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By Philippe Legrain 1 COMMENT

Corporate social responsibility – it seems impossible to be against it: who wants companies to be irresponsible towards society? But words are deceptive. The premise behind CSR – that the profit motive is tainted, global capitalism is leading the world to rack and ruin, and business has a duty to give something back to society – is fundamentally flawed. And so too is the practice of it.

I spoke about this theme at a very stimulating seminar last week, which underscored how far the pernicious logic of CSR has won over businesspeople, politicians and anti-corporate campaigners alike.

Anyone in Europe or North America who doubts whether global capitalism can benefit the public good should look around at the material plenty that surrounds us. We are not just wealthier than ever before, we are healthier and better educated too.

Of course, profits and social welfare are not always synonymous. For profit-seeking to maximise social welfare, markets must be competitive and prices need to reflect true social costs and benefits. It is easy to think of cases where this is not so: for instance, a factory that spews out pollution without regard for its neighbours. But then the issue is: what is the best way to curb that pollution? I believe that legislation enacted by elected parliaments is infinitely superior to CSR. 

What, though, are we to make of companies’ individual CSR projects? Are they good, bad or indifferent? The two key tests are: do they improve a company’s long-term profitability? And do they advance the broader public good?

Consider corporate giving. Many businesspeople see charitable donations
as a kind of feel-good advertising, or a way of improving a poor public
image. Fair enough, but unless those benefits exceed the cost of the
donation, it is damaging to profits. So what? – you may say – it is all
in a good cause. Not so fast. Managers do not own companies,
shareholders do. While managers may wish to earn kudos, or feel good
about themselves, by making corporate donations to charity, generosity
with other people’s money is not philanthropy, it is theft.   

CSR may also impose costs on companies that are partly hidden and hard
to measure, so that even though a company thinks its CSR policy is
profit-enhancing, it may in fact be a drag on profits. For instance,
CSR can divert managers’ energy and attention from the company’s core
business, discourage potentially profitable risk-taking behaviour, and
allow managers to disguise poor performance at achieving the single
bottom line through emphasis on the inherently subjective and
incommensurate "triple bottom line".

Unsurprisingly, businessmen tend to see all CSR as win-win; while anti-corporate campaigners often believe that win-win activities are mere window-dressing and that CSR is only effective if companies sacrifice profits in the pursuit of greater social welfare. They both neglect, of course, the possibility that CSR could actually harm social welfare. 

Even window-dressing and tokenism have a financial cost – and if they produce no benefit at all, they reduce social welfare. Worse, CSR is often used as a pretext to restrict competition, and in an international context as a form of backdoor protectionism: expensive CSR commitments act as a barrier to entry for smaller firms, or those from developing countries. 

While it may be rational for companies to enact CSR policies if they are the lesser of two evils – if the cost of not doing so is greater than the cost of doing so – this does not mean that CSR is socially desirable. It may make business sense for a shopkeeper to pay off the Mafia if they threaten otherwise to burn down his store, but this does not make a protection racket socially beneficial. Likewise, it may make business sense for Tesco to give in to the demands of pressure groups who want it to do business in a more environmentally friendly way, because of the costs to its reputation if it doesn’t, but that doesn’t imply that the NGOs’ criticisms are correct, or that society is better off thanks to NGOs’ successful blackmail of Tesco.   

The most pernicious kind of CSR is the more ambitious kind: the efforts to impose higher global labour and environmental standards around the world. Although it is probably a win-win for rich-country multinationals operating in poor countries to offer higher-than-average wages and working conditions – as indeed they do – because they want to attract the best workers, trying to enforce too high a standard, or pulling out of developing countries altogether, costs poor people their jobs and thus an opportunity to improve their lives.

Of course, there are many examples of abuse and exploitation, but it is not true that developing countries’ lower labour and environmental standards are by definition a bad thing. They are a consequence, not a cause, of poverty and it is only through companies making products in developing countries and selling them on the global market – thereby raising living standards – that those standards are going to rise. Capitulating to NGOs’ wrong-headed demands may be rational, profit-seeking behaviour for multinationals – but it harms the poor people it purports to help.

The bigger problem with CSR is that it is undemocratic. The UN’s Global Compact, for instance, talks about spreading "good practices" based on "universal principles". But who decides what those good practices and universal principles are? Ask people what the world’s problems are and you will get a variety of opinions. Ask them what the solutions are, and how we might achieve them, and you get an even wider range of answers. If everyone agreed on the solution to the world’s problems, there would be no need for politics. We could just appoint administrators and let them get on with the job. But in fact, people disagree on just about everything. That is why we have elections, governments and political debate. It is a messy, rough-and-ready way of deciding society’s priorities, but it is less bad than all the alternatives – not least CSR.   

Companies’ social responsibility is to make profits, not decide how, or how much, the environment should be protected. It is a duty that they have to their shareholders who have entrusted their savings to them. Workers’ jobs depend on it. So does a country’s prosperity: scarce resources should only be tied up in a company if it is adding value. Profit is not a dirty word. Profits help pay for schools, hospitals and pensions. 

Certainly, people have aims besides getting richer. They care about how the pie is shared out, as well as its size. They also care about how the pie is produced: whether corporate activity damages the environment or compromises workers’ safety and dignity. These plural aims do not always conflict: companies with happy workers are often profitable, and vice-versa. But sometimes they do. That is where there is a role for governments: to draft and enforce laws that express society’s collective view about how, say, the balance between economic growth and environmental protection should be struck.   

This traditional model of governance has many advantages. The lines of responsibility are clear: governments set the rules of the game, companies then aim to make profits subject to those constraints. This is not only democratic. It is also fair: laws are transparent, apply equally to all companies, and are impartially enforced by the courts. And it is flexible: laws can vary according to local conditions and preferences. The best way to help workers and the environment is generally through national laws drafted on the basis of democratic participation and consultation.

Governments are more than capable, either individually or collectively, of achieving social aims through legislation. And if there is an appropriate framework of laws that ensures effective competition and corrects market failures, maximising profits is not just good for a company’s shareholders, it is in society’s best interests too. So companies are not irresponsible if they maximise profits within the framework of the law; it is society that is irresponsible if it seeks to pursue (often misguided) social and environmental aims through CSR.

Posted 23 Oct 2006 in Blog
  1. I distinctly disagree with your blog posting here. The idea of the triple bottom line, which is an integral part to the CSR concept focuses on Profit. The triple bottom line P’s are: Planet, People, and Profit. The idea that by focusing on all of these things and being a socially responsible corporation will increase your profits through numerous means.
    For instance if your people are happier, it will reduce turnover rates (which statistics show cost a company 150% of the individual’s salary to replace them) and increases productivity and teamwork…which result in larger margins. Or, if you focus on decreasing waste in packaging and processes of manufacturing, you’re reducing your cost of goods sold, increasing profit margins, and helping the planet in the mean time. AND, if you can get your prices down to beat the competition, or connect with a consumer’s values, you’ve won a customer for life (and all of their friends and family), which clearly results in long term profits.
    So, knocking good deeds and saying we should focus on capitalism as a way to boost ecomomy, etc isn’t the way to go. No one would suggest that CSR should come to the detriment of the bottom line, otherwise a company would go out of business. I think CSR should be promoted again and again…because, oh yeah, it makes a better world in the end, and we see where corporate greed has led us.

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