responsibly? The very term cor- serve the special praise which this label is ties of business to one side for the mo- porate social responsibility endorses the intended to elicit. ment, setting motives aside as well and actions to which it is applied. No doubt At the strong end of the range, many ac- thinking only of results, one might ask two that is why companies fasten the label to a tivities do deserve a special label: they go questions of any act of supposedly en- quite bewildering variety of supposedly well beyond the requirements of ordinary lightened corporate citizenship. Does it im- enlightened, progressive or charitable cor- decency or business necessity, so the term prove the company’s long-term pro tabil- porate actions. CSR is serving a useful purpose. But can ity? And does it advance the broader At one end of the broad span of CSR lie the same be said of the policies? public good? corporate policies that any well-run com- At rst sight that looks like a churlish pany ought to have in place anyway, poli- question. What could possibly be wrong Two tests cies that are called for on any sensible with policies such as corporate charity or Successful managers usually do both at view of business ethics or good manage- careful attention to the demands of envi- once, of course: merely by running a pro t- ment practice. These include not lying to ronmental protection and sustainable de- able company, they are likely to be ad- your employees, for instance, not paying velopment? Sometimes nothing, but it de- vancing the public good as well. This argu- bribes, and looking farther ahead than the pends. Many individual acts of good ment will be taken up in more detail next few weeks. At the other end of the corporate citizenship do make sense in below. Some of the business practices that range are the more ambitious and distinc- business terms, or as ways of advancing are often (perhaps misleadingly) labelled tive policies that di erentiate between the public good, or both. But others do not. as CSR do fall into this category: they raise leaders and laggards in the CSR race large Sometimes CSR policies are motivated pro ts and advance society’s well-being at expenditures of time and resources on by genuine concern for the intended bene- the same time. Examples include estab- charitable activities, for instance, or bind- ciaries, or by a conscientious belief that lishing a reputation for dealing honestly ing commitments to ethical investment , businesses must earn their licence to op- with employees, suppliers and customers. or spending on environmental protection erate . There are some kindly CEOs out This is the win-win kind of CSR the sort beyond what regulators demand. there, and some with a troubled con- that fails to impress much of civil society. In other words, at the mild end of the science. But there can be other motives for Perhaps it would be better to call it simply range are practices that do not need any CSR too. There are quite a few vain CEOs good management . special CSR defence: they can perfectly who enjoy the attention which CSR lead- Turning back to those two questions, well justify themselves in simpler ways, ei- ership brings them, and many others who, however, note that there are three other ther as meeting standards of ordinary de- having climbed their way to the top, seem possible answers as well. These are cency (of which more later), or as being to nd running a pro table company too mapped out in the table on the next page. 1 4 A survey of corporate social responsibility The Economist January 22nd 2005
2 Some kinds of CSR reduce pro ts but raise tsunami. You might suppose that devoting Note that the world’s most spectacular social welfare (this is what civil society pro t to the public interest is CSR at its best, philanthropists think of the Bill & Me- likes best: call it borrowed virtue , for rea- or at any rate its noblest. The enlightened linda Gates Foundation, with its endow- sons to be explained in a moment). There company is surrendering some of its earn- ment of $27 billion are not spending the is also CSR that raises pro ts but reduces ings to make the world a better place. pro ts of the companies they are associ- social welfare ( pernicious CSR ), and CSR ated with but their own private wealth. that reduces both pro ts and welfare (a po- Philanthropy that isn’t That is the real thing, true philanthropy, lite name for which might be delusional As many CEOs point out, this is not to say and is nothing but admirable, especially if CSR ). Consider some examples. that there are no business bene ts. Some the givers are taking care to ensure the To begin with, win-win, or good man- executives think of their charitable dona- money is spent wisely, as the biggest priv- agement . There is a lot of it about. Many tions especially gifts such as sponsoring ate foundations now do. executives in the CSR movement deserve high-pro le sporting or artistic events as Philanthropy nanced out of the pro ts credit for testing and drawing attention to a kind of advertising. Others may feel that of publicly owned companies is a quite novel practices that can yield these good their companies, or their industries (oil, to- di erent thing, ethically speaking. Share- results. Their ideas may not be applicable bacco, pharmaceuticals), have such a poor holders might expect to be allowed to in all or even most companies, but their image with the public at large that gener- spend their money on good causes of their success in particular cases is impressive. ous charitable donations are needed to re- own choosing, rather than seeing the man- One of the most enthusiastic and per- dress matters. But straightforward cor- agers whose salaries they pay take that up- suasive evangelists of win-win CSR is porate philanthropy of this kind is not lifting duty upon themselves. Marc Benio , head of salesforce.com, a woven into the way the rm manages its In the case of some public companies, it strikingly successful internet-based busi- personnel, so the commercial bene ts are is true that there are mitigating circum- ness-services company. In his book, probably limited. Most cash donations out stances. Some companies have a tradition Compassionate Capitalism , he explains, of pro ts probably do represent a net loss of generosity with shareholders’ money among other things, how good corporate of pro ts (even if the loss is less than the stretching many years back. Some, for in- citizenship can be used to attract, retain gross outlay). stance, are formerly private or demutual- and motivate the best workers. His com- And what, you might ask, is wrong ised enterprises which, on going public, pany encourages its sta to devote time, at with that? What is wrong with a company created charitable foundations and under- the rm’s expense, to charitable works. In giving part of its pro ts to help the victims took to keep them nanced. In these cases, complementary ways, it also provides of the disaster in Asia, for instance a good the shareholders knew what they were exibility in working hours and condi- cause if ever there was one? getting into when they acquired stakes in tions. The character of the rm, as per- Not so fast. Remember that corporate the companies. Conceivably, these poli- ceived by its employees and its customers philanthropy is charity with other peo- cies may even be among the reasons why alike, is closely associated with this com- ple’s money which is not philanthropy at some shareholders acquired their stakes in mitment to good causes. all. When a company gives some of its pro- the rst place. At any rate, such owners All this seems to pay. Mr Benio argues ts away in a good cause, its managers are have little or no reason for complaint. As that this draws the right kind of people to indulging their charitable instincts not at for the rest, the majority, it might have the rm team players, joiners, volunteers, their own expense but at the expense of been polite to ask. generous and committed colleagues with the rm’s owners. That is a morally du- Still judging acts by their e ects, as op- a sense of loyalty to the enterprise. This bious transaction. When Robin Hood stole posed to motives and underlying ratio- kind of corporate philanthropy, which from the rich to give to the poor, he was nale, the most harmful kinds of CSR, how- marries good works with a clever way of still stealing. He might have been a good ever, are the pernicious and de- sorting and motivating sta , is undoubt- corporate citizen, but he was still a bandit lusional sorts that is, policies and edly catching on. and less of one, arguably, than the vica- practices that actually reduce social wel- When you press a CEO for details of a riously charitable CEO, who is spending fare. How can that happen? All too easily. company’s CSR policies, and for their busi- money taken not from strangers, but from Most CSR, in fact, is probably delu- ness rationale, you nd that every rm be- people who have placed him in a position sional, meaning that it reduces both pro ts lieves that its CSR actions fall in the win- of trust to safeguard their property. That is and social welfare, even if the cost under win box. No chief executive wants to be- why the box in the table containing cor- both headings is usually small. Almost all lieve that the rm’s various services to the porate philanthropy is marked (perhaps CSR has at least some cost, after all, even if community might reduce social welfare, too politely) borrowed virtue . it is no more than a modest increase in the and none seems willing to admit that his rm’s bureaucratic overhead. That cost enlightened management practices might subtracts from social welfare in its own reduce pro ts what would the sharehold- Pick your permutation right. So the kind of CSR that merely goes ers make of that? But those other cells of Varieties of CSR through the motions, delivering no new the matrix are far from empty. Raises Reduces resources to worthy causes, giving the A clear instance of an action that re- social welfare social welfare rm’s workers or customers no good rea- duces pro ts while (presumably) improv- son to think more highly of it (perhaps the Raises Good Pernicious ing social welfare is a straightforward cash profits management CSR opposite), involves a net loss of welfare. donation to charity. The donations fea- Or consider the current enthusiasm for tured in the Giving List fall into this cate- Reduces Borrowed Delusional recycling. No doubt there are cases where profits virtue CSR gory. Sums donated in this way have it makes good business sense to recycle. soared recently in response to the Asian These fall under the good management 1 The Economist January 22nd 2005 A survey of corporate social responsibility 5
2 heading: they increase pro ts and (mainly raises pro ts but lowers welfare perni- on matters such as health and safety. There for that reason) social welfare as well. But cious CSR. Recognising the existence of is a debate in CSR circles about exactly the point is that recycling is not free. E ort this category is especially important. how much higher than this the standard of and other resources must be expended on Some economically literate bosses argue responsible conduct should be. Some im- it. Waste must be collected, transported that if CSR raises pro ts then it must by the provement on the minimal market stan- and processed before it can re-enter the same token raise social welfare. So long as dard is probably win-win in any case, be- productive process. The costs can be sub- good corporate citizenship is good for the cause rich-country multinationals stantial. If those private costs exceed the bottom line, they assume, you can rest as- operating in developing countries typi- private savings, pro ts will su er and so, sured that it must be win-win, and good cally want to hire from a big pool of keen most likely, will social welfare. for society as well. As a rule, this may be applicants and to nd better-than-average Advocates of recycling would say this true. But there are some large exceptions. workers. Rich-country multinationals do is short-sighted and wrong, because it ig- Almost all CSR advocates are passion- in fact pay substantially higher wages and nores the need to conserve natural re- ate about sustainable development . The give substantially better bene ts (such as sources. Shortages of materials (such as idea is strongly endorsed by governments access to health care) than the local norm. newsprint), and of the natural resources everywhere, by institutions such as the But how much of an improvement on this needed to produce them (trees), are not re- World Bank and the United Nations, and pro t-seeking market standard does good ected in the prices paid, they argue. So a indeed by anybody at all with a desire to corporate citizenship require? private calculation of costs and bene ts Some CSR advocates have aligned will not su ce. Pro t, which is private ben- themselves with those in the NGO move- e t minus private cost, might rule out recy- ment who regard it as wrong exploitative, cling, whereas a broader social calculation or unfair to hire workers in the develop- of costs and bene ts would show a di er- ing countries on any terms that are signi - ent balance. Since society has a collective cantly less generous than those granted to interest in conserving resources, an inter- their rich-country workers. Companies est not re ected in the market prices of under NGO scrutiny have been dissuaded commodities, recycling might very well re- from investing in manufacturing opera- duce pro t but at the same time increase tions in developing countries such as India welfare and, as with corporate philan- or Bangladesh, or have decided to end thropy, that is what CSR is about. such operations, faced with charges that The trouble is, the notion that the mar- they are employing sweatshop labour . ket prices of commodities fail to re ect As good corporate citizens, they say with their scarcity is wrong. In commodity mar- arms twisted behind their back, they no kets, prices re ect scarcity just ne. The longer do that. Many development NGOs long-term global trend of falling commod- are pushing for labour standards that ity prices, despite growth in the world would mandate this kind of best prac- economy, is not due to the failure of mar- tice , and want these standards written kets to re ect diminishing supplies and im- into future trade agreements. pending shortages. Commodity markets The evidence clearly shows that poli- are for the most part e cient and forward- cies of this kind (especially if they come to looking. Commodity prices, measured be required of all companies as part of fu- over recent decades, have followed a ture trade pacts) are not in the interests of downward trend because innovation has the workers they purport to help. Foreign brought about ever-rising productivity in direct investment in the third world is the use of those resources. In other words, known to be one of the best spurs to econ- supply has outstripped demand. Where, be thought well of. It has become an orga- omic development: just look at China. unusually, it has not, prices have indeed nising principle for the whole CSR move- Even when the wages and other terms of- gone up providing the signal that may ment. Emphasis is laid on environmental fered to local workers are much less gener- make recycling in those cases commer- protection and on responsible behaviour ous than those o ered to their western cially sensible. towards workers and communities in the counterparts, they are typically much bet- By and large, the world is not running developing countries. In order to advance ter than the local economy can provide, out of resources; where it is, prices re ect those eminently worthy goals, some com- which is why jobs with foreign multina- that fact. As a result, the ordinary pursuit panies have lately devised codes of prac- tionals are nearly always in great demand of pro ts is an excellent guide to compa- tice, or have adopted codes written by in poor countries. nies on whether to recycle. There is no other organisations. The danger lies in the Attitudes that discourage such invest- need to anoint recycling as a kind of moral detail of these policies. ment by making it less pro table, or by ex- standard of responsible behaviour. And if To many advocates of CSR, and to virtu- posing companies that have made such in- doing so succeeds in de ecting companies ally all of the NGOs that have given the vestments to ridicule or censure, un- from thinking hard about their costs, ac- CSR movement its intellectual drive, doubtedly hold poor countries back. They tual social harm results. Use of materials is responsible behaviour towards workers in also keep in poverty the very workers who an area where private and social bene ts the developing countries goes far beyond would otherwise have got those jobs. To are typically well-aligned. giving them jobs at market wages and withdraw from such investments, as good Consider, nally, the case of CSR that complying with local laws and regulations corporate citizens are frequently enjoined1 6 A survey of corporate social responsibility The Economist January 22nd 2005
2 to, may well be pro table for the compa- tect their reputation. This is just as it Whether that response advances the nies concerned because staying put would should be: concern for the way they are broader social good then depends on the impose heavy costs on their reputation. judged by customers, suppliers and the circumstances. If consumers reject out- Capitulating to the ill-judged demands of world at large is a useful discipline. If it sourcing of this kind because it provides a the NGOs may be rational, pro t-seeking were absent, there would be no economic lower quality of service, ne: that is the behaviour on their part. But in this case, pressure on companies to behave de- market working as it should. If the public what is good for pro ts is bad for welfare. cently. If nobody is paying attention, why rejects outsourcing because it falsely be- This danger is compounded when CSR worry about dealing honestly with peo- lieves that workers in foreign call-centres leaders campaign for the introduction of ple, or honouring a contract? This pressure are being exploited, that is not ne: that is codes that impose such standards on all of outsiders’ perceptions is an indispens- the market, through popular misconcep- rms. This too may be ne for pro ts, able force. Without it, companies in a priv- tion, getting it wrong. which is why so many companies have be- ate-enterprise system would be nasty, In a way, this is to concede an impor- gun to endorse this policy. It is a good idea brutish and very short-lived. tant point to the advocates of CSR. Capital- for a business to hobble its competition if ism does function on top of, and one way possible which is what mandatory la- Need to know or another is moulded by, prevailing pop- bour standards of the sort demanded of However, it is important that this pressure ular opinion. As noted earlier, the condi- the WTO tend to do. How much better if should be well-informed, or at least not ut- tions that must be satis ed if capitalism is grasping this commercial advantage can terly misguided. In particular, it needs to to serve the public good are not trivial. A be disguised as acting the good corporate embody some basic economic under- comprehending and supportive climate of citizen. But hobbling the competition is standing. Unwarranted, misguided or opinion must be added to the list. That is bad for the public at large. Again, by de- contradictory public demands on compa- why the battle of ideas matters so much. priving them of investment, such per- nies, especially if these demands emerge CSR comes in a wide variety of forms. verted virtue especially harms the econ- in due course as government mandates, Judged by results, it may be win-win, bor- omic prospects of developing countries. can a ect decisions in such a way as to de- rowed virtue, delusional or pernicious. All this underlines a broader worry. tach pro table business conduct from the Judged by motives, it may be done in good Companies do operate in a climate of public good. faith or bad faith, out of conviction, bore- opinion. To be successful and pro table, If the public decides to punish banks dom or vanity, by genuinely well-inten- they must take account of how they are and other service companies that move tioned business leaders or by cynical perceived. Big, successful businesses, their call-centres o shore by withholding bosses looking to dupe their consumers. which often nd themselves in the public its custom, the pro t-seeking company But invariably, and dangerously, it is un- view, strive constantly to improve and pro- will respond by ending the practice. derpinned by mixed-up economics. 7 The world according to CSR
Good corporate citizens believe that capitalism is wicked but redeemable
VER the past century or so, and espe- from chronic sickness and pain, is better italism, if guided by nothing but their own Ocially in the past 50 years, the western than earlier generations ever dreamed it unchecked intentions, would be wicked, industrial democracies have experienced could be. destructive and exploitative, they appar- what can only be described as an econ- All this has been bestowed not just on ently believe bent on raping the planet omic miracle. Living standards and the an elite, but on the broad mass of people. and intent on keeping the poor outside the quality of life have risen at a pace, and to a In the West today the poor live better lives capitalist West in poverty. level, that would have been impossible to than all but the nobility enjoyed through- In a much-discussed recent book, The imagine in earlier times. out the course of modern history before Corporation: The Pathological Pursuit of This improvement in people’s lives, capitalism. Capitalism, plainly, has been Pro t and Power , Joel Bakan, a law profes- staggering by any historical standard, is the driving force behind this unparalleled sor at the University of British Columbia, not measured solely in terms of material economic and social progress. Yet today it lays bare the danger. His themes were fur- consumption important though it is, for is suspected, feared and deplored and not ther developed and illustrated in a lm of instance, to have enough to eat, to keep just by the kind of energetic anti-capitalists the same title, which was also successful warm in winter, to be entertained and who now and then put bricks through the and well reviewed. educated and to be able to travel. In addi- windows of McDonald’s. tion to material gains such as these, and to According even to middle-of-the-road The corporation’s legally de ned mandate is all the other blessings of western con- popular opinion, capitalism is at best a re- to pursue relentlessly and without exception its own economic self-interest, regardless of sumer society , broader measures of well- grettable necessity, a useful monster that the harmful consequences it might cause to being have raced upward as well: infant needs to be bound, drugged and muzzled others Today, corporations govern our mortality has plummeted, life expectancy if it is not to go on the rampage. Stranger lives. They determine what we eat, what we has soared, and the quality of those ex- still, this view seems to be shared by a watch, what we wear, where we work and tended years of life, in terms of freedom good proportion of business leaders. Cap- what we do. We are inescapably surrounded1 The Economist January 22nd 2005 A survey of corporate social responsibility 7
2 by their culture, iconography and ideology. And, like the church and the monarchy in other times, they posture as infallible and omnipotent, glorifying themselves in im- posing buildings and elaborate displays. Increasingly, corporations dictate the deci- sions of their supposed overseers in govern- ment and control domains of society once rmly embedded in the public sphere. Cor- porations now govern society, perhaps more than governments themselves do; yet ironically it is their very power, much of which they have gained through economic globalisation, that makes them vulnerable. As is true of any ruling institution, the cor- poration now attracts mistrust, fear and de- mands for accountability from an increasingly anxious public. Today’s cor- So far as society at large is concerned, in more than just make money for its owners. porate leaders understand, as did their prede- other words, the untrammelled pursuit of Therein lies the case for CSR. But is the pre- cessors, that work is needed to regain and pro t yields nothing, but costs plenty. Un- mise actually true? True or false, it is never maintain the public’s trust. And they, like less it is checked either by CSR or (as Mr Ba- challenged. their predecessors, are seeking to soften the kan would prefer, if only as a rst step) by One of the world’s foremost CSR net- corporation’s image by presenting it as hu- double-strength government regulation, works and organisations is the World Busi- man, benevolent and socially responsible. private enterprise makes losers of every- ness Council for Sustainable Develop- one but itself. ment. Its membership is made up of 175 In Mr Bakan’s view, CSR is mostly a big multinationals, including Shell, along- fraud. Companies, after all, are in patho- Private pro t, public interest side rms such as ABB, Dow Chemical, logical pursuit of pro t and power . CSR is The perceived tension between private Ford, General Motors, Procter & Gamble, merely a means to those ends, a way to in- pro t and public interest pervades the CSR Time Warner and so on. One of the coun- gratiate capitalism to a rightly suspecting literature. Yet the idea is never examined. It cil’s publications begins: public. The book’s jacket has blurbs of gen- is always regarded as self-evident. Although the rationale for the very existence erous praise not just, as you might expect, The top executives at Royal Dutch/Shell of business at law and in other respects is to from Noam Chomsky but also from an in- have lately been acting as CSR thought- generate acceptable returns for its share- vestment-fund manager and a CEO, who leaders and they are CSR champions in holders and investors, business and busi- says it is holding up a mirror for [corpora- other ways as well (through the activities ness leaders have, over the centuries, made tions] to see their destructive selves as oth- of the generously supported charitable ac- signi cant contributions to the societies of ers see them . tivities of the Shell Foundation, for in- which they form part. Many businessmen do seem to recog- stance). Shell has a lot of popular suspi- Why yes. If you compare people’s lives nise themselves in that mirror. And popu- cion to live down, following the scandal in the West today with those of people liv- lar culture has the corporate psycho in over its operations in Nigeria, for instance, ing, say, a century ago, or two centuries plain view which is remarkable, given and the controversy surrounding its plans ago, it would be right, if perhaps a little mi- the corporation’s su ocating grip on all for the disposal of the Brent Spar oil-drill- serly, to concede that business has made thoughts and deeds. What is the capitalist ing platform in the North Sea. Its senior ex- some signi cant contributions . But in ethos according to Hollywood? Greed is ecutives have done their best. In a lea et the council’s opinion these moderately im- good, as Gordon Gekko explained in explaining why the company had em- portant bene ts did not arise because Wall Street . From RoboCop (the mili- braced CSR, Sir Mark Moody-Stuart, who businesses generated acceptable returns tary-industrial complex) to Super Size was chairman between 1998 and 2001, for their owners; they arose despite that Me (fast-food tyrants) and back again, the and before that managing director, wrote: fact. Pro t, unfortunately, is necessary, as brave unequal war against corporate do- the council sadly notes: otherwise you minion is waged. [M]y colleagues and I on the committee of cannot have business, along with the pos- This paranoid fear of capitalism, shared managing directors are totally committed to sibility of those quite useful contributions. a business strategy that generates pro ts by so many of its leading practitioners, while contributing to the well-being of the But those contributions have to be sepa- boils down to two main ideas. First, pro t planet and its people. rately willed. It is simply not in the nature in its own right has nothing to do with the of business as such to contribute. That is public good. A company in pursuit of pro- That seems entirely unobjectionable, an add-on, a responsibility that business t is seeking a purely private gain. If the you might think: a commitment to mother- may choose to discharge or not discharge, pursuit of pro t is to yield an advance in hood and apple pie. But the clear implica- as it sees t. social welfare, then something else, acting tion and Sir Mark, to judge by other So, anti-capitalists believe this; angry with deliberation and intelligence from speeches and articles, buys it whole- law-school professors (whose own signi - outside the corporation, must intervene. sale is that if Shell simply made pro ts for cant contributions cannot be in doubt) be- Second, in their mad pursuit of private its owners, that would in itself contribute lieve it; and the leaders of international big gain, companies are driven by the logic of nothing to the planet and its people . business believe it. For good measure, their quest to place crippling burdens on From this it follows that if Shell is to justify many industrial-country governments, society and on the environment. its activities to society at large, it has to do acting singly or in concert, believe it as1 8 A survey of corporate social responsibility The Economist January 22nd 2005
2 well. Britain is just one of many countries the public interest. This second idea, al- other two.) Measuring pro ts the good to have designated a minister responsible ready noted, is an extension of the rst. old single bottom line o ers a pretty clear for encouraging CSR initiatives. In 2001 the And this is where sustainable develop- test of business success. The triple bottom European Commission published a con- ment comes in. line does not. sultative paper entitled, Promoting a The concept of sustainable develop- The problem is not just that there is no European Framework for Corporate Social ment puts esh on the idea that business one yardstick allowing the three measures Responsibility . The aim is to launch a left to its own devices is dangerous. Un- to be compared with each other. It is also wide debate on how the European Union tamed pro t-seeking, it is argued, puts that there is no agreement on what pro- could promote corporate social respon- strain on the environment and exploits gress on the environment, or progress in sibility at both the European and interna- workers. At the same time the goal of sus- the social sphere, actually mean not, at tional level . Values, it says, need to be tainable development points to a more least, if you are trying to be precise about translated into action . concrete agenda for CSR: while pursuing it. In other words, there are no yardsticks Leading international institutions such pro t, enlightened companies should take by which di erent aspects of environmen- as the World Bank, the United Nations, the care to protect the environment and up- tal protection can be compared even with Organisation of Economic Co-operation hold the rights of workers (and others) as each other, let alone with other criteria. and Development, and indeed more or well. Hence the triple bottom line which And the same goes for social justice. less any out t of that sort you care to thought-leaders on CSR (including the Un- One company reduces its emissions of name, endorse the view that pro t serves ited Nations and the European Commis- greenhouse gases. One increases its spend- an exclusively private interest, and that sion) want companies to monitor and re- ing on recycling. Another provides free blind pursuit of pro t is therefore likely to port: don’t just aim to make money, but child-care facilities for its workers. An- prove socially harmful. protect the environment and ght for so- other raises the wages of its lowest-paid The United Nations is especially keen cial justice as well. workers. All of these things cost money: on CSR, as part of a broad new approach to suppose, for the sake of argument, that all global governance. It continues to promote Unsustainable four have reduced pro t by the same its Global Compact , launched at the One problem with the triple bottom line is amount. Which company has done most World Economic Forum in 1999. This ini- quickly apparent. Measuring pro ts is to protect the environment? Which has tiative aims to draw together businesses fairly straightforward; measuring environ- done most to advance social progress? and business organisations, NGOs, and mental protection and social justice is not. Overall, how far has each company im- UN and other international agencies. The The di culty is partly that there is no sin- proved its triple bottom line? Bearing in goal of this new tripartism an ongoing gle yardstick for measuring progress in mind the cost, can you even say that any of discussion among governments, compa- those areas. How is any given success for them have done so? nies and civil society (which is how the UN environmental action to be weighed The great virtue of the single bottom refers to NGOs) is to nd ways to under- against any given advance in social jus- line is that it holds managers to account for pin the free and open market system with tice or, for that matter, against any given something. The triple bottom line does stable and just societies . change in pro ts? And how are the three to not. It is not so much a licence to operate as It is one thing to believe that pro t-seek- be traded o against each other? (CSR ad- a licence to obfuscate. ing serves no public interest directly. It is vocates who emphasise sustainable de- CSR advocates could reply that this another to believe that pro t-seeking, un- velopment implicitly insist that there must misses the point. The idea of the triple bot- less tempered and channelled by CSR or in be such a trade-o , at least when it comes tom line is not that the three-dimensional some other way, actually works against to weighing pro t against either of the performance of business can ever be judged as precisely as its orthodox one-di- mensional performance. The triple bot- tom line is just shorthand for saying: take other things into account, acknowledge that pro t isn’t everything, and don’t pur- sue pro t relentlessly, as you would other- wise be inclined to, even at the expense of damage to the environment and infringe- ments of the rights of workers and other stakeholders. You cannot be precise about these things, but at least you can recognise the social and environmental peril of too narrow a focus on pro t. That is a perfectly reasonable line of ar- gument or it would be, if a narrow focus on pro t really did endanger the environ- ment, systematically infringe the rights of workers and stakeholders, and in general fail to serve the public interest. That is the world according to CSR, but is the world really like that? The short answer is no. For a slightly longer answer, read on. 7 The Economist January 22nd 2005 A survey of corporate social responsibility 9
Pro t and the public good
Companies that merely compete and prosper make society better o
DAM SMITH, you might say, wrote the measure of what society has to surrender Abook on corporate social responsibil- to consume those things. If what people ity. It is entitled, Wealth of Nations . pay exceeds the cost, society has gained and the company has turned a pro t. The Every individual necessarily labours to ren- bigger the gain for society, the bigger the der the annual revenue of the society as great as he can. He generally, indeed, neither pro t. So pro ts are a guide (by no means a intends to promote the public interest, nor perfect one, but a guide nonetheless) to the knows how much he is promoting it...he in- value that companies create for society. tends only his own gain, and he is in this, as Does this mean that Gordon Gekko, the in many other cases, led by an invisible odious protagonist of the movie, Wall hand to promote an end which was no part Street , was right to say that greed is of his intention. Nor is it always the worse good ? No: greed and self-interest are not for the society that it was no part of it. By pur- the same thing, as Mr Gekko discovered in suing his own interest he frequently pro- that movie. Greed, in the ordinary mean- motes that of the society more e ectually than when he really intends to promote it. I ing of the word, is not rational or calculat- have never known much good done by ing. Freely indulged, it makes you fat and those who a ected to trade for the public drives you into bankruptcy. The kind of good. self-interest that advances the public good It is not from the benevolence of the is rational and enlightened. Rational, cal- butcher, the brewer, or the baker, that we ex- culating self-interest makes a person, or a pect our dinner, but from their regard to their rm, worry about its reputation for hon- own interest. We address ourselves, not to esty and fair dealing, for paying debts and their humanity but to their self-love, and honouring agreements. It looks beyond never talk to them of our own necessities but of their advantages. the short term and plans ahead. It consid- ers sacri ces today for the sake of gains to- Smith did not worship sel shness. He morrow, or ve years from now. It makes regarded benevolence as admirable, as a good neighbours. great virtue, and he saw the instinct for Morally, also, there is a world of di er- sympathy towards one’s fellow man as the ence between greed and self-interest. The foundation on which civilised conduct is rst, even if it were not self-defeating, built (he wrote another book about this: would still be a gross perversion of the sec- The Theory of Moral Sentiments ). But at the United Nations, World Bank and ond. Failing to see this distinction, and his greatest economic insight and indeed OECD who argue in favour of CSR have ad- thus concluding without further thought the greatest single insight yielded by the vanced degrees in the subject from the best that private enterprise is tainted, is a kind discipline of economics was that benevo- universities. Yet they have apparently of ethical stupidity. Greed is ugly. There is lence was not in fact necessary to advance failed to grasp this most basic and neces- nothing ignoble, in contrast, about a calm the public interest, so long as people were sary insight of the entire discipline. and moderate desire to advance one’s own free to engage with each other in voluntary Through the action of Smith’s invisible welfare, married (as it is in most people) to economic interaction. That is fortunate, he hand, the private search for pro t does ad- a sympathetic regard for the well-being of pointed out, since benevolence is often in vance the public interest. There is no need others. And, as Smith pointed out, rational short supply. Self-interest, on the other for thought-leaders in CSR armed with ini- self-interest also happens to make the hand, is not. tiatives and compacts to bring this about. world go round. If self-interest, guided as though by an Smith was a genius because this har- invisible hand, inadvertently serves the mony of private interest and public inter- Faulty premise public good, then it is easy to see why soci- est is not at all obvious and yet, at the The premise that CSR advocates never ety can prosper even if people are not al- same time, once it is pointed out, the idea is question is in fact wrong. It is an error to ways driven by benevolence. It is because instantly simple and plausible. This is es- suppose that pro t-seeking, as such, fails Smith was right about self-interest and the pecially so if you think not about self-in- to advance the public good, and that spe- public interest that communism failed and terested individuals but about pro t-seek- cial e orts to give something back to soci- capitalism worked. ing companies. The value that people ety are needed to redeem it. Most advocates of CSR, especially attach to the goods and services they buy However, as already noted, pro t suc- those who run giant international cor- from companies is shown by what they ceeds as an indicator of value creation, and porations, have probably read some eco- are willing to pay for them. The costs of as a signal that draws new investment to nomics in their time. Many of the o cials producing those goods and services are a socially useful purposes, only under cer-1 10 A survey of corporate social responsibility The Economist January 22nd 2005
2 tain circumstances. It cannot be taken for granted that these conditions will always be satis ed. One main requirement is that rms are in competition with each other. The pro ts that a monopoly can extract from the econ- omy are a measure of market power, not social gain. And monopoly pro ts may not serve as an e ective signal for new invest- ment if economic barriers of one kind or another hamper competition by keeping new entrants o the monopolist’s turf. Oddly enough, business leaders who voice their commitment to good corporate citizenship rarely demand the removal of barriers to competition in their indus- tries a measure that would almost invari- ably serve the public interest. Manufactur- ers are far more likely to call for import barriers to be raised against their foreign competitors than they are to call for exist- ing tari s or other barriers to come down. Producers of all manner of goods and ser- makes sense for one reason or another. But be oversupplied. vices are more likely to call for the intro- it is striking that business leaders espe- This kind of argument is invoked to duction of licences and controls to protect cially, it seems, those who speak up most make sense of sustainable development their existing positions in their markets enthusiastically for CSR call for regula- and the claims pressed on business by that than to demand that newcomers should tion that restricts competition far more of- idea. Prices are wrong, the argument goes, be permitted and even encouraged to con- ten than they call for regulation that so markets are failing. Pollution, including test those markets. strengthens it. This prompts the thought the accumulation of greenhouse gases, is And CSR often helps them in this. Al- that the design of economic regulation is not priced into the market, so there is too though it is true that many business lead- best left to governments, rather than to cor- much of it. Impending shortages of natural ers mean what they say about good cor- porate citizens, however enlightened. resources are not priced into the market, so porate citizenship, and speak up for CSR in those resources are consumed too rapidly. good faith, CSR is nonetheless far more of- Social prices The value of wilderness, either for its ten invoked as a rationale for anti-competi- A second condition must be met before beauty or for its stocks of endangered spe- tive practices than as a reason to bolster one can be sure that private enterprise in cies, is not priced into the market, so too competition. Incumbent rms or profes- competitive markets is advancing the pub- much of it gets cemented over. sions seem to nd it easier to comply with lic good. Prices need to re ect true social Whether the pattern of consumption burdensome regulations if they know that costs and bene ts. Many transactions, based on these false prices is sustainable is those rules are deterring new entrants. however, have side-e ects externalities, really beside the point. Some patterns of That is why, often in the name of CSR, in- as they are called. Where they do, private consumption could be inde nitely sus- cumbent businesses are so given to calling costs and bene ts diverge from public tained but still be wrong, causing mount- for rules and standards to be harmonised costs and bene ts. Sometimes external- ing damage as far ahead as one can see. and extended, both at home and abroad. ities are positive. If your neighbour re- Others might indeed be unsustainable, For the good of the public, you under- paints his house, that may increase the meaning bound to be halted at some stand, barristers are opposed to reforms value of yours; since he fails to capture all point, yet not be wrong, as when the ap- that would allow solicitors to appear more the gains created by his spending, he may proaching exhaustion of a raw material often as advocates in English courts (their repaint his house less frequently than leads to the invention of a substitute. Sus- training just isn’t up to it). For the safety of would be best for society at large or, in tainability has a nice ring to it, but it is not the consumer, American pharmaceutical this case, for your end of the street. Markets the issue. The question is whether false companies insist, extraordinary precau- tend to undersupply goods that involve prices are causing big economic mistakes tions must be taken before drugs can be positive externalities. and, if so, what might be done about that. imported from Canada (heaven knows Externalities can also be negative. The Many market prices do diverge from the what the Canadians, a devil-may-care sort classic instance is a polluting factory. The corresponding shadow prices that of people, put into those pills). For the owners of the factory and the customers would direct resources to their socially good of the world’s poor, industrial-coun- for its goods do not have to bear the full best uses. In many cases, the divergence is try manufacturers believe, goods should costs of the pollution that comes out of its big enough to warrant government ac- not be imported from countries where em- smokestacks. Failing to take that into ac- tion a point which all governments have ployees have to work long hours for low count, the market sets the price of the fac- taken on board, sometimes to a fault. All pay and without statutory vacations (that tory’s goods too low. Demand for the pro- industrial-country governments intervene is unfair trade). duct is stronger than it should be. Goods in their economies. In principle, much of A great deal of economic regulation that involve negative externalities tend to this intervention aims to mitigate the mis-1 The Economist January 22nd 2005 A survey of corporate social responsibility 11
of current projections, the environmental damage will be great. Yet the world still lacks an e ective re- gime for global carbon abatement. This is not so much because the United States has refused to support the Kyoto agreement as because that agreement is deeply awed in any case but this is beside the point. Global warming is a potentially very sig- ni cant externality that governments up to now have failed to address properly. Another such case is excessive en- croachment on wilderness areas. Once a wilderness has been lost, it cannot be re- placed and, unlike for copper or oil, there will never be a substitute. Governments in many rich and poor countries are neglect- ing this issue. But on questions such as these, where governments are, it seems, leaving signi - cant market failures unaddressed, the question for businesses is whether CSR 2 allocation of resources caused by external- tonnes; reserves by the end of the century can do anything useful to bridge the gap. ities and other kinds of market failure. But stood at 25 billion tonnes. Or take energy. Many companies at the forefront of the it is important to keep a sense of propor- Oil reserves in 1970: 580 billion barrels. Oil CSR movement have embarked on initia- tion about the supposed unreliability of consumed between 1970 and the turn of tives of their own, aimed, for example, at market signals. the century: 690 billion barrels. Oil re- reducing greenhouse-gas emissions or at So far as environmental externalities serves in 2000: 1,050 billion barrels. And protecting wilderness areas. are concerned, most leading advocates of so on. These would need to be judged case by CSR seem to be in the grip of a grossly exag- case, to see whether particular policies gerated environmental pessimism. The The colour of gloom were instances of good management (as claim that economic growth is necessarily What about pollution? On the whole, rich when an oil company invests pro tably in bad for the environment is an article of countries are less polluted than poor coun- alternative fuels, anticipating both shifts in faith in the CSR movement. But this idea is tries, not more. The reason is that wealth consumer demand and forthcoming taxes simply wrong. increases both the demand for a healthier on carbon), borrowed virtue , (for exam- Natural resources are not running out, environment and the means to bring it ple, creating private wilderness reserves at if you measure e ective supply in relation about. Environmental regulation has been shareholders’ expense), pernicious CSR to demand. The reason is that scarcity necessary to achieve this, to be sure, be- (blocking competition in the name of spe- raises prices, which spurs innovation: new cause pollution is indeed an externality. cious environmental goals) or delusional sources are found, the e ciency of extrac- But it is not true that the problem has been CSR (increasing emissions of greenhouse tion goes up, existing supplies are used left unattended in the rich world, that gases in order to conserve raw materials more economically, and substitutes are in- things are therefore getting worse, and that that are not in diminishing supply). vented. In 1970, global reserves of copper CSR initiatives have to rise to the challenge There will be good and bad. As a gen- were estimated at 280m tonnes; during the of dealing with this neglect. eral rule, however, correcting market fail- next 30 years about 270m tonnes were Strong environmental protection is al- ures is best left to government. Businesses consumed. Where did estimated reserves ready in place in Europe and the United cannot be trusted to get it right, partly be- of copper stand at the turn of the century? States. In some cases, no doubt, it needs to cause they lack the wherewithal to frame Not at 10m tonnes, but at 340m. Available be strengthened further. In some other intelligent policy in these areas. Aside supplies have surged, and, it so happens, cases, most likely, it is already too strong. from the implausibility of expecting the demand per unit of economic activity has Overall, the evidence fails to show system- unco-ordinated actions of thousands of been falling: copper is being replaced in atic neglect, or any tendency, once govern- private rms to yield a coherent optimis- many of its main industrial applications ment regulation is taken into account, for ing policy on global warming, say, there is by other materials (notably, bre-optic ca- economic growth to make things worse. also what you might call the constitutional ble instead of copper wire for telecom- How much of an exception to this is issue. The right policy on global warming munications). global warming? Potentially, as many CSR is not clear-cut even at the global level, to Copper, therefore, is unlikely ever to advocates say, a very important one. Emis- say nothing of the national level or the run out and if it did, in some very distant sions of greenhouse gases are causing level of the individual rm or consumer. future, it would be unlikely by then to mat- stocks of carbon in the atmosphere to grow Devising such a policy, and sharing the ter. The same is true for other key minerals. rapidly. Almost all climate scientists ex- costs equitably, is a political challenge of Reserves of bauxite in 1970 were 5.3 billion pect this to raise temperatures to some un- the rst order. Settling such questions ex- tonnes; the amount consumed between known extent during the coming decades. ceeds both the competence and the proper 1970 and 2000 was around 3 billion If temperatures rise towards the upper end remit of private enterprise. 7 12 A survey of corporate social responsibility The Economist January 22nd 2005
The ethics of business
Good corporate citizens, and wise governments, should be wary of CSR
ECALL that Joel Bakan, the angry law- Rschool professor and scourge of mod- ern corporations, argued that CSR is usu- ally a scam. It is for governments, he says, not rms, 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 con- tinue to rape and pillage. Mr Bakan and those who share his mor- bid fear of capitalism are wrong about that second point. Not only is competitive priv- ate enterprise already heavily regulated; it also comes with a great deal of built-in ad- ditional self-interested self-regulation, as it were. But they are quite right about the rst point. It is indeed desirable to estab- lish 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 straints on their actions. In most cases, act- actly is in the box? concern themselves with ethics? Just the ing within these constraints advances the Elaine Sternberg, an academic philoso- opposite. Managers should think much aim of the business, just as individuals pher and business consultant (and a for- harder about business ethics than they ap- nd that enlightened self-interest and ethi- mer investment banker), persuasively ar- pear to at present. It is lack of clarity about cal conduct usually sit well together. But, gues in her book, Just Business , that business ethics that gives rise to confusion for rms as for people, this will not always there are two main things: ordinary de- over what managers’ responsibilities are, be true. Sometimes the aims of the busi- cency and distributive justice . These and over where the limits of those respon- ness and rational self-interest will clash need to be understood in relation to the sibilities lie. with ethics, and when they do, those aims proper goal of the rm. Without these ba- The crucial point is that managers of and interests must give way. sic values, business would not be possible. public companies do not own the busi- Much the same goes for acting within nesses they run. They are employed by the the law. In democratic societies where the Be decent, be just rms’ owners to maximise the long-term rule of law is upheld, businesses and indi- If owner value, and ownership itself, are value of the owners’ assets. Putting those viduals should work under a strong pre- to mean anything, there must be respect assets to any other use is cheating the own- sumption that they will obey those soci- for property rights. This excludes, Ms ers, and that is unethical. If a manager be- eties’ laws. This will generally be good for Sternberg points out, lying, cheating, lieves that the business he is working for is business, and usually will be ethical as stealing, killing, coercion, physical vio- causing harm to society at large, the right well but, again, not always. Now and lence and most illegality ; it calls instead thing to do is not to work for that business then, depending on the circumstances, it is for honesty and fairness . Taken together, in the rst place. Nothing obliges someone wrong to obey the law. And merely fol- in her formulation, these constraints re- who believes that the tobacco industry is lowing the law does not exhaust a rm’s ect the demands of ordinary decency . evil to work in that industry. But if some- ethical responsibilities, any more than it Some businessmen appear to believe one accepts a salary to manage a tobacco does an individual’s. Some things that are that anything which is not outright illegal, business in the interests of its owners, he legal are unethical; and many things re- however unethical, can be regarded as has an obligation to those owners. To out quired by ethics are not required by law. proper business conduct. But without or- that obligation is unethical. Managers of companies must confront dinary decency (which goes a long way be- In addition, of course, managers ought these questions in running their busi- yond what the law requires of rms), busi- to behave ethically as they pursue the nesses, just as individuals must in leading ness could not be carried on. proper business goal of maximising their everyday lives. Business ethics, in Firms that lie and cheat cannot expect owner value and that puts real con- short, is not an empty box. But what ex- to stay in business very long, even if their1 The Economist January 22nd 2005 A survey of corporate social responsibility 13
2 actions are allowed by law. Dishonest as a practical matter, they are needed if the the courts, you might say, managers are companies will be unable to borrow, to business is to do as well as it can; and they held accountable to society at large. Public obtain working capital, or to form stable are also questions of ethics, and hence part policy can make managers accountable to business relationships with suppliers and of the ethics of business. To promote a regulators. Managerial accountability to customers. Decency in this sense is not just friend rather than the best person for the workers can also be required by law: good for business, it is essential. When it job, or to reward a manager for incompe- worker representation on company comes to maximising long-term owner tence or wrongdoing, is a bad way to run a boards is mandated in Germany, for in- value, honesty is not just the best policy, it business and is also unethical. stance. (Whether this serves the interests is the only feasible policy. Many writers on business ethics, and of German workers, or of Germany’s citi- just about all advocates of CSR, argue that zens in general, is nowadays in doubt.) But Crime doesn’t pay this way of thinking mistakes the proper all such lines of accountability recognise What about organised crime, you might purpose of the enterprise. Making money owners as primary. You cannot deem ask? The ma a lasted pretty well as a pro- for the owners is too narrow a view of stakeholders to be equal co-owners of a t-maximising business, did it not? Yes, what a corporation is for. It raises owner- business without repudiating the very but organised crime nonetheless proves ship mere ownership , as they would idea of ownership. And where the law the point. See what a criminal or inde- say too high. Owners are just one group does not create accountability to non- cent enterprise has to do to grow and sur- among many kinds of di erent stake- owners, there is none. vive: it must corrupt and intimidate, and holders in a business. It is wrong to run a In many of the corporate scandals of re- thoroughly subvert both politics and the business in the interest of one kind of cent years, it has seemed that managers criminal-justice system. Some sick juris- stakeholder, ignoring the legitimate inter- have acted as though they were account- dictions have let that happen. Where the ests of all the others. Is this correct? able to nobody not even, and in some rule of law prevails, however, those meth- There is a lot of unnecessary confusion cases least of all, to the rms’ owners. This ods do not work outside a highly circum- about stakeholders . Businesses certainly has been rightly recognised as a problem, scribed and perpetually beleaguered crim- need to take account of other interested and a lot of time and e ort has been spent inal domain. Inside this zone, enterprises parties if they are to succeed as businesses: on trying to make accountability to share- are small, always in hiding, and in patho- they must satisfy their customers, get on holders on matters such as executive logical con ict with each other. Outside it, with their suppliers, motivate their work- pay more e ective. in the light, honesty and fair dealing are re- ers, and so forth. In that sense, these di er- Muddled thinking on CSR, and on sup- quired if business enterprises are to ent groups of stakeholders will have their posed accountability to non-owners, only prosper and survive. say and exercise their in uence. But tak- makes it harder to put this right. Advocates Granted, some critics of business re- ing account of is not the same as being of CSR ought to re ect on the fact that the gard the big multinationals as little more held accountable to . Accountability refers triple bottom line and the bogus pay than outposts of a ma a-like empire. In the to a much more formal and direct set of scheme which rewards bad performance world according to Michael Moore, such rights and obligations. with riches have something important in companies do systematically lie and cheat, Of course it is always possible, as a mat- common: the idea that the interests of and get away with it by corrupting and ter of law, to create forms of managerial mere owners should not be allowed to intimidating, and subverting both politics accountability to non-owners. Through come between managers and their per- and the criminal-justice system. There is sonal objectives. Broken corporate gover- indeed little to choose, on this view, be- nance and CSR are close relations. You of- tween Halliburton (or IBM, for that matter, ten see them together. or General Motors or GlaxoSmithKline) and the cosa nostra. Now and then execu- Good companies, good government tives do commit crimes, of course. Usually, An earlier section of this article sketched they are found out and punished. That out a four-way classi cation of CSR: good aside, if you believe that the big multina- management, borrowed virtue, perni- tionals are essentially criminal enter- cious CSR and delusional CSR. Does busi- prises getting away with murder (perhaps ness ethics shed any more light on those literally), you are beyond the reach of an categories? It does, though some of the re- article about business ethics. sults are a little troubling at rst sight. What about the second component of Good management and delusional business ethics, distributive justice? In the CSR raise no new di culties from an ethi- business context, this simply means align- cal point of view: the rst, which increases ing bene ts within the organisation to the pro ts and improves social welfare, is contribution made to achieving the aims plainly a good thing and the second, of the rm. Pay linked to performance and which reduces both, is plainly not. Bor- promotion on merit are instances of dis- rowed virtue has already been criticised tributive justice within the company. on ethical grounds, even though it is as- Much of what was said about the role sumed to advance social welfare. That ver- of ordinary decency applies here too. dict stands, as you would expect. A proper Again, these notions of what is fair are understanding of business ethics makes widely accepted; on the other hand, they the reasoning clearer, but the main thing is are not, for the most part, required by law; still that the pro ts of a publicly owned1 14 A survey of corporate social responsibility The Economist January 22nd 2005
2 company are not the managers’ to give of its workers. All of these things may well even to think about it. If they merely con- away. The remaining category is perni- be ethical even when, from the point of centrate on discharging their responsibil- cious CSR, the kind that raises pro ts but view of society as a whole, they are likely ity to the owners of their rms, acting ethi- reduces social welfare. to be undesirable. cally as they do so, they will usually serve Is pernicious CSR also unethical? Of- This seeming paradox only underlines the public good in any case. ten, paradoxically, the answer will be no. the point that businesses should not try to The proper guardians of the public in- Managers cannot be criticised on ethical do the work of governments, just as gov- terest are governments, which are account- grounds for aiming to increase long-term ernments should not try to do the work of able to all citizens. It is the job of elected owner-value: that is their job. Assuming businesses. The goals of business and the politicians to set goals for regulators, to that they have also acted within the law, goals of government are di erent or deal with externalities, to mediate among the next question is whether they have vi- should be. That, by the way, is why part- di erent interests, to attend to the de- olated the standards of ordinary decency nership between those two should al- mands of social justice, to provide public and distributive justice within the orga- ways arouse intense suspicion. Managers, goods and collect the taxes to pay for them, nisation. If they have if they have lied, or acting in their professional capacity, ought to establish collective priorities where that bribed, or coerced, for instance then they not to concern themselves with the public is necessary and appropriate, and to or- have behaved unethically. But if they have good: they are not competent to do it, they ganise resources accordingly. acted in accordance with those two stan- lack the democratic credentials for it, and The proper business of business is busi- dards of business conduct, they are ethi- their day jobs should leave them no time ness. No apology required. 7 cally in the right, even though they have acted against the public interest. This is not as strange as it seems. Con- O er to readers Future surveys Reprints of this survey are available at a price of sider the case of monopoly. Managers are £2.50 plus postage and packing. Countries and regions not to be criticised on ethical grounds for A minimum order of ve copies is required. New York February 19th striving to drive their competitors out of Send orders to: India and China March 5th business provided that they do this by The Economist Shop Turkey March 19th selling a better product, for instance, rather 15 Regent Street, London SW1Y 4LR Australia May 7th than by deception or coercion or through Tel +44 (0)20 7839 1937 Business, nance and economics unlawful anti-competitive practices. And Fax +44 (0)20 7839 1921 if they succeed in establishing a monop- e-mail: [email protected] Consumer power April 2nd oly, it is not unethical to set a price that Oil April 16th maximises the company’s pro ts, or even Corporate o er International banking May 21st (to the extent that the law allows it) to For corporate orders of 500 or more and Higher education June 4th customisation options, please contact the Rights create business barriers to the entry of and Syndication Department on: new competitors (for instance, by spend- Tel +44 (0)20 7830 7000 ing heavily on advertising). For that mat- Fax +44 (0)20 7830 7135 ter, it is not unethical for a company to or e-mail: [email protected] Previous surveys and a list of forthcoming lobby the government for protection from surveys can be found online foreign competition, citing its concerns, as www.economist.com/surveys a good corporate citizen, for the well-being