Wednesday, September 1, 2010
WSJ Ignores the Growing Complexity of Corporations in Society
Recently, the Wall Street Journal published an article outlining the “case against corporate social responsibility”. This was well written and is indeed a provocative piece for students of business, practitioners, academic scholars, and even policy makers. While I think the author brings up some very important points with which I agree, there are some elements of his logic that I find disturbing, or at least misguided.
Where I Agree
First, the author states, “in cases where private profits and public interests are aligned, the idea of corporate social responsibility is irrelevant”. This is a very interesting and important point because it suggests that companies may be promoting themselves as responsible or doing something different when they are merely meeting market demands that have increasingly aligned with what is good for society. So DuPont’s claim that producing environmentally sustainable cleaning products is part of their new found responsibility could be perceived as a mirage because they are engaging in business behaviour that is no different than responding to any other market trend. To the author, these businesses merely advertise instances where their behaviour and society’s interest align and then label such behaviour as some kind of revolutionary shift. But there is an underlying assumption here that managers are at the mercy of their regulatory and market environments - something that I'll get to later.
Second, there is good logic behind the author’s and Milton Friedman’s argument that any activity taken on by the firm that is in direct opposition to shareholder value is NOT responsible. The author put it nicely when he said that CSR, when it is in opposition to creating shareholder wealth, is in violation of corporate governance whereby managers are accountable by law to the owners of the firm. One could argue that this usurps the very ideology of corporate social responsibility given that managers are breaking the law. This same argument was put forward by the Economist (see Profit and the Public Good) in 2005. Theoretically, spending money on some charity or social cause that has nothing to do with the company’s value proposition could have been money used for research and development of a more sustainable means of producing an existing product or the creation of a new product line that is more sustainable. I would agree that this could be irresponsible when these social causes are perhaps less urgent and there are other actors available with more skills to address them – again, two important assumptions that I get to later.
Third, the author realizes that solutions to social issues need to come from a mixed bag of actors – government, social activists, civil society organizations, and business – implying that business needs to be pushed in the right direction so that market and regulatory trends make it profitable for them to do so. This is important because the author recognizes the growing complexity of the different actors in society and the collaborative role needed to address these issues.
Where I Disagree
1) Business as Passive Recipient: My greatest concern with this article is the author’s presumption that business merely represents a passive recipient to market and regulatory trends as reflected in his examples of the auto sector and health food sector. We’ve known for quite some time though that companies have played a proactive role in shaping the market and regulation for food, vehicles, and many other products and services. General Motors played a very influential role in curbing government imposition of taxes on gasoline so that larger gas-guzzling vehicles would still be attractive to the market. The private sector’s role in ‘killing’ the electric car was, according to many, not a result of any lack of market demand but the preservation of corporate interests, suggesting that business exercises the power to build and dismantle markets. So while I agree that companies will respond when the market demands change, I disagree that companies sit by idly in response with no influence on this market and on public opinion through political lobbying or strong marketing.
While it is true that companies have adapted to the changing demands of consumers in, for example, healthier food, this was not without strong corporate interest in preventing such trends through strong lobbying for regulation that supports practices that undermine the health of consumers. Examples here include the subsidization of corn and soy to support the processed food industry and the strong lobbying for the allowance of trans fat in food. And as an aside, the author’s argument that social activists have had little impact on changing company ways is unfounded. Many would argue that civil society organizations, non-governmental organizations, and activists play an important role in shaping market demand and consumer behaviour in spite of corporate efforts to preserve the status quo. Consider Greenpeace’s ability to catalyze a massive boycott of Shell in 1995 or the Asian-American Free Labor Association’s ability to boycott Nike products in early 1990s. More recently, the New York Times reported that banks are becoming more wary about lending to mining companies in light of growing criticism by environmental advocates such as the Rainforest Action Network and Sierra Club.
2) Business as a Political Actor: I would argue that there are indeed situations when firms are best positioned to respond to social and ecological issues regardless of the relevance to business operations. This is especially the case in the global south where substantial public service gaps exist and companies have stepped in to fill governmental roles like, for example, the efforts of several multinational corporations in Kenya to address public service gaps after the post-election conflict in 2008. While I agree that in an ideal world, government or other public bodies may be best positioned, in reality these actors are not always available and it is instead business that finds itself better positioned (see Private, but Public WSJ, 2009). Regardless of the reality of the situation, the article implies that companies should stand by and do the responsible thing which is to continue with daily operations that maximizes profitability when its surrounding communities don’t, for example, have access to food and water.
But governmental gaps exist as a consequence of an increasingly complex socio-economic environment rather than because government has lost its capacity. Similar to the economic models that are built upon a ‘theoretical’ assumption of perfect competition, the ideal scenario of which the author speaks may not exist, however logical his argument might be. So while it is true that, in theory, “governments are a far more effective protector of the public good”, the reality is that their ability to do this is waning when we consider the rather pervasive loss of power of government to regulate and provide public services, the ability of corporations to transcend state level regulation, and the growing privatization of public services. We can either keep beating a dead horse and try to revert back to a simplistic design that relies on the separation of the public and private sectors or we can begin to adapt to the reality that these lines are blurred and business might have to be involved in the solution to these problems. This is a frightening thought of course because it suggests that a profit-making entity is influencing public discourse. The truth is that this has been happening for quite some time. Perhaps our efforts should be directed to understanding this growing phenomenon, building theories to guide it, and advising managers and policy makers how to use it to align corporate and public interests.
3) Managerial Choice to be Part of the Solution: Even when activists, NGOs, and civil society groups do exist to address some of these issues, we find that business is typically brought in as part of the solution. Many unique business models of the global south represent innovative responses, suggesting that business is not merely a passive recipient to market trends but an active player in the solution to these issues. The point is that firms represent architects in finding ways to align profit with social goals. This gets to an important presumption that the author makes regarding the view that managers do not have control over the alignment of profit with public goals and that factors beyond its control determine this alignment.
Exemplary scholars like Ed Freeman argue that it is the responsibility of business to migrate to areas that ultimately maximize value for multiple stakeholders, including shareholders, concurrently. Put another way, managerial options may not be limited to being responsible on the one hand and sacrificing profits on the other OR vice versa. A manager’s job is to think outside of the box to understand how profit maximization can take place in conjunction with the maximization of value for different stakeholders; stakeholders who represent social interests. So, for example, let’s say an automotive manufacturer is pondering their next line of vehicles to be designed and manufactured. The author’s view is that the firm can do one of two things – either ‘responsibly’ make a green car at the expense of profits because no market yet exists or maximize profitability and make an SUV where the market currently resides. As already mentioned, companies have a very strong ability to create new markets and influence public policy in a way that shapes society’s behaviours. To Freeman and others, the challenge of business is to find a way to make responsibility (or ethical behaviour) and profitability commensurable. So being responsible here may involve pushing for regulation that supports sustainable vehicles and building marketing campaigns that educate the market about such products and thus make such strategies profitable.
In sum, the views put forward in the WSJ article, while relevant at a time when public and private roles were distinct and clearly defined, are quite outdated. It may be time to let go of the theoretical niceties associated with pigeonholing roles and responsibilities to different actors and recognize that the blurring lines between them may represent a future reality that requires the attention of managers, business scholars, and policy makers.