The good company · The good company A survey of corporate social responsibility January 22nd 2005...

The good companyA survey of corporate social responsibilityJanuary 22nd 2005

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The movement for corporate social responsibility has won the battle ofideas. That is a pity, argues Clive Crook

much higher up the corporate agenda.In public-relations terms, their victory

is total. In fact, their opponents neverturned up. Unopposed, the CSR move-ment has distilled a widespread suspicionof capitalism into a set of demands for ac-tion. As its champions would say, theyhave held companies to account, byembarrassing the ones that especially of-fend against the principles of CSR, and bymobilising public sentiment and an al-most universally sympathetic pressagainst them. Intellectually, at least, thecorporate world has surrendered and goneover to the other side.

The signs of the victory are not just inthe speeches of top executives or the dili-gent reporting of CSR e�orts in their pub-lished accounts. Corporate social respon-sibility is now an industry in its own right,and a �ourishing profession as well. Con-sultancies have sprung up to advise com-panies on how to do CSR, and how to let itbe known that they are doing it. The big au-diting and general-practice consulting�rms o�er clients CSR advice (while con-spicuously striving to be exemplary cor-porate citizens themselves).

Most multinationals now have a seniorexecutive, often with a sta� at his disposal,explicitly charged with developing and co-ordinating the CSR function. In somecases, these executives have been re-cruited from NGOs. There are executive-education programmes in CSR, business-school chairs in CSR, CSR professional

The union of concerned executivesCSR as practised means many di�erentthings. Page 6

The world according to CSRGood corporate citizens believe that capital-ism is wicked but redeemable. Page 10

Pro�t and the public goodCompanies that merely compete and prospermake society better o�. Page 13

The ethics of businessGood corporate citizens, and wise govern-ments, should be wary of CSR. Page 16

The Economist January 22nd 2005 A survey of corporate social responsibility 1

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The good company

OVER the past ten years or so, corporatesocial responsibility (CSR) has blos-

somed as an idea, if not as a coherent prac-tical programme. CSR commands the at-tention of executives everywhere�if theirpublic statements are to be believed�andespecially that of the managers of multi-national companies headquartered in Eu-rope or the United States. Today corporatesocial responsibility, if it is nothing else, isthe tribute that capitalism everywherepays to virtue.

It would be a challenge to �nd a recentannual report of any big internationalcompany that justi�es the �rm’s existencemerely in terms of pro�t, rather than �ser-vice to the community�. Such reports oftentalk proudly of e�orts to improve societyand safeguard the environment�by re-stricting emissions of greenhouse gasesfrom the sta� kitchen, say, or recycling of-�ce stationery�before turning hesitantlyto less important matters, such as pro�ts.Big �rms nowadays are called upon to begood corporate citizens, and they all wantto show that they are.

On the face of it, this marks a signi�cantvictory in the battle of ideas. The winnersare the charities, non-government orga-nisations and other elements of what iscalled civil society that pushed for CSR inthe �rst place. These well-intentionedgroups certainly did not invent the idea ofgood corporate citizenship, which goesback a long way. But they dressed the no-tion in its new CSR garb and moved it

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AcknowledgmentsThis survey owes a lot to �Misguided Virtue� by DavidHenderson, published by the Institute of Economic A�airsin London and the Competitive Enterprise Institute inWashington, DC; �A Poverty of Reason� by WilfredBeckerman, published by the Independent Institute; and�Just Business� by Elaine Sternberg, published by OxfordUniversity Press. This is not to say that these authors wouldagree with each other, or with this survey, about all of theissues discussed.

2 A survey of corporate social responsibility The Economist January 22nd 2005

2 organisations, CSR websites, CSR newslet-ters and much, much more.

But what does it all amount to, really?The winners, oddly enough, are disap-pointed. They are starting to suspect thatthey have been conned. Civil-society ad-vocates of CSR increasingly accuse �rmsof merely paying lip-service to the idea ofgood corporate citizenship. Firms are stillmainly interested in making money, theynote disapprovingly, whatever the CEO

may say in the annual report. When com-mercial interests and broader social wel-fare collide, pro�t comes �rst. Judge �rmsand their CSR e�orts by what the compa-nies do, charities such as Christian Aid (aCSR pioneer) now insist, not by what theysay�and prepare to be unimpressed.

By all means, judge companies by theiractions. And, applying that sound mea-sure, CSR enthusiasts are bound to be dis-appointed. This year’s Giving List, pub-lished by Britain’s Guardian newspaper,showed that the charitable contributionsof FTSE 100 companies (including gifts inkind, sta� time devoted to charitablecauses and related management costs) av-eraged just 0.97% of pre-tax pro�ts. A fewgive more; many give almost nothing(though every one of them records somesort of charitable contribution). The total isnot exactly startling. The �gures for Ameri-can corporate philanthropy are bigger, butthe numbers are unlikely to impress manyCSR advocates.

Still, you might say, CSR was always in-tended to be more about how companiesconduct themselves in relation to �stake-holders� (such as workers, consumers, thebroader society in which �rms operateand, as is often argued, future generations)than about straightforward gifts to charity.Seen that way, donations, large or small,are not the main thing.

Setting gifts aside, then, what about themany other CSR initiatives and activitiesundertaken by big multinational compa-nies? Many of these are expressly in-tended to help pro�ts as well as do good. Itis unclear whether this kind of CSR quitecounts. Some regard it as �win-win�, andsomething to celebrate; others view it as asham, the same old tainted pro�t motivemasquerading as altruism. And, even tothe most innocent observer, plenty of CSR

policies smack of tokenism and politicalcorrectness more than of a genuine con-cern to �give back to the community�, asthe Giving List puts it. Is CSR then mostlyfor show?

It is hazardous to generalise, becauseCSR takes many di�erent forms and is dri-

ven by many di�erent motives. But theshort answer must be yes: for most compa-nies, CSR does not go very deep. There aremany interesting exceptions�companiesthat have modelled themselves in waysdi�erent from the norm; quite often, par-ticular practices that work well enough inbusiness terms to be genuinely embraced;charitable endeavours that happen to bedoing real good, and on a meaningfulscale. But for most conventionally organ-ised public companies�which means al-most all of the big ones�CSR is little morethan a cosmetic treatment. The humanface that CSR applies to capitalism goes oneach morning, gets increasingly smearedby day and washes o� at night.

Under pressure, big multinationals asktheir critics to judge them by CSR criteria,and then, as the critics charge, mostly failto follow through. Their e�orts may beenough to convince the public that whatthey see is pretty, and in many cases thismay be all they are ever intended toachieve. But by and large CSR is at best agloss on capitalism, not the deep systemicreform that its champions deem desirable.

Does this give cause for concern? Onthe whole, no, for a simple reason. Capital-ism does not need the fundamental reformthat many CSR advocates wish for. If CSR

really were altering the bones behind theface of capitalism�sawing its jaws, remov-ing its teeth and reducing its bite�that

would be bad: not just for the owners ofcapital, who collect the company’s pro�ts,but, as this survey will argue, also for soci-ety at large. Better that CSR be undertakenas a cosmetic exercise than as serious sur-gery to �x what doesn’t need �xing.

We are an equal-opportunity employerBut this is not the end of the matter. Par-ticular CSR initiatives may do good, orharm, or make no di�erence one way orthe other, but it is important to resist thesuccess of the CSR idea�that is, the almostuniversal acceptance of its premises andmain lines of argument. Otherwise bonesmay indeed begin to snap and CSR mayencroach on corporate decision-making inways that seriously reduce welfare.

Private enterprise requires a supportinginfrastructure of laws and permissions,and more generally the consent of elector-ates, to pursue its business goals, whateverthey may be. This is something that CSR

advocates emphasise�they talk of a �li-cence to operate��and they are quite right.But the informed consent of electorates,and an appropriately designed economicinfrastructure, in turn require an under-standing of how capitalism best works toserve the public good. The thinking be-hind CSR gives an account of this which ismuddled and, in some important ways,downright false.

There is another danger too: namely,that CSR will distract attention from genu-ine problems of business ethics that doneed to be addressed. These are not inshort supply. To say that CSR re�ects a mis-taken analysis of how capitalism servessociety is certainly not to say that manag-ers can be left to do as they please, nor tosay that the behaviour of �rms is nobody’sconcern but their own. There is indeedsuch a thing as �business ethics�: manag-ers need to be clear about that, and to com-prehend what it implies for their actions.

Also, private enterprise serves the pub-lic good only if certain stringent conditionsare met. As a result, getting the most out ofcapitalism requires public intervention ofvarious kinds, and a lot of it: taxes, publicspending, regulation in many di�erent ar-eas of business activity. It also requirescorporate executives to be accountable�but to the right people and in the right way.

CSR cannot be a substitute for wisepolicies in these areas. In several little-no-ticed respects, it is already a hindrance tothem. If left unchallenged, it could well be-come more so. To improve capitalism, you�rst need to understand it. The thinking be-hind CSR does not meet that test. 7

ON THE face of it, questioning the ef-forts of companies to behave respon-

sibly is an odd thing to do�unless you areaccusing them of faking it, or of falling be-low some commonly agreed minimumstandard. How could a company ever be-have too responsibly? The very term �cor-porate social responsibility� endorses theactions to which it is applied. No doubtthat is why companies fasten the label to aquite bewildering variety of supposedlyenlightened, progressive or charitable cor-porate actions.

At one end of the broad span of CSR liecorporate policies that any well-run com-pany ought to have in place anyway, poli-cies that are called for on any sensibleview of business ethics or good manage-ment practice. These include not lying toyour employees, for instance, not payingbribes, and looking farther ahead than thenext few weeks. At the other end of therange are the more ambitious and distinc-tive policies that di�erentiate betweenleaders and laggards in the CSR race�largeexpenditures of time and resources oncharitable activities, for instance, or bind-ing commitments to �ethical investment�,or spending on environmental protectionbeyond what regulators demand.

In other words, at the mild end of therange are practices that do not need anyspecial CSR defence: they can perfectlywell justify themselves in simpler ways, ei-ther as meeting standards of ordinary de-cency (of which more later), or as being

necessary in any case if managers are torun a successful business. The issue here isnot whether the activities themselvesmake sense, but whether they deserve tobe digni�ed by the term �corporate socialresponsibility��that is, whether they de-serve the special praise which this label isintended to elicit.

At the strong end of the range, many ac-tivities do deserve a special label: they gowell beyond the requirements of ordinarydecency or business necessity, so the termCSR is serving a useful purpose. But canthe same be said of the policies?

At �rst sight that looks like a churlishquestion. What could possibly be wrongwith policies such as corporate charity orcareful attention to the demands of envi-ronmental protection and sustainable de-velopment? Sometimes nothing, but it de-pends. Many individual acts of goodcorporate citizenship do make sense inbusiness terms, or as ways of advancingthe public good, or both. But others do not.

Sometimes CSR policies are motivatedby genuine concern for the intended bene-�ciaries, or by a conscientious belief thatbusinesses must earn their �licence to op-erate�. There are some kindly CEOs outthere, and some with a troubled con-science. But there can be other motives forCSR too. There are quite a few vain CEOswho enjoy the attention which CSR lead-ership brings them, and many others who,having climbed their way to the top, seemto �nd running a pro�table company too

small a test of their talents. Yet whateverthe variations, one thing is constant: theweight given to specious arguments aboutwhat businesses must do to justify theirexistence and pay their way in society.

Putting those arguments about the du-ties of business to one side for the mo-ment, setting motives aside as well andthinking only of results, one might ask twoquestions of any act of supposedly en-lightened corporate citizenship. Does it im-prove the company’s long-term pro�tabil-ity? And does it advance the broaderpublic good?

Two testsSuccessful managers usually do both atonce, of course: merely by running a pro�t-able company, they are likely to be ad-vancing the public good as well. This argu-ment will be taken up in more detailbelow. Some of the business practices thatare often (perhaps misleadingly) labelledas CSR do fall into this category: they raisepro�ts and advance society’s well-being atthe same time. Examples include estab-lishing a reputation for dealing honestlywith employees, suppliers and customers.This is the win-win kind of CSR�the sortthat fails to impress much of civil society.Perhaps it would be better to call it simply�good management�.

Turning back to those two questions,however, note that there are three otherpossible answers as well. These aremapped out in the table on the next page.

The union of concerned executives

CSR as practised means many di�erent things

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2 Some kinds of CSR reduce pro�ts but raisesocial welfare (this is what civil societylikes best: call it �borrowed virtue�, for rea-sons to be explained in a moment). Thereis also CSR that raises pro�ts but reducessocial welfare (�pernicious CSR�), and CSR

that reduces both pro�ts and welfare (a po-lite name for which might be �delusionalCSR�). Consider some examples.

To begin with, win-win, or �good man-agement�. There is a lot of it about. Manyexecutives in the CSR movement deservecredit for testing and drawing attention tonovel practices that can yield these goodresults. Their ideas may not be applicablein all or even most companies, but theirsuccess in particular cases is impressive.

One of the most enthusiastic and per-suasive evangelists of win-win CSR isMarc Benio�, head of salesforce.com, astrikingly successful internet-based busi-ness-services company. In his book,�Compassionate Capitalism�, he explains,among other things, how good corporatecitizenship can be used to attract, retainand motivate the best workers. His com-pany encourages its sta� to devote time, atthe �rm’s expense, to charitable works. Incomplementary ways, it also provides�exibility in working hours and condi-tions. The character of the �rm, as per-ceived by its employees and its customersalike, is closely associated with this com-mitment to good causes.

All this seems to pay. Mr Benio� arguesthat this draws the right kind of people tothe �rm�team players, joiners, volunteers,generous and committed colleagues witha sense of loyalty to the enterprise. Thiskind of corporate philanthropy, whichmarries good works with a clever way ofsorting and motivating sta�, is undoubt-edly catching on.

When you press a CEO for details of acompany’s CSR policies, and for their busi-ness rationale, you �nd that every �rm be-lieves that its CSR actions fall in the win-win box. No chief executive wants to be-lieve that the �rm’s various services to thecommunity might reduce social welfare,and none seems willing to admit that hisenlightened management practices mightreduce pro�ts�what would the sharehold-ers make of that? But those other cells ofthe matrix are far from empty.

A clear instance of an action that re-duces pro�ts while (presumably) improv-ing social welfare is a straightforward cashdonation to charity. The donations fea-tured in the Giving List fall into this cate-gory. Sums donated in this way havesoared recently in response to the Asian

tsunami. You might suppose that devotingpro�t to the public interest is CSR at its best,or at any rate its noblest. The enlightenedcompany is surrendering some of its earn-ings to make the world a better place.

Philanthropy that isn’tAs many CEOs point out, this is not to saythat there are no business bene�ts. Someexecutives think of their charitable dona-tions�especially gifts such as sponsoringhigh-pro�le sporting or artistic events�asa kind of advertising. Others may feel thattheir companies, or their industries (oil, to-bacco, pharmaceuticals), have such a poorimage with the public at large that gener-ous charitable donations are needed to re-dress matters. But straightforward cor-porate philanthropy of this kind is notwoven into the way the �rm manages itspersonnel, so the commercial bene�ts areprobably limited. Most cash donations outof pro�ts probably do represent a net lossof pro�ts (even if the loss is less than thegross outlay).

And what, you might ask, is wrongwith that? What is wrong with a companygiving part of its pro�ts to help the victimsof the disaster in Asia, for instance�a goodcause if ever there was one?

Not so fast. Remember that corporatephilanthropy is charity with other peo-ple’s money�which is not philanthropy atall. When a company gives some of its pro-�ts away in a good cause, its managers areindulging their charitable instincts not attheir own expense but at the expense ofthe �rm’s owners. That is a morally du-bious transaction. When Robin Hood stolefrom the rich to give to the poor, he wasstill stealing. He might have been a goodcorporate citizen, but he was still a bandit�and less of one, arguably, than the vica-riously charitable CEO, who is spendingmoney taken not from strangers, but frompeople who have placed him in a positionof trust to safeguard their property. That iswhy the box in the table containing �cor-porate philanthropy� is marked (perhapstoo politely) �borrowed virtue�.

Note that the world’s most spectacularphilanthropists�think of the Bill & Me-linda Gates Foundation, with its endow-ment of $27 billion�are not spending thepro�ts of the companies they are associ-ated with but their own private wealth.That is the real thing, true philanthropy,and is nothing but admirable, especially ifthe givers are taking care to ensure themoney is spent wisely, as the biggest priv-ate foundations now do.

Philanthropy �nanced out of the pro�tsof publicly owned companies is a quitedi�erent thing, ethically speaking. Share-holders might expect to be allowed tospend their money on good causes of theirown choosing, rather than seeing the man-agers whose salaries they pay take that up-lifting duty upon themselves.

In the case of some public companies, itis true that there are mitigating circum-stances. Some companies have a traditionof generosity with shareholders’ moneystretching many years back. Some, for in-stance, are formerly private or demutual-ised enterprises which, on going public,created charitable foundations and under-took to keep them �nanced. In these cases,the shareholders knew what they weregetting into when they acquired stakes inthe companies. Conceivably, these poli-cies may even be among the reasons whysome shareholders acquired their stakes inthe �rst place. At any rate, such ownershave little or no reason for complaint. Asfor the rest, the majority, it might havebeen polite to ask.

Still judging acts by their e�ects, as op-posed to motives and underlying ratio-nale, the most harmful kinds of CSR, how-ever, are the �pernicious� and �de-lusional� sorts�that is, policies andpractices that actually reduce social wel-fare. How can that happen? All too easily.

Most CSR, in fact, is probably delu-sional, meaning that it reduces both pro�tsand social welfare, even if the cost underboth headings is usually small. Almost allCSR has at least some cost, after all, even ifit is no more than a modest increase in the�rm’s bureaucratic overhead. That costsubtracts from social welfare in its ownright. So the kind of CSR that merely goesthrough the motions, delivering no newresources to worthy causes, giving the�rm’s workers or customers no good rea-son to think more highly of it (perhaps theopposite), involves a net loss of welfare.

Or consider the current enthusiasm forrecycling. No doubt there are cases whereit makes good business sense to recycle.These fall under the �good management�

Pick your permutationVarieties of CSR

Raisesprofits

Reducesprofits

Goodmanagement

Borrowedvirtue

PerniciousCSR

Raisessocial welfare

Reducessocial welfare

DelusionalCSR

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2 heading: they increase pro�ts and (mainlyfor that reason) social welfare as well. Butthe point is that recycling is not free. E�ortand other resources must be expended onit. Waste must be collected, transportedand processed before it can re-enter theproductive process. The costs can be sub-stantial. If those private costs exceed theprivate savings, pro�ts will su�er�and so,most likely, will social welfare.

Advocates of recycling would say thisis short-sighted and wrong, because it ig-nores the need to conserve natural re-sources. Shortages of materials (such asnewsprint), and of the natural resourcesneeded to produce them (trees), are not re-�ected in the prices paid, they argue. So aprivate calculation of costs and bene�tswill not su�ce. Pro�t, which is private ben-e�t minus private cost, might rule out recy-cling, whereas a broader social calculationof costs and bene�ts would show a di�er-ent balance. Since society has a collectiveinterest in conserving resources, an inter-est not re�ected in the market prices ofcommodities, recycling might very well re-duce pro�t but at the same time increasewelfare�and, as with corporate philan-thropy, that is what CSR is about.

The trouble is, the notion that the mar-ket prices of commodities fail to re�ecttheir scarcity is wrong. In commodity mar-kets, prices re�ect scarcity just �ne. Thelong-term global trend of falling commod-ity prices, despite growth in the worldeconomy, is not due to the failure of mar-kets to re�ect diminishing supplies and im-pending shortages. Commodity marketsare for the most part e�cient and forward-looking. Commodity prices, measuredover recent decades, have followed adownward trend because innovation hasbrought about ever-rising productivity inthe use of those resources. In other words,supply has outstripped demand. Where,unusually, it has not, prices have indeedgone up�providing the signal that maymake recycling in those cases commer-cially sensible.

By and large, the world is not runningout of resources; where it is, prices re�ectthat fact. As a result, the ordinary pursuitof pro�ts is an excellent guide to compa-nies on whether to recycle. There is noneed to anoint recycling as a kind of moralstandard of responsible behaviour. And ifdoing so succeeds in de�ecting companiesfrom thinking hard about their costs, ac-tual social harm results. Use of materials isan area where private and social bene�tsare typically well-aligned.

Consider, �nally, the case of CSR that

raises pro�ts but lowers welfare�perni-cious CSR. Recognising the existence ofthis category is especially important.Some economically literate bosses arguethat if CSR raises pro�ts then it must by thesame token raise social welfare. So long asgood corporate citizenship is good for thebottom line, they assume, you can rest as-sured that it must be win-win, and goodfor society as well. As a rule, this may betrue. But there are some large exceptions.

Almost all CSR advocates are passion-ate about �sustainable development�. Theidea is strongly endorsed by governmentseverywhere, by institutions such as theWorld Bank and the United Nations, andindeed by anybody at all with a desire to

be thought well of. It has become an orga-nising principle for the whole CSR move-ment. Emphasis is laid on environmentalprotection and on responsible behaviourtowards workers and communities in thedeveloping countries. In order to advancethose eminently worthy goals, some com-panies have lately devised codes of prac-tice, or have adopted codes written byother organisations. The danger lies in thedetail of these policies.

To many advocates of CSR, and to virtu-ally all of the NGOs that have given theCSR movement its intellectual drive,responsible behaviour towards workers inthe developing countries goes far beyondgiving them jobs at market wages andcomplying with local laws and regulations

on matters such as health and safety. Thereis a debate in CSR circles about exactlyhow much higher than this the standard ofresponsible conduct should be. Some im-provement on the minimal market stan-dard is probably win-win in any case, be-cause rich-country multinationalsoperating in developing countries typi-cally want to hire from a big pool of keenapplicants and to �nd better-than-averageworkers. Rich-country multinationals doin fact pay substantially higher wages andgive substantially better bene�ts (such asaccess to health care) than the local norm.But how much of an improvement on thispro�t-seeking market standard does goodcorporate citizenship require?

Some CSR advocates have alignedthemselves with those in the NGO move-ment who regard it as wrong�exploitative,or �unfair��to hire workers in the develop-ing countries on any terms that are signi�-cantly less generous than those granted totheir rich-country workers. Companiesunder NGO scrutiny have been dissuadedfrom investing in manufacturing opera-tions in developing countries such as Indiaor Bangladesh, or have decided to endsuch operations, faced with charges thatthey are employing �sweatshop labour�.As good corporate citizens, they say witharms twisted behind their back, they nolonger do that. Many development NGOsare pushing for labour standards thatwould mandate this kind of �best prac-tice�, and want these standards writteninto future trade agreements.

The evidence clearly shows that poli-cies of this kind (especially if they come tobe required of all companies as part of fu-ture trade pacts) are not in the interests ofthe workers they purport to help. Foreigndirect investment in the third world isknown to be one of the best spurs to econ-omic development: just look at China.Even when the wages and other terms of-fered to local workers are much less gener-ous than those o�ered to their westerncounterparts, they are typically much bet-ter than the local economy can provide,which is why jobs with foreign multina-tionals are nearly always in great demandin poor countries.

Attitudes that discourage such invest-ment by making it less pro�table, or by ex-posing companies that have made such in-vestments to ridicule or censure, un-doubtedly hold poor countries back. Theyalso keep in poverty the very workers whowould otherwise have got those jobs. Towithdraw from such investments, as goodcorporate citizens are frequently enjoined

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2 to, may well be pro�table for the compa-nies concerned because staying put wouldimpose heavy costs on their reputation.Capitulating to the ill-judged demands ofthe NGOs may be rational, pro�t-seekingbehaviour on their part. But in this case,what is good for pro�ts is bad for welfare.

This danger is compounded when CSR

leaders campaign for the introduction ofcodes that impose such standards on all�rms. This too may be �ne for pro�ts,which is why so many companies have be-gun to endorse this policy. It is a good ideafor a business to hobble its competition ifpossible�which is what mandatory la-bour standards of the sort demanded ofthe WTO tend to do. How much better ifgrasping this commercial advantage canbe disguised as acting the good corporatecitizen. But hobbling the competition isbad for the public at large. Again, by de-priving them of investment, such per-verted virtue especially harms the econ-omic prospects of developing countries.

All this underlines a broader worry.Companies do operate in a climate ofopinion. To be successful and pro�table,they must take account of how they areperceived. Big, successful businesses,which often �nd themselves in the publicview, strive constantly to improve and pro-

tect their reputation. This is just as itshould be: concern for the way they arejudged by customers, suppliers and theworld at large is a useful discipline. If itwere absent, there would be no economicpressure on companies to behave de-cently. If nobody is paying attention, whyworry about dealing honestly with peo-ple, or honouring a contract? This pressureof outsiders’ perceptions is an indispens-able force. Without it, companies in a priv-ate-enterprise system would be nasty,brutish and very short-lived.

Need to knowHowever, it is important that this pressureshould be well-informed, or at least not ut-terly misguided. In particular, it needs toembody some basic economic under-standing. Unwarranted, misguided orcontradictory public demands on compa-nies, especially if these demands emergein due course as government mandates,can a�ect decisions in such a way as to de-tach pro�table business conduct from thepublic good.

If the public decides to punish banksand other service companies that movetheir call-centres o�shore by withholdingits custom, the pro�t-seeking companywill respond by ending the practice.

Whether that response advances thebroader social good then depends on thecircumstances. If consumers reject out-sourcing of this kind because it provides alower quality of service, �ne: that is themarket working as it should. If the publicrejects outsourcing because it falsely be-lieves that workers in foreign call-centresare being exploited, that is not �ne: that isthe market, through popular misconcep-tion, getting it wrong.

In a way, this is to concede an impor-tant point to the advocates of CSR. Capital-ism does function on top of, and one wayor another is moulded by, prevailing pop-ular opinion. As noted earlier, the condi-tions that must be satis�ed if capitalism isto serve the public good are not trivial. Acomprehending and supportive climate ofopinion must be added to the list. That iswhy the battle of ideas matters so much.

CSR comes in a wide variety of forms.Judged by results, it may be win-win, bor-rowed virtue, delusional or pernicious.Judged by motives, it may be done in goodfaith or bad faith, out of conviction, bore-dom or vanity, by genuinely well-inten-tioned business leaders or by cynicalbosses looking to dupe their consumers.But invariably, and dangerously, it is un-derpinned by mixed-up economics. 7

OVER the past century or so, and espe-cially in the past 50 years, the western

industrial democracies have experiencedwhat can only be described as an econ-omic miracle. Living standards and thequality of life have risen at a pace, and to alevel, that would have been impossible toimagine in earlier times.

This improvement in people’s lives,staggering by any historical standard, isnot measured solely in terms of materialconsumption�important though it is, forinstance, to have enough to eat, to keepwarm in winter, to be entertained andeducated and to be able to travel. In addi-tion to material gains such as these, and toall the other blessings of western �con-sumer society�, broader measures of well-being have raced upward as well: infantmortality has plummeted, life expectancyhas soared, and the quality of those ex-tended years of life, in terms of freedom

from chronic sickness and pain, is betterthan earlier generations ever dreamed itcould be.

All this has been bestowed not just onan elite, but on the broad mass of people.In the West today the poor live better livesthan all but the nobility enjoyed through-out the course of modern history beforecapitalism. Capitalism, plainly, has beenthe driving force behind this unparalleledeconomic and social progress. Yet today itis suspected, feared and deplored�and notjust by the kind of energetic anti-capitalistswho now and then put bricks through thewindows of McDonald’s.

According even to middle-of-the-roadpopular opinion, capitalism is at best a re-grettable necessity, a useful monster thatneeds to be bound, drugged and muzzledif it is not to go on the rampage. Strangerstill, this view seems to be shared by agood proportion of business leaders. Cap-

italism, if guided by nothing but their ownunchecked intentions, would be wicked,destructive and exploitative, they appar-ently believe�bent on raping the planetand intent on keeping the poor outside thecapitalist West in poverty.

In a much-discussed recent book, �TheCorporation: The Pathological Pursuit ofPro�t and Power�, Joel Bakan, a law profes-sor at the University of British Columbia,lays bare the danger. His themes were fur-ther developed and illustrated in a �lm ofthe same title, which was also successfuland well reviewed.

The corporation’s legally de�ned mandate isto pursue relentlessly and without exceptionits own economic self-interest, regardless ofthe harmful consequences it might cause toothers�Today, corporations govern ourlives. They determine what we eat, what wewatch, what we wear, where we work andwhat we do. We are inescapably surrounded

The world according to CSR

Good corporate citizens believe that capitalism is wicked but redeemable

1


2 by their culture, iconography and ideology.And, like the church and the monarchy inother times, they posture as infallible andomnipotent, 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, perhapsmore than governments themselves do; yetironically it is their very power, much ofwhich they have gained through economicglobalisation, that makes them vulnerable.As is true of any ruling institution, the cor-poration now attracts mistrust, fear and de-mands for accountability from anincreasingly anxious public. Today’s cor-porate leaders understand, as did their prede-cessors, that work is needed to regain andmaintain the public’s trust. And they, liketheir predecessors, are seeking to soften thecorporation’s image by presenting it as hu-man, benevolent and socially responsible.

In Mr Bakan’s view, CSR is mostly afraud. Companies, after all, are in �patho-logical pursuit of pro�t and power�. CSR ismerely a means to those ends, a way to in-gratiate capitalism to a rightly suspectingpublic. The book’s jacket has blurbs of gen-erous praise not just, as you might expect,from Noam Chomsky but also from an in-vestment-fund manager and a CEO, whosays it is holding up �a mirror for [corpora-tions] to see their destructive selves as oth-ers see them�.

Many businessmen do seem to recog-nise themselves in that mirror. And popu-lar culture has the corporate psycho inplain view�which is remarkable, giventhe corporation’s su�ocating grip on allthoughts and deeds. What is the capitalistethos according to Hollywood? �Greed isgood,� as Gordon Gekko explained in�Wall Street�. From �RoboCop� (the mili-tary-industrial complex) to �Super SizeMe� (fast-food tyrants) and back again, thebrave unequal war against corporate do-minion is waged.

This paranoid fear of capitalism, sharedby so many of its leading practitioners,boils down to two main ideas. First, pro�tin its own right has nothing to do with thepublic good. A company in pursuit of pro-�t is seeking a purely private gain. If thepursuit of pro�t is to yield an advance insocial welfare, then something else, actingwith deliberation and intelligence fromoutside the corporation, must intervene.Second, in their mad pursuit of privategain, companies are driven by the logic oftheir quest to place crippling burdens onsociety and on the environment.

So far as society at large is concerned, inother words, the untrammelled pursuit ofpro�t yields nothing, but costs plenty. Un-less it is checked either by CSR or (as Mr Ba-kan would prefer, if only as a �rst step) bydouble-strength government regulation,private enterprise makes losers of every-one but itself.

Private pro�t, public interestThe perceived tension between privatepro�t and public interest pervades the CSR

literature. Yet the idea is never examined. Itis always regarded as self-evident.

The top executives at Royal Dutch/Shellhave lately been acting as CSR thought-leaders�and they are CSR champions inother ways as well (through the activitiesof the generously supported charitable ac-tivities of the Shell Foundation, for in-stance). Shell has a lot of popular suspi-cion to live down, following the scandalover its operations in Nigeria, for instance,and the controversy surrounding its plansfor the disposal of the Brent Spar oil-drill-ing platform in the North Sea. Its senior ex-ecutives have done their best. In a lea�etexplaining why the company had em-braced CSR, Sir Mark Moody-Stuart, whowas chairman between 1998 and 2001,and before that managing director, wrote:

[M]y colleagues and I on the committee ofmanaging directors are totally committed toa business strategy that generates pro�tswhile contributing to the well-being of theplanet and its people.

That seems entirely unobjectionable,you might think: a commitment to mother-hood and apple pie. But the clear implica-tion�and Sir Mark, to judge by otherspeeches and articles, buys it whole-sale�is that if Shell simply made pro�ts forits owners, that would in itself contributenothing to �the planet and its people�.From this it follows that if Shell is to justifyits activities to society at large, it has to do

more than just make money for its owners.Therein lies the case for CSR. But is the pre-mise actually true? True or false, it is neverchallenged.

One of the world’s foremost CSR net-works and organisations is the World Busi-ness Council for Sustainable Develop-ment. Its membership is made up of 175big multinationals, including Shell, along-side �rms such as ABB, Dow Chemical,Ford, General Motors, Procter & Gamble,Time Warner and so on. One of the coun-cil’s publications begins:

Although the rationale for the very existenceof business at law and in other respects is togenerate acceptable returns for its share-holders and investors, business and busi-ness leaders have, over the centuries, madesigni�cant contributions to the societies ofwhich they form part.

Why yes. If you compare people’s livesin the West today with those of people liv-ing, say, a century ago, or two centuriesago, it would be right, if perhaps a little mi-serly, to concede that business has madesome �signi�cant contributions�. But inthe council’s opinion these moderately im-portant bene�ts did not arise becausebusinesses generated acceptable returnsfor their owners; they arose despite thatfact. Pro�t, unfortunately, is necessary, asthe council sadly notes: otherwise youcannot have business, along with the pos-sibility of those quite useful contributions.But those contributions have to be sepa-rately willed. It is simply not in the natureof business as such to contribute. That isan add-on, a responsibility that businessmay choose to discharge or not discharge,as it sees �t.

So, anti-capitalists believe this; angrylaw-school professors (whose own signi�-cant contributions cannot be in doubt) be-lieve it; and the leaders of international bigbusiness believe it. For good measure,many industrial-country governments,acting singly or in concert, believe it as


2 well. Britain is just one of many countriesto have designated a minister responsiblefor encouraging CSR initiatives. In 2001 theEuropean Commission published a con-sultative paper entitled, �Promoting aEuropean Framework for Corporate SocialResponsibility�. The aim is �to launch awide debate on how the European Unioncould promote corporate social respon-sibility at both the European and interna-tional level�. Values, it says, �need to betranslated into action�.

Leading international institutions suchas the World Bank, the United Nations, theOrganisation of Economic Co-operationand Development, and indeed more orless any out�t of that sort you care toname, endorse the view that pro�t servesan exclusively private interest, and thatblind pursuit of pro�t is therefore likely toprove socially harmful.

The United Nations is especially keenon CSR, as part of a broad new approach toglobal governance. It continues to promoteits �Global Compact�, launched at theWorld Economic Forum in 1999. This ini-tiative aims to draw together businessesand business organisations, NGOs, andUN and other international agencies. Thegoal of this new �tripartism��an ongoingdiscussion among governments, compa-nies and civil society (which is how the UN

refers to NGOs)�is to �nd ways to �under-pin the free and open market system withstable and just societies�.

It is one thing to believe that pro�t-seek-ing serves no public interest directly. It isanother to believe that pro�t-seeking, un-less tempered and channelled by CSR or insome other way, actually works against

the public interest. This second idea, al-ready noted, is an extension of the �rst.And this is where �sustainable develop-ment� comes in.

The concept of sustainable develop-ment puts �esh on the idea that businessleft to its own devices is dangerous. Un-tamed pro�t-seeking, it is argued, putsstrain on the environment and exploitsworkers. At the same time the goal of sus-tainable development points to a moreconcrete agenda for CSR: while pursuingpro�t, enlightened companies should takecare to protect the environment and up-hold the rights of workers (and others) aswell. Hence the �triple bottom line� whichthought-leaders on CSR (including the Un-ited Nations and the European Commis-sion) want companies to monitor and re-port: don’t just aim to make money, butprotect the environment and �ght for so-cial justice as well.

UnsustainableOne problem with the triple bottom line isquickly apparent. Measuring pro�ts isfairly straightforward; measuring environ-mental protection and social justice is not.The di�culty is partly that there is no sin-gle yardstick for measuring progress inthose areas. How is any given success forenvironmental action to be weighedagainst any given advance in social jus-tice�or, for that matter, against any givenchange in pro�ts? And how are the three tobe traded o� against each other? (CSR ad-vocates who emphasise sustainable de-velopment implicitly insist that there mustbe such a trade-o�, at least when it comesto weighing pro�t against either of the

other two.) Measuring pro�ts�the goodold single bottom line�o�ers a pretty cleartest of business success. The triple bottomline does not.

The problem is not just that there is noone yardstick allowing the three measuresto be compared with each other. It is alsothat there is no agreement on what pro-gress on the environment, or progress inthe social sphere, actually mean�not, atleast, if you are trying to be precise aboutit. In other words, there are no yardsticksby which di�erent aspects of environmen-tal protection can be compared even witheach other, let alone with other criteria.And the same goes for social justice.

One company reduces its emissions ofgreenhouse gases. One increases its spend-ing on recycling. Another provides freechild-care facilities for its workers. An-other raises the wages of its lowest-paidworkers. All of these things cost money:suppose, for the sake of argument, that allfour have reduced pro�t by the sameamount. Which company has done mostto protect the environment? Which hasdone most to advance social progress?Overall, how far has each company im-proved its triple bottom line? Bearing inmind the cost, can you even say that any ofthem have done so?

The great virtue of the single bottomline is that it holds managers to account forsomething. The triple bottom line doesnot. It is not so much a licence to operate asa licence to obfuscate.

CSR advocates could reply that thismisses the point. The idea of the triple bot-tom line is not that the three-dimensionalperformance of business can ever bejudged as precisely as its orthodox one-di-mensional performance. The triple bot-tom line is just shorthand for saying: takeother things into account, acknowledgethat 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 ofdamage to the environment and infringe-ments of the rights of workers and otherstakeholders. You cannot be precise aboutthese things, but at least you can recognisethe social and environmental peril of toonarrow a focus on pro�t.

That is a perfectly reasonable line of ar-gument�or it would be, if a narrow focuson pro�t really did endanger the environ-ment, systematically infringe the rights ofworkers and stakeholders, and in generalfail to serve the public interest. That is theworld according to CSR, but is the worldreally like that? The short answer is no. Fora slightly longer answer, read on. 7

1


ADAM SMITH, you might say, wrote thebook on corporate social responsibil-

ity. It is entitled, �Wealth of Nations�.

Every individual necessarily labours to ren-der the annual revenue of the society asgreat as he can. He generally, indeed, neitherintends to promote the public interest, norknows how much he is promoting it...he in-tends only his own gain, and he is in this, asin many other cases, led by an invisiblehand to promote an end which was no partof his intention. Nor is it always the worsefor the society that it was no part of it. By pur-suing his own interest he frequently pro-motes that of the society more e�ectuallythan when he really intends to promote it. Ihave never known much good done bythose who a�ected to trade for the publicgood.

It is not from the benevolence of thebutcher, the brewer, or the baker, that we ex-pect our dinner, but from their regard to theirown interest. We address ourselves, not totheir humanity but to their self-love, andnever talk to them of our own necessities butof their advantages.

Smith did not worship sel�shness. Heregarded benevolence as admirable, as agreat virtue, and he saw the instinct forsympathy towards one’s fellow man as thefoundation on which civilised conduct isbuilt (he wrote another book about this:�The Theory of Moral Sentiments�). Buthis greatest economic insight�and indeedthe greatest single insight yielded by thediscipline of economics�was that benevo-lence was not in fact necessary to advancethe public interest, so long as people werefree to engage with each other in voluntaryeconomic interaction. That is fortunate, hepointed out, since benevolence is often inshort supply. Self-interest, on the otherhand, is not.

If self-interest, guided as though by aninvisible hand, inadvertently serves thepublic good, then it is easy to see why soci-ety can prosper even if people are not al-ways driven by benevolence. It is becauseSmith was right about self-interest and thepublic interest that communism failed andcapitalism worked.

Most advocates of CSR, especiallythose who run giant international cor-porations, have probably read some eco-nomics in their time. Many of the o�cials

at the United Nations, World Bank andOECD who argue in favour of CSR have ad-vanced degrees in the subject from the bestuniversities. Yet they have apparentlyfailed to grasp this most basic and neces-sary insight of the entire discipline.Through the action of Smith’s invisiblehand, the private search for pro�t does ad-vance the public interest. There is no needfor thought-leaders in CSR armed with ini-tiatives and compacts to bring this about.

Smith was a genius because this har-mony of private interest and public inter-est is not at all obvious�and yet, at thesame time, once it is pointed out, the idea isinstantly simple and plausible. This is es-pecially so if you think not about self-in-terested individuals but about pro�t-seek-ing companies. The value that peopleattach to the goods and services they buyfrom companies is shown by what theyare willing to pay for them. The costs ofproducing those goods and services are a

measure of what society has to surrenderto consume those things. If what peoplepay exceeds the cost, society has gained�and the company has turned a pro�t. Thebigger the gain for society, the bigger thepro�t. So pro�ts are a guide (by no means aperfect one, but a guide nonetheless) to thevalue that companies create for society.

Does this mean that Gordon Gekko, theodious protagonist of the movie, �WallStreet�, was right to say that �greed isgood�? No: greed and self-interest are notthe same thing, as Mr Gekko discovered inthat movie. Greed, in the ordinary mean-ing of the word, is not rational or calculat-ing. Freely indulged, it makes you fat anddrives you into bankruptcy. The kind ofself-interest that advances the public goodis rational and enlightened. Rational, cal-culating self-interest makes a person, or a�rm, worry about its reputation for hon-esty and fair dealing, for paying debts andhonouring agreements. It looks beyondthe short term and plans ahead. It consid-ers sacri�ces today for the sake of gains to-morrow, or �ve years from now. It makesgood neighbours.

Morally, also, there is a world of di�er-ence between greed and self-interest. The�rst, even if it were not self-defeating,would still be a gross perversion of the sec-ond. Failing to see this distinction, andthus concluding without further thoughtthat private enterprise is tainted, is a kindof ethical stupidity. Greed is ugly. There isnothing ignoble, in contrast, about a calmand moderate desire to advance one’s ownwelfare, married (as it is in most people) toa sympathetic regard for the well-being ofothers. And, as Smith pointed out, rationalself-interest also happens to make theworld go round.

Faulty premiseThe premise that CSR advocates neverquestion is in fact wrong. It is an error tosuppose that pro�t-seeking, as such, failsto advance the public good, and that spe-cial e�orts to give something back to soci-ety are needed to redeem it.

However, as already noted, pro�t suc-ceeds as an indicator of value creation, andas a signal that draws new investment tosocially useful purposes, only under cer-

Pro�t and the public good

Companies that merely compete and prosper make society better o�

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2 tain circumstances. It cannot be taken forgranted that these conditions will alwaysbe satis�ed.

One main requirement is that �rms arein competition with each other. The pro�tsthat a monopoly can extract from the econ-omy are a measure of market power, notsocial gain. And monopoly pro�ts may notserve as an e�ective signal for new invest-ment if economic barriers of one kind oranother hamper competition by keepingnew entrants o� the monopolist’s turf.

Oddly enough, business leaders whovoice their commitment to good corporatecitizenship rarely demand the removal ofbarriers 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 importbarriers to be raised against their foreigncompetitors than they are to call for exist-ing tari�s or other barriers to come down.Producers of all manner of goods and ser-vices are more likely to call for the intro-duction of licences and controls to protecttheir existing positions in their marketsthan to demand that newcomers shouldbe permitted and even encouraged to con-test those markets.

And CSR often helps them in this. Al-though it is true that many business lead-ers mean what they say about good cor-porate citizenship, and speak up for CSR ingood faith, CSR is nonetheless far more of-ten invoked as a rationale for anti-competi-tive practices than as a reason to bolstercompetition. Incumbent �rms or profes-sions seem to �nd it easier to comply withburdensome regulations if they know thatthose rules are deterring new entrants.That is why, often in the name of CSR, in-cumbent businesses are so given to callingfor rules and standards to be harmonisedand extended, both at home and abroad.

For the good of the public, you under-stand, barristers are opposed to reformsthat would allow solicitors to appear moreoften as advocates in English courts (theirtraining just isn’t up to it). For the safety ofthe consumer, American pharmaceuticalcompanies insist, extraordinary precau-tions must be taken before drugs can beimported from Canada (heaven knowswhat the Canadians, a devil-may-care sortof people, put into those pills). For thegood of the world’s poor, industrial-coun-try manufacturers believe, goods shouldnot be imported from countries where em-ployees have to work long hours for lowpay and without statutory vacations (thatis unfair trade).

A great deal of economic regulation

makes sense for one reason or another. Butit is striking that business leaders�espe-cially, it seems, those who speak up mostenthusiastically for CSR�call for regula-tion that restricts competition far more of-ten than they call for regulation thatstrengthens it. This prompts the thoughtthat the design of economic regulation isbest left to governments, rather than to cor-porate citizens, however enlightened.

Social pricesA second condition must be met beforeone can be sure that private enterprise incompetitive markets is advancing the pub-lic good. Prices need to re�ect true socialcosts and bene�ts. Many transactions,however, have side-e�ects�externalities,as they are called. Where they do, privatecosts and bene�ts diverge from publiccosts and bene�ts. Sometimes external-ities are positive. If your neighbour re-paints his house, that may increase thevalue of yours; since he fails to capture allthe gains created by his spending, he mayrepaint his house less frequently thanwould be best for society at large�or, inthis case, for your end of the street. Marketstend to undersupply goods that involvepositive externalities.

Externalities can also be negative. Theclassic instance is a polluting factory. Theowners of the factory and the customersfor its goods do not have to bear the fullcosts of the pollution that comes out of itssmokestacks. Failing to take that into ac-count, the market sets the price of the fac-tory’s goods too low. Demand for the pro-duct is stronger than it should be. Goodsthat involve negative externalities tend to

be oversupplied.This kind of argument is invoked to

make sense of �sustainable development�and the claims pressed on business by thatidea. Prices are wrong, the argument goes,so markets are failing. Pollution, includingthe accumulation of greenhouse gases, isnot priced into the market, so there is toomuch of it. Impending shortages of naturalresources are not priced into the market, sothose resources are consumed too rapidly.The value of wilderness, either for itsbeauty or for its stocks of endangered spe-cies, is not priced into the market, so toomuch of it gets cemented over.

Whether the pattern of consumptionbased on these false prices is sustainable isreally beside the point. Some patterns ofconsumption could be inde�nitely sus-tained but still be wrong, causing mount-ing damage as far ahead as one can see.Others might indeed be unsustainable,meaning bound to be halted at somepoint, yet not be wrong, as when the ap-proaching exhaustion of a raw materialleads to the invention of a substitute. �Sus-tainability� has a nice ring to it, but it is notthe issue. The question is whether falseprices are causing big economic mistakes�and, if so, what might be done about that.

Many market prices do diverge from thecorresponding �shadow prices� thatwould direct resources to their sociallybest uses. In many cases, the divergence isbig enough to warrant government ac-tion�a point which all governments havetaken on board, sometimes to a fault. Allindustrial-country governments intervenein their economies. In principle, much ofthis intervention aims to mitigate the mis-


allocation of resources caused by external-ities and other kinds of market failure. Butit is important to keep a sense of propor-tion about the supposed unreliability ofmarket signals.

So far as environmental externalitiesare concerned, most leading advocates ofCSR seem to be in the grip of a grossly exag-gerated environmental pessimism. Theclaim that economic growth is necessarilybad for the environment is an article offaith in the CSR movement. But this idea issimply wrong.

Natural resources are not running out,if you measure e�ective supply in relationto demand. The reason is that scarcityraises prices, which spurs innovation: newsources are found, the e�ciency of extrac-tion goes up, existing supplies are usedmore economically, and substitutes are in-vented. In 1970, global reserves of copperwere estimated at 280m tonnes; during thenext 30 years about 270m tonnes wereconsumed. Where did estimated reservesof copper stand at the turn of the century?Not at 10m tonnes, but at 340m. Availablesupplies have surged, and, it so happens,demand per unit of economic activity hasbeen falling: copper is being replaced inmany of its main industrial applicationsby other materials (notably, �bre-optic ca-ble instead of copper wire for telecom-munications).

Copper, therefore, is unlikely ever torun out�and if it did, in some very distantfuture, it would be unlikely by then to mat-ter. The same is true for other key minerals.Reserves of bauxite in 1970 were 5.3 billiontonnes; the amount consumed between1970 and 2000 was around 3 billion

tonnes; reserves by the end of the centurystood at 25 billion tonnes. Or take energy.Oil reserves in 1970: 580 billion barrels. Oilconsumed between 1970 and the turn ofthe century: 690 billion barrels. Oil re-serves in 2000: 1,050 billion barrels. Andso on.

The colour of gloomWhat about pollution? On the whole, richcountries are less polluted than poor coun-tries, not more. The reason is that wealthincreases both the demand for a healthierenvironment and the means to bring itabout. Environmental regulation has beennecessary to achieve this, to be sure, be-cause pollution is indeed an externality.But it is not true that the problem has beenleft unattended in the rich world, thatthings are therefore getting worse, and thatCSR initiatives have to rise to the challengeof dealing with this neglect.

Strong environmental protection is al-ready in place in Europe and the UnitedStates. In some cases, no doubt, it needs tobe strengthened further. In some othercases, most likely, it is already too strong.Overall, the evidence fails to show system-atic neglect, or any tendency, once govern-ment regulation is taken into account, foreconomic growth to make things worse.

How much of an exception to this isglobal warming? Potentially, as many CSR

advocates say, a very important one. Emis-sions of greenhouse gases are causingstocks of carbon in the atmosphere to growrapidly. Almost all climate scientists ex-pect this to raise temperatures to some un-known extent during the coming decades.If temperatures rise towards the upper end

of current projections, the environmentaldamage will be great.

Yet the world still lacks an e�ective re-gime for global carbon abatement. This isnot so much because the United States hasrefused to support the Kyoto agreement asbecause that agreement is deeply �awedin any case�but this is beside the point.Global warming is a potentially very sig-ni�cant externality that governments upto now have failed to address properly.

Another such case is excessive en-croachment on wilderness areas. Once awilderness has been lost, it cannot be re-placed�and, unlike for copper or oil, therewill never be a substitute. Governments inmany rich and poor countries are neglect-ing this issue.

But on questions such as these, wheregovernments are, it seems, leaving signi�-cant market failures unaddressed, thequestion for businesses is whether CSR

can do anything useful to bridge the gap.Many companies at the forefront of theCSR movement have embarked on initia-tives of their own, aimed, for example, atreducing greenhouse-gas emissions or atprotecting wilderness areas.

These would need to be judged case bycase, to see whether particular policieswere instances of �good management� (aswhen an oil company invests pro�tably inalternative fuels, anticipating both shifts inconsumer demand and forthcoming taxeson carbon), �borrowed virtue�, (for exam-ple, creating private wilderness reserves atshareholders’ expense), �pernicious CSR�(blocking competition in the name of spe-cious environmental goals) or �delusionalCSR� (increasing emissions of greenhousegases in order to conserve raw materialsthat are not in diminishing supply).

There will be good and bad. As a gen-eral rule, however, correcting market fail-ures is best left to government. Businessescannot be trusted to get it right, partly be-cause they lack the wherewithal to frameintelligent policy in these areas. Asidefrom the implausibility of expecting theunco-ordinated actions of thousands ofprivate �rms to yield a coherent optimis-ing policy on global warming, say, there isalso what you might call the constitutionalissue. The right policy on global warmingis not clear-cut even at the global level, tosay nothing of the national level or thelevel of the individual �rm or consumer.Devising such a policy, and sharing thecosts equitably, is a political challenge ofthe �rst order. Settling such questions ex-ceeds both the competence and the properremit of private enterprise. 7

2

1


RECALL that Joel Bakan, the angry law-school 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�andgovernments should know that if they failin 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 thatsecond point. Not only is competitive priv-ate enterprise already heavily regulated; italso comes with a great deal of built-in ad-ditional self-interested self-regulation, asit were. But they are quite right about the�rst point. It is indeed desirable to estab-lish a clear division of duties betweenbusiness and government. Governments,which are accountable to their electorates,should decide matters of public policy.Managers, who are accountable to theirshareholders, should run their businesses.

Does this mean that managers need notconcern themselves with ethics? Just theopposite. Managers should think muchharder about business ethics than they ap-pear to at present. It is lack of clarity aboutbusiness ethics that gives rise to confusionover what managers’ responsibilities are,and over where the limits of those respon-sibilities lie.

The crucial point is that managers ofpublic companies do not own the busi-nesses they run. They are employed by the�rms’ owners to maximise the long-termvalue of the owners’ assets. Putting thoseassets to any other use is cheating the own-ers, and that is unethical. If a manager be-lieves that the business he is working for iscausing harm to society at large, the rightthing to do is not to work for that businessin the �rst place. Nothing obliges someonewho believes that the tobacco industry isevil to work in that industry. But if some-one accepts a salary to manage a tobaccobusiness in the interests of its owners, hehas an obligation to those owners. To �outthat obligation is unethical.

In addition, of course, managers oughtto behave ethically as they pursue theproper business goal of maximisingowner value�and that puts real con-

straints on their actions. In most cases, act-ing within these constraints advances theaim of the business, just as individuals�nd that enlightened self-interest and ethi-cal conduct usually sit well together. But,for �rms as for people, this will not alwaysbe true. Sometimes the aims of the busi-ness and rational self-interest will clashwith ethics, and when they do, those aimsand interests must give way.

Much the same goes for acting withinthe law. In democratic societies where therule of law is upheld, businesses and indi-viduals should work under a strong pre-sumption that they will obey those soci-eties’ laws. This will generally be good forbusiness, and usually will be ethical aswell�but, again, not always. Now andthen, depending on the circumstances, it iswrong to obey the law. And merely fol-lowing the law does not exhaust a �rm’sethical responsibilities, any more than itdoes an individual’s. Some things that arelegal are unethical; and many things re-quired by ethics are not required by law.

Managers of companies must confrontthese questions in running their busi-nesses, just as individuals must in leadingtheir everyday lives. Business ethics, inshort, is not an empty box. But what ex-

actly is in the box?Elaine Sternberg, an academic philoso-

pher and business consultant (and a for-mer investment banker), persuasively ar-gues in her book, �Just Business�, thatthere are two main things: �ordinary de-cency� and �distributive justice�. Theseneed to be understood in relation to theproper goal of the �rm. Without these ba-sic values, business would not be possible.

Be decent, be justIf owner value, and ownership itself, areto mean anything, there must be respectfor property rights. This excludes, MsSternberg points out, �lying, cheating,stealing, killing, coercion, physical vio-lence and most illegality�; it calls insteadfor �honesty and fairness�. Taken together,in her formulation, these constraints re-�ect the demands of �ordinary decency�.

Some businessmen appear to believethat anything which is not outright illegal,however unethical, can be regarded asproper business conduct. But without or-dinary decency (which goes a long way be-yond what the law requires of �rms), busi-ness could not be carried on.

Firms that lie and cheat cannot expectto stay in business very long, even if their

The ethics of business

Good corporate citizens, and wise governments, should be wary of CSR

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2 actions are allowed by law. Dishonestcompanies will be unable to borrow, toobtain working capital, or to form stablebusiness relationships with suppliers andcustomers. Decency in this sense is not justgood for business, it is essential. When itcomes to maximising long-term ownervalue, honesty is not just the best policy, itis the only feasible policy.

Crime doesn’t payWhat about organised crime, you mightask? The ma�a lasted pretty well as a pro-�t-maximising business, did it not? Yes,but organised crime nonetheless provesthe point. See what a criminal or �inde-cent� enterprise has to do to grow and sur-vive: it must corrupt and intimidate, andthoroughly subvert both politics and thecriminal-justice system. Some sick juris-dictions have let that happen. Where therule of law prevails, however, those meth-ods do not work outside a highly circum-scribed and perpetually beleaguered crim-inal domain. Inside this zone, enterprisesare small, always in hiding, and in patho-logical con�ict with each other. Outside it,in the light, honesty and fair dealing are re-quired if business enterprises are toprosper and survive.

Granted, some critics of business re-gard �the big multinationals� as little morethan outposts of a ma�a-like empire. In theworld according to Michael Moore, suchcompanies do systematically lie and cheat,and get away with it by corrupting andintimidating, and subverting both politicsand the criminal-justice system. There isindeed little to choose, on this view, be-tween Halliburton (or IBM, for that matter,or General Motors or GlaxoSmithKline)and the cosa nostra. Now and then execu-tives do commit crimes, of course. Usually,they are found out and punished. Thataside, if you believe that �the big multina-tionals� are essentially criminal enter-prises getting away with murder (perhapsliterally), you are beyond the reach of anarticle about business ethics.

What about the second component ofbusiness ethics, distributive justice? In thebusiness context, this simply means align-ing bene�ts within the organisation to thecontribution made to achieving the aimsof the �rm. Pay linked to performance andpromotion on merit are instances of dis-tributive justice within the company.

Much of what was said about the roleof ordinary decency applies here too.Again, these notions of what is fair arewidely accepted; on the other hand, theyare not, for the most part, required by law;

as a practical matter, they are needed if thebusiness is to do as well as it can; and theyare also questions of ethics, and hence partof the ethics of business. To promote afriend rather than the best person for thejob, or to reward a manager for incompe-tence or wrongdoing, is a bad way to run abusiness�and is also unethical.

Many writers on business ethics, andjust about all advocates of CSR, argue thatthis way of thinking mistakes the properpurpose of the enterprise. Making moneyfor the owners is too narrow a view ofwhat a corporation is for. It raises owner-ship��mere ownership�, as they wouldsay�too high. Owners are just one groupamong many kinds of di�erent �stake-holders� in a business. It is wrong to run abusiness in the interest of one kind ofstakeholder, ignoring the legitimate inter-ests of all the others. Is this correct?

There is a lot of unnecessary confusionabout �stakeholders�. Businesses certainlyneed to take account of other interestedparties if they are to succeed as businesses:they must satisfy their customers, get onwith their suppliers, motivate their work-ers, and so forth. In that sense, these di�er-ent groups of stakeholders will have theirsay and exercise their in�uence. But �tak-ing account of� is not the same as �beingheld accountable to�. Accountability refersto a much more formal and direct set ofrights and obligations.

Of course it is always possible, as a mat-ter of law, to create forms of managerialaccountability to non-owners. Through

the courts, you might say, managers areheld accountable to society at large. Publicpolicy can make managers accountable toregulators. Managerial accountability toworkers can also be required by law:worker representation on companyboards is mandated in Germany, for in-stance. (Whether this serves the interestsof German workers, or of Germany’s citi-zens in general, is nowadays in doubt.) Butall such lines of accountability recogniseowners as primary. You cannot deemstakeholders to be equal co-owners of abusiness without repudiating the veryidea of ownership. And where the lawdoes not create accountability to non-owners, there is none.

In many of the corporate scandals of re-cent years, it has seemed that managershave acted as though they were account-able to nobody�not even, and in somecases least of all, to the �rms’ owners. Thishas been rightly recognised as a problem,and a lot of time and e�ort has been spenton trying to make accountability to share-holders�on matters such as executivepay�more e�ective.

Muddled thinking on CSR, and on sup-posed accountability to non-owners, onlymakes it harder to put this right. Advocatesof CSR ought to re�ect on the fact that the�triple bottom line� and the bogus payscheme which rewards bad performancewith riches have something important incommon: the idea that the interests of�mere owners� should not be allowed tocome between managers and their per-sonal objectives. Broken corporate gover-nance and CSR are close relations. You of-ten see them together.

Good companies, good governmentAn earlier section of this article sketchedout a four-way classi�cation of CSR: goodmanagement, borrowed virtue, perni-cious CSR and delusional CSR. Does busi-ness ethics shed any more light on thosecategories? It does, though some of the re-sults are a little troubling at �rst sight.

Good management and delusionalCSR raise no new di�culties from an ethi-cal point of view: the �rst, which increasespro�ts and improves social welfare, isplainly a good thing and the second,which reduces both, is plainly not. Bor-rowed virtue has already been criticisedon ethical grounds, even though it is as-sumed to advance social welfare. That ver-dict stands, as you would expect. A properunderstanding of business ethics makesthe reasoning clearer, but the main thing isstill that the pro�ts of a publicly owned

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company are not the managers’ to giveaway. The remaining category is perni-cious CSR, the kind that raises pro�ts butreduces social welfare.

Is pernicious CSR also unethical? Of-ten, paradoxically, the answer will be no.Managers cannot be criticised on ethicalgrounds for aiming to increase long-termowner-value: that is their job. Assumingthat they have also acted within the law,the next question is whether they have vi-olated the standards of ordinary decencyand distributive justice within the orga-nisation. If they have�if they have lied, orbribed, or coerced, for instance�then theyhave behaved unethically. But if they haveacted in accordance with those two stan-dards of business conduct, they are ethi-cally in the right, even though they haveacted against the public interest.

This is not as strange as it seems. Con-sider the case of monopoly. Managers arenot to be criticised on ethical grounds forstriving to drive their competitors out ofbusiness�provided that they do this byselling a better product, for instance, ratherthan by deception or coercion or throughunlawful anti-competitive practices. Andif they succeed in establishing a monop-oly, it is not unethical to set a price thatmaximises the company’s pro�ts, or even(to the extent that the law allows it) tocreate business barriers to the entry ofnew competitors (for instance, by spend-ing heavily on advertising). For that mat-ter, it is not unethical for a company tolobby the government for protection fromforeign competition, citing its concerns, asa good corporate citizen, for the well-being

of its workers. All of these things may wellbe ethical�even when, from the point ofview of society as a whole, they are likelyto be undesirable.

This seeming paradox only underlinesthe point that businesses should not try todo the work of governments, just as gov-ernments should not try to do the work ofbusinesses. The goals of business and thegoals of government are di�erent�orshould be. That, by the way, is why �part-nership� between those two should al-ways arouse intense suspicion. Managers,acting in their professional capacity, oughtnot to concern themselves with the publicgood: they are not competent to do it, theylack the democratic credentials for it, andtheir day jobs should leave them no time

even to think about it. If they merely con-centrate on discharging their responsibil-ity to the owners of their �rms, acting ethi-cally as they do so, they will usually servethe public good in any case.

The proper guardians of the public in-terest are governments, which are account-able to all citizens. It is the job of electedpoliticians to set goals for regulators, todeal with externalities, to mediate amongdi�erent interests, to attend to the de-mands of social justice, to provide publicgoods and collect the taxes to pay for them,to establish collective priorities where thatis necessary and appropriate, and to or-ganise resources accordingly.

The proper business of business is busi-ness. No apology required. 7

Future surveys

Countries and regionsNew York February 19th India and China March 5th Turkey March 19th Australia May 7th

Business, �nance and economicsConsumer power April 2nd Oil April 16th International banking May 21stHigher education June 4th

The good company · The good company A survey of corporate social responsibility January 22nd 2005...

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