Paul Holmes 06 Sep 2010 // 1:55PM GMT
Ah yes, The Case Against Corporate Social Responsibility, which rears its ugly—and presumably weary—head again, this time in a Wall Street Journal (surprise!) article by Aneel Kanarni, associate professor of strategy at the University of Michigan's Stephen M. Ross School of Business. Kanami makes the familiar Friedmanesque case: “Very simply, in cases where private profits and public interests are aligned, the idea of corporate social responsibility is irrelevant: Companies that simply do everything they can to boost profits will end up increasing social welfare. In circumstances in which profits and social welfare are in direct opposition, an appeal to corporate social responsibility will almost always be ineffective, because executives are unlikely to act voluntarily in the public interest and against shareholder interests.” The problems with this seemingly simple formulation are twofold. The first is that it assumes two possible courses of action, one of which will maximize shareholder returns and one of which will not. Such a scenario might make for an interesting academic example of how decision-making works, but it doesn’t reflect the real world. The real world is not quite so binary. In the real world, executives frequently have to choose between multiple paths to the same objective: some of those paths may be more or less certain, some may require greater or lesser investment, some may be more “responsible” than others. Executives will generally weigh multiple factors—including the social responsibility of their actions—in deciding which strategy to follow in order to achieve the objective. The second problem is that Kanami, like most of his CSR-skeptic predecessors, ignores the key question that underpins the corporate responsibility debate, which is how to balance short-term and long-term interests. One of Kanami’s examples involves pollution: “In most cases, doing what's best for society means sacrificing profits. This is true for most of society's pervasive and persistent problems; if it weren't, those problems would have been solved long ago by companies seeking to maximize their profits. A prime example is the pollution caused by manufacturing. “Reducing that pollution is costly to the manufacturers, and that eats into profits.... Should executives in these situations heed the call for corporate social responsibility even without the allure of profiting from it? You can argue that they should. But you shouldn't expect that they will. Executives are hired to maximize profits; that is their responsibility to their company's shareholders.” A focus on the short-term interests of shareholders would suggest that companies should strive to maximize the amount of pollution they produce. The ultimate long-term consequence of such a policy involves catastrophic climate change, which is unlikely to be good for anyone’s shareholders. Even in the medium-term, a company that pursues pollution maximization as a strategy is likely to suffer a variety of negative consequences: it may find it difficult to attract and keep employees; it will find local authorities less inclined to allow new factory construction; it will see an increase in consumer activism and boycotts, regulatory oversight, and legal challenges. Ultimately, the approach that Kanami appears to be endorsing—that corporations should take every opportunity to maximize profits, even if it means inflicting the maximum harm on society or the environment—would cause a massive crisis of confidence in the capitalist system. Most business leaders understand that, which is why most business leaders endorse—to a greater or lesser degree—some notion of corporate social responsibility. Increasingly, the only people arguing against that notion are academics and ideologues.