Friedman and ‘Corporate Social Responsibility’ — It’s Not the Line That’s Blurred, It’s Peoples’ Thinking That Has Moved the Line
Henry Manne has a great op-ed at Friday’s OpinionJournal.com (may require free e-mail registration) that is ultimately about how cancerous the notion of “corporate social responsibilty” has been, not only to the corporation, but to the economy and society as a whole.
Here are his key paras (bolds are mine throughout this post):
(Friedman) was absolutely correct about the significance of proposals for socially responsible corporate behavior, whether they emanated from within or outside the corporation. These proposals reflect, as well as anything else happening today, the inability of many commentators to distinguish between private and public property–in other words, between a free enterprise system and socialism. Somehow large-scale business success, usually resulting in a publicly held company, seems mysteriously to transform the nature of numerous individuals’ private investments into assets affected with a public interest. And once these corporate behemoths are “affected with a public interest,” they must either be regulated by the state or they must act as though they are owned by the public, and are therefore inferentially a part of the state. This attitude is reflected not merely by corporate activists, but by many “modern” corporate managers.
(Today’s corporate social responsibility advocates require no) arguments, weak as they are, about natural monopoly, market failure, government creation of corporations or the alleged government gifts of limited liability and perpetual existence ….. to justify the demands now regularly placed on business entities. (They believe that) Any large enterprise, no matter how competitive its industry and no matter how successfully it is fulfilling the public’s desires, has a social responsibility–a term that makes mockery of the idea of individual responsibility–to use part of its resources for “public” endeavors. Today’s favorite causes are environmental protection, employee health, sales of goods at below-market prices, weather modification, community development, private enforcement of (not merely abiding by) government regulations and support of cultural, educational and medical facilities.
….. The origins of this transformation lie in the minds of people who do not like or appreciate the genius of capitalist success stories, including always politicians, who will generally make any argument in order to control more private wealth. Of course, the social responsibility of corporations is always tied to the proponents’ own views of compassion or justice or avoidance of a cataclysm. But the logic of their own arguments requires that essentially private corporations be viewed as somehow “public” in nature.
….. The illusion of great and threatening power, the superficial attractiveness of the notion, and the frequent repetition of the mantra of corporate social responsibility have made this fallacy a part of the modern corporate zeitgeist. Like the citizens who were afraid to tell the emperor that he was naked, no responsible business official would dare contradict the notion publicly for fear of financial ruin, even though the practice continues to cost shareholders and society enormous amounts.
There are myriad examples of people who really should know better who have fallen into the muddle. One is business columnist Leon Gettler (HT Gettler’s Soxfirst Blog), who clearly doesn’t catch the irony of his observations:
For example, Health Minister Tony Abbott’s accusation last week that Coca-Cola was fuelling Australia’s childhood obesity crisis should be put in the context of calls around the world for controls on the marketing of fast foods.
The tobacco, oil, mining, banking, forestry and pharmaceutical industries have all felt the long-term impact of social issues when they were caught out by society’s changing expectations.
With an issue such as obesity, for instance, the public’s view once upon a time was that the responsibility lay with the individual. Now the blame has shifted to the way companies are marketing fattening foods. The same applies to the tobacco industry.
You see? Corporate social responsibilty (CSR) has become necessary because personal responsibility is soooooo “once upon a time” — with obesity, tobacco, video games, and any number of other causes and items.
To the extent that societies have abdicated personal responsibility as a core belief, they have attempted to have governments and business fill in the breach. The problems with government involvement are that it takes unpopular tax increases for it to “take responsibility,” and that the government isn’t particularly good at doing much of anything beyond using brute force.
That leaves corporations as the deep pocket of last resort. Getting at their money is the bottom line of the CSR movement. Unfortunately, it has achieved some success at this.
As Manne notes above, it will be a very rare corporate manager who publicly defies the orthodoxy that corporations have social responsibilties beyond getting the best returns for their shareholders. Earlier this week, Wal-Mart, in the course of responding to a threatened post-Thanksgiving boycott, came as close as I’ve seen any big company get to open defiance of the CSR mantra when it said, “Wal-Mart will not make corporate contributions to support or oppose highly controversial issues unless they directly relate to our ability to serve our customers.” Hear, hear; the only thing they didn’t dare say is that they didn’t want to jeopardize shareholder returns.
At least three generations of Americans have been taught “Business is bad; government is good; people are entitled to help and protection from government and businesses” in schools, by the news media, and by the entertainment industry. They have succeeded in moving the line of demarcation businesses face between acting in the best interests of owners and shareholders and wasting their resources on CSR. The problem now is to decide what level of CSR is appropriate to get keep the activists off their backs.
At the Soxfirst blog post, Gettler asks: “So is this corporate social responsibility, or is it about the bottom line? Does it really matter?”
Yes. A lot.
We are all poorer for CSR’s “success.” To the extent that companies must spend time and money feeding the CSR monsters, they inevitably shortchange the time and money they could have devoted to research, innovation, and business-building if a more favorable societal climate had existed. But, as noted, they must play the CSR game, if only to fake it, as none other than George Soros recommends. It’s the playing field they’re on. Economic growth is lower than it could be, as, ironically, is the ability of individuals and social organizations to marshal the resources to solve the very problems they are so concerned about. The foregone growth is the most “enormous amount” Manne is so very right to be concerned over.
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CLARIFICATION: Manne does go a bit overboard when he seems to imply that private corporations shouldn’t be considered “public” in any way. That’s obviously wrong. When you decide to incorporate, and to receive the limited-liability benefits that accrue to being incorporated (i.e., you can’t be forced to personally pay for debts incurred by the corporation), you have to get the permission of the state you wish to incorporate in. By doing so, you have become “public,” in the sense of agreeing to abide by and obey all laws, regulations, and reporting requirements that apply to corporations.
Going further, if a corporation decides to raise money in the equity markets, it “goes public.” In addition to the obligations of any chartered corporation just mentioned, the corporation now agrees that it will abide by all of the rules and regulations relating to federal and state securities laws.
This brings out another interesting aspect of the CSR movement, which is its success in forcing companies, through clever use of the media and peer pressure, to do things that in a more honest world they (the CSR advocates) would have to achieve by working to pass legislation, most of which they know full well would be laughed out of state and congressional committees before getting anywhere. Successfully creating the expectation that a “good company” simply must be strong in CSR is an easy way around all of that dirty work.
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UPDATE for Previous Links:
- Friedman’s original essay from 1970.
- Tuesday’s post on Wal-Mart’s response (though not stated as such) to American Family Association’s pressure.
- Oct. 6 — BizzyBlog - Milton Friedman on Hong Kong
- Aug. 22 — BizzyBlog - Friedman’s Timeless Essay on “Corporate Social Responsibilityâ€
- July 14 — BizzyBlog - Friedman on “Self-Interest”
Interesting article. Gives me a lot of thoughts. But this one popped out first while reading it.
The coca-cola riff. Seems like a two way street to me. Coke is made using large quantities of high fructose corn syrup (it’s cheaper than sugar and more, well, sugary). The corn industry is heavily subsidized (Iowa is first in the nation after all !). While I hear coca cola bitch and moan about people being upset about selling their product to kids, especially in schools as some kind of public meddling in business - I don’t hear them complaining about the public subsidizing one of their largest ingredients to the tune of billions of dollars.
The question isn’t regulation yes or no. But how much and how heavy or light. This post seems very simplistic to me. For example. We have lots of laws about accounting practices. It’s quite burdensome to business to comply. It reduces their profitability. Would you argue that we eliminate that social responsibility to honestly account in order to increase profit ?
Should we allow business to use child labor to reduce costs ? I’m going to the margins of extreme here simply to highlight the point.
Finally, because businesses are naturally narrowly focused on their business, they aren’t appropriate organizations to develop an environment that is best for everyone.
Take the FCC for example. It regulates spectrum that broadcasters can use. Without it a socially irresponsible company could “pollute” the airwaves making everyones services from TV and radio, to cell phones and emergency services useless. Therefore having this imposed “CSR” benefits all business because it guarantees their services will work. Meeting FCC requirements is expensive and time consuming, but without it their business would be pointless. The free market alone does not solve this complex problem.
The business bad, government good or vice-versa is such a stupid frame to argue from. It’s neither and it’s both. The key is finding the right balance between public and private partnership to create the best possible environment for business to fuel a healthy society.
I think there are a whole bunch of ridiculous regulations that should be scrapped and I think there are a whole bunch of under-regulated businesses that should be regulated (California energy deregulation was a disaster).
Comment by staff — November 25, 2006 @ 2:25 pm
#1 staff, I think you’re losing the distinction between laws and CSR, which is in essence only a form of social pressure, and I’m not going to move this post into a discussion of what should or shouldn’t be regulated.
Friedman himself says:
In a free-enterprise, private-property sysÂtem, a corporate executive is an employee of the owners of the business. He has direct reÂsponsibility to his employers. That responsiÂbility is to conduct the business in accordance with their desires, which generally will be to make as much money as possible while conÂforming to the basic rules of the society, both those embodied in law and those embodied in ethical custom.
The LAW is not CSR. The minute something become LAW (e.g., FCC, child labor restrictions, sugar subsidies), persumably because society has agree that something has to be done about a problem area or some other concern, it becomes something Friedman would agree the corporation has to abide by and/or leverage, whether it is in reality socially desirable or not. To the extent Coke has influenced corn subsidies (I don’t know whether they have or haven’t), shame on them. To the extent that politicians continue to allow one company (Archer Daniels Midland) to have such a death-grip over sugar subsidies, or Coke to unduly influence policy (if they do), shame on them.
CSR as it is generally understood operates totally outside the law, and short-circuits it by trying to move the perceived bar of “ethical custom.” They are somewhat successful at it, thanks to the biz-bad, govt-good mantra (which I agree, is “stupid”) that has been inculcated into too many skulls full of mush. CSR advocates manage to sometimes get their way even though they would have no chance of enacting their point of view into law. It’s best seen as an extra-legal means by which a small vocal group exerts influence they are not entitled to.
Comment by TBlumer — November 25, 2006 @ 3:35 pm
on the premise you present then you can only conclude a number of things.
1. The corporate management is weak and bending to external forces it should not and hence they should be replaced if their actions are to the detriment of the company.
2. The corporate management have weighed the particular “CSR” before them and concluded that it would be good for business.
It seems to me, and I am not alone in this observation, that company executives of too many companies have long ceased to behave and manage in the best interests of their shareholders, and have indeed formulated the situation such that shareholders have very limited ability to control their own company. Executive compensation is the obvious example, but also the make up of BoD’s too. This situation has led to an utter collapse of accountability to shareholders for performance - by another group of “experts” - the company executives.
When it comes to pressure for responsibility we have seen numerous times that adherence to the customers view has been in the best interests of the company. For example car safety.
there’s a local example in the Dispatch today . Customers biggest objection to increased water prices stem from poor water quality and service. While the water company might adhere to minimum standards, their customers want the standards to be higher. This seems right to me.
That’s the choice companies have to make. Weigh the added costs of compliance with customer demands with potential loss of sales if they don’t.
Isn’t that how all change starts? People advocate for change and bring pressure and sometimes that change is them legislated. It isn’t unusual at all, it’s how things work. People advocated the abolition of slavery before that was legislated and many believed that too was unlikely to pass, with the south believing that abolitionists were exerting influence they were not entitled too - so much so they ceded from the Union. Again an extreme example to highlight the point.
For me it is a sign of a system that works. Some argue for more social responsibility from corporations while others argue for less regulation and a free hand. where it is breaking down currently is in the lop sided access to power via financial inducements to politicians via lobbyists. the bankruptcy bill is a fine example of this.
Comment by staff — November 25, 2006 @ 4:42 pm
#3 as to claims:
# 1. by bending to CSR, Corp management is deciding that the external forces will give them less trouble than if they fight (remember, if competitors are also taking this approach, then the defiant one sticks out like a sore thumb and gets all the flak, causing a competitive disadvantage. The corp can’t change millions of minds brainwashed by the ed system, the news media, and the entertainment industry all by itself.
# 2. It may be good for a Company B, esp if a competitor A is trying the defiance route and will get dumped on badly by it.
As to how execs act and pay themselves, that’s a topic for another time — well, actually no, because it may be, and often is, in the execs’ best personal interest to play the CSR game to get the good press and get invited to the right parties while the company as a whole starts to underperform (Exhibit A — BP and Lord Browne). There is not generally not a good alignment between execs’ and shareholder interests, and it is the Achilles heel of the way business is done today.
I don’t get the car safety example, unless you’re going all the way back to the 1960s, when the Big Three and hte UAW essentially operated in a non-competitive industry that passed along mediocre crap to drivers who couldn’t do much about it. Was safety enhanced because the govt mandated it, or because other car cos came in and showed the Big Three how to do safety (and reliability, and service, and any number of other things) right? I think it’s more the latter than the former.
Your water co example is problematic precisely because it’s a monopoly situation and the only choice is either customer resistance or more regulation.
I don’t agree that CSR is just another example of how changes and societal improvement get done. There’s very little attempt to persuade or change hearts and minds. In fact, it’s more of a presumption of “we’re right, you’re wrong, bleep you, the debate’s over (e.g., “global warming/climate change”). It’s more a matter of bringing a form of coercion to bear and seeing if it is enough to force a targeted company to do something it would not have done without the coercion. Do it enough and you reduce returns to shareholders and to the economy as a whole. Next thing you know, you’re France or Germany and can’t figure out why you can’t grow the economy faster than 1.5% to 2%, if that.
I don’t disagree with your last two sentences. I’m not at all optimistic that the new Congress is less immune to inducements than the old one. Just look at the Dems who supported BK “reform” without any kind of reciprocity from the lending industry.
Comment by TBlumer — November 25, 2006 @ 6:57 pm
#5, please elaborate. I don’t understand.
Comment by TBlumer — January 27, 2007 @ 5:44 pm