The ModernSquib

by Michael Ryan

Preface

In light of the recent news about the Government bailout of failed financial institutions FreddieMac and FannieMae and the unprecedented number of corporate scandals: Enron, Tyco, WorldCom, and Global Crossing in 2002, a few questions arise: What do today’s multinational Corporations owe to society, (if anything), other than offering employment and dividends to stockholders? Shouldn’t they follow the same ethical principles as other citizens of society? What kind of ethic ought they employ? And what might be the benefits, if any, of adopting a business model that includes corporate social responsibility?

Corporate social responsibility (CSR), as a type of business ethic typically discussed within academic circles, politics and activist groups, is getting serious attention by the powers that be within the business community. As company’s become more “globalized” and their business dealings affect more broadly and deeply society in general, the competition for profit is actually driving business managers to embrace a specific business ethic that focuses on a greater responsibility to the community. CSR may be what they are looking for.

One difficulty, however, still lies with the fact that there is no clearly accepted definition of CSR or how to move the arguably normative ethic to an applied one. There is one definition however, that may be applicable in most cases: “Corporate social responsibility is the commitment of businesses to contribute to sustainable economic development by working with employees, their families, the local community and society at large to improve their lives in ways that are good for business and for development” (World Bank Group’s, as a department of Foreign Investment Advisory Service (FIAS) .

With this definition at hand, we will address the issues both for and against the adoption of corporate social responsibility by a growing number of Multinational companies that seek first to maximize profits yet may indeed desire a method of improving their image beyond the mere Marketplace.

In Part 1, I will address the basic principles of what constitutes CSR as it is currently practiced and give some arguments of why companies might employ such a business model.

For Part 2, I will look at some of the counter arguments against CSR citing some criticisms from such notable Economists as Milton Friedman and other more Libertarian economists as well as some thoughts on the subject of “Distributive Justice” by Robert Nozick who could be seen as an advocate against CSR as well.

Lastly, I will weigh the arguments and see which one might prove to be the best in most circumstances, i.e. in the light of a kind of overarching socio-economic Utilitarianism that speaks of Economic Justice without sacrificing natural rights to ownership, property and yes wealth, how will CSR, if adopted perhaps as law, benefit all of society, not just shareholders.

On The Social Responsibility of Corporations
With Criticisms and Concerns

Part 1.

Although corporate social responsibility is not yet viewed as a common business practice, the idea is gaining acceptance by many larger corporations who want to appeal to a new kind of customer base that is increasingly looking for ethics in the marketplace, customers that also have the potential to increase the bottom line as well as the standing of the company in the community.

Before we begin our discussion of social responsibility of corporations, let’s review the definition of a corporation. A corporation may be defined as:
“a body formed and authorized by law to act as a single person although constituted by one or more persons and legally endowed with various rights and duties including the capacity of succession.” (Merriam-Webster’s Online). Also, “despite not being persons, corporations are recognized by the law to have rights and responsibilities like actual people. Corporations can exercise human rights against real individuals and the state, and they may be responsible for human rights violations.” (Wikipedia, Phillip I. Blumberg, 1993)

Firstly, we might view business ethics in general, as a form of ethics that examines moral or ethical problems that can arise in a business environment. The importance of following an ethic becomes clearer as we see that there
is a new conscience-focused marketplace arising in the 21st century that demands more ethical business processes and actions. Secondly, pressure is being applied on industry to improve business ethics through new laws.

Business ethics can be both a normative and a descriptive discipline although as a corporate practice and a career specialization, the field is primarily normative. In academia, descriptive approaches are also taken.

The term CSR itself came into common use in the early 1970’s although it was seldom abbreviated. The term stakeholder, meaning those impacted by an organization’s activities, was used to describe owners beyond shareholders from around 1989.

Corporate social responsibility is an idea whereby organizations consider the interests of society by taking responsibility for the impact of their activities on communities, other stakeholders and the environment, as well as their customers, employees and shareholders.

The need for more corporate social responsibility becomes evident as ethical issues reflect the degree to which businesses are perceived to be at odds with non-economic social values; issues such as destructive environmental practices or abusive labor laws increasingly call attention to the offending companies and force them to take stock of their policies.

As such, a kind of social accounting, which relates the social and environmental effects of a company’s economic actions to particular interest groups within society, is one very important element of CSR.
There are other arguments to be made for employing CSR within a company based purely on practical business reasons that will likely rest on one or more of these claims:

1. A CSR approach can be seen as an aid to recruitment, especially within the graduate student market. Potential employees often ask about a firm’s CSR policy during an interview, and having a comprehensive policy can give an advantage.

2. In a global marketplace, companies strive for a unique selling proposition which can separate them from the competition in the minds of consumers. CSR can play a role in building customer loyalty based on distinctive ethical values.

3. Consumers are becoming more aware of the environmental and social implications of their day-to-day consumer decisions and are beginning to make purchasing decisions related to their environmental and ethical concerns.

As globalization becomes the norm for businesses, “CSR as a rapidly developing business strategy (and not simply a theory in the management literature), is a response to globalization and the extension of global multi-national enterprises (“MNEs”) across countries, with the implication that state control over such enterprises is rapidly fragmenting.” (Logsdon & Wood, 2002; Zumbansen, 2006).

Although CSR is still not a common enough practice for businesses, it is likely to become more so in response to a growing demand by an ethically minded marketplace and the desire to increase their margin of profit as well as their overall standing in the community.

Part 2.

Although corporate social responsibility is becoming a common business practice, the idea is still not without its many detractors. One chief critic among them has been the great Economist Milton Friedman. And with Friedman’s “seal of disapproval,” the arguments against CSR are strong and may even be valid ranging from the simple laissez faire claims of Smith to the more extreme tenets of Libertarian Economic theories.

Critics of CSR as well as proponents debate a number of concerns related to it. These include CSR’s relationship to the fundamental purpose and nature of business and critics argue that there exists questionable motives for engaging in CSR, and raise concerns about insincerity and hypocrisy among those companies that profess to follow CSR.

One counter argument against following CSR is that corporations simply exist to provide products and/or services that produce profits for their shareholders. Companies in fact do not owe to society, (in the sense of an ethical duty), anything beyond its stated purpose of creating and maximizing profits.

Milton Friedman takes this further, arguing that “a corporation’s purpose is to maximize returns to its shareholders, and that since only people can have social responsibilities, corporations are only responsible to their shareholders and not to society as a whole” (Friedman, New York Times).
Although Friedman accepts that corporations should obey the laws of the countries within which they work, he asserts that corporations have no other obligation to society.

Another powerful argument against CSR might be found in the theories of Robert Nozick. In his work, “Anarchy, State and Utopia” (1974) Nozick takes “a natural law perspective and uses Kant’s Second Categorical Imperative to stress the idea that people should be treated as an end in themselves and have a right to own what they justifiably earned and in fact offers the position that holdings are morally owned by those that earned it” (Ryan, pg 2).

This claim would go against any idea that companies owe anything to those that didn’t earn profits; no obligation is warranted or deserved and reminds us of a corporate version of the rational egoism ethic or even of the notion of the Capitalist as an enlightened social savior after Ayn Rand.

Some critics perceive CSR as incompatible with the very concept of business, and are in fact a hindrance to free trade. Critics who assert that CSR is incompatible with capitalism and are in favor of neo-liberalism argue that improvements in health, longevity and/or infant mortality have been created by economic growth attributed to free enterprise.

Another argument is that CSR programs are undertaken by companies such as BP the petroleum giant and McDonald’s to distract the public from ethical questions posed by their core operations. The claim is that some corporations start CSR programs for the commercial benefit they enjoy through raising their reputation with the public or with government. They suggest that corporations which exist solely to maximize profits are unable to advance the interests of society as a whole even though they may pretend otherwise.

Another concern is when companies claim to promote CSR while simultaneously engaging in harmful business practices. One example is the relationship McDonald’s has with the charity Ronald McDonald house. While seen as CSR by some, it is also apparent that this connection is more for marketing and PR than simply for the common good. Especially when it could be argued that McDonald’s employees worldwide, “do badly in terms of pay and conditions” (Wikipedia, Restaurants v Morris & Steel). Not to mention the poor nutrition offered by the restaurant such that, “’if one eats enough McDonald’s food, one’s diet may well become high in fat etc., with the very real risk of heart disease” (Wikipedia, Restaurants v Morris & Steel).

Rather than follow a business model that is not in the best interest of the corporation and its shareholders, (a model that is arguably even incompatible with common economic philosophies), critics of CSR maintain that there are already laws in place that if followed will ensure that companies behave in a socially responsible manner. Besides, any so-called voluntary adherence is more likely driven by hypocrisy and insincerity with the bottom line still the real motivator.

Final Comments and Conclusions

As we have seen, there are strong arguments on both sides of the issue of whether or not there is a need for a “new” standard in business ethics that will address the needs of not only the Global Marketplace but the societies that are a part of it. Proponents of the idea that there is a need for a clear and distinct ethic, may point out the recent examples of corporate greed and will argue that in order to insure that those in charge of the means of production are held to a high standard of stewardship, a CSR must be followed. Also including CSR as part of the business model will yield greater profits in the long run as the companies that employ such a modern model will attract more socially conscious consumers.

Opponents of CSR however, do not see companies as anything other than mere businesses that are owned by their shareholders –any duty to other’s than those whose rights are to enjoy the fruits of their labor-is practically immoral according to the extreme claims. These critics of CSR view it as a restrictive ethic where any money spent on so-called social responsibility is effectively theft from those shareholders who can, after all, decide for themselves if they want to give to charity or not.

Although both sides make good arguments, it is the events of recent history that provide us with the impetus to side with the proponents of a clear and distinct Ethical business model that necessarily includes corporate social responsibility. Although Friedman would have us believe that “corporations are not people” and do not have a social responsibility, elsewhere we can have a definition that a corporation is indeed: “a body formed and authorized by law to act as a single person although constituted by one or more persons and legally endowed with various rights and duties including the capacity of succession” (Merriam-Webster’s Online). And based in part on this definition, the corporation must act with mindful intent as a socially responsible citizen following a mandate of a duty to other’s not just the shareholders.

There are organizations that operate in between these poles. For example, the REALeadership Alliance asserts that the business of leadership (be it corporate or otherwise) is to change the world for the better. Many religious and cultural traditions hold that the economy exists to serve human beings, so all economic entities have an obligation to society (e.g., cf. Economic Justice for All). Moreover, as discussed above, many CSR proponents point out that CSR can significantly improve long-term corporate profitability because it reduces risks and inefficiencies while offering a host of potential benefits such as enhanced brand reputation and employee engagement.

Also, there are large Multinationals that have found that incorporating CSR in their business model works very well. According to Mallen Baker: “in the case of GE, there are many aspects in the way Jack Welch restructured the company which would play to the kind of agenda recognizable to advocates of social responsibility – in particular that of employee empowerment. Welch has gone on record as saying that he believes the time has passed when making a profit and paying taxes was all that a company had to worry about” (Baker, online). The fact that CSR is being employed successfully also adds strength to the proponents case. If companies like GE find that CSR is of benefit, this may lessen the arguments by the critics that CSR does not lend itself to economic growth models.

The critics of CSR argue that the companies that currently employ the model do so only as a marketing scheme, and in that sense, is not useful as anything meaningful in regard to CSR’s real intent. I would argue that whatever the motive, the end result is going to achieve at least in part, the affect of a perhaps better intentioned model, not as far reaching in overall scope, but still better than nothing.

Lastly, even if a company is doing CSR it may be that they are doing it badly. This may lend some strength to the critics argument that CSR is just nonsense with no real value in the long term. Managing social responsibility is like managing other aspects of a business: it can be done well and if so CSR will support the business objectives of the company, build the relationships with key stakeholders whose opinion will be most valuable when times are hard, and will reduce business costs.

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