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Lay off the corporate guilt trip

Sun, 22nd Aug 2004

THERE is a minister for it, an academy for it, and companies and managers are signing up for it in droves: corporate social responsibility (CSR) is rapidly becoming management's new conventional wisdom.

JK Galbraith, who invented the term, pointed out that conventional wisdom becomes so by being repeated so many times by those with axes to grind that it becomes the default position irrespective of its merits. As such, all conventional wisdom bears the beadiest scrutiny. CSR is no exception: what is actually going on behind these blandly reassuring words? Should it be welcomed or is it a dangerous distraction from business's real role?

This is the question posed by David Henderson in The Role of Business in the Modern World (Institute of Economic Affairs, pounds 12.50). Henderson, a prominent academic economist and former head of economics and statistics at the OECD, is a CSR sceptic. But his scepticism derives not from the common reproach that CSR is trivial, a fig-leaf for runaway capitalism that does nothing to change it. His charge is that CSR may be too powerful, undermining the 'primary purpose of business' as the vehicle of economic progress and thereby damaging, rather than increasing, welfare.

Henderson has aired some of these concerns before but it's a measure of how far the debate has moved on that he now aims not so much at the possible consequences of adopting CSR on the individual firm - he accepts that in some cases CSR can contribute to long-term profitability - as on the economy as a whole.

'It is the possible economy-wide effects of CSR which are especially worrying,' he says. His fear is that if managers allow corporate political correctness to take primacy over red-blooded entrepreneurialism, market opportunities will be neglected and competitive pressures weakened, making people in general worse off. 'Such a trend towards a more regulated world, with social pressures serving to weaken competitive pressures, would cause the primary pur pose of business to be less well performed... The case against the general adoption of CSR by businesses... is not that it would necessarily be bad for enterprise profits, but that it would reduce welfare.'

There is a case to be made against CSR but this is not it. In fact, the overall welfare - and companies themselves - are far more at risk from the traditional 'economic' approach that he supports than from the 'global salvationism' or 'new millennium collectivism' that he identifies as the main danger.

Let's agree with Henderson that, particularly over the last half-century, capitalist economies have produced huge increases in material welfare for their citizens and that companies, as the main engine of capitalist evolution, have an essential role to play in bringing new products to market and opening up new ones.

We live, in fact, in an organisational economy. Unfortunately, like almost all free-market economists, Henderson fails to take the logical next step and make the essential distinction between organisations and markets. A vibrant economy, to increase welfare, needs both, each fulfilling its own function: companies innovating to create temporary advantage for themselves, and markets competing that advantage away and handing the benefit on to consumers.

For companies, the real trouble comes not when they adopt CSR but when they obey the injunctions of free-market economists, which cause them to imitate markets. These are: to put short-term efficiencies before the creation of new resources through innovation to pursue profits or shareholder value explicitly at the expense of customers, suppliers and employees and to neglect the fact that, unlike blind economic forces, they are intentional entities with long-term purpose and choices.

It may well be true, as Henderson suggests, that in some areas corporate behaviour is in danger of becoming overregulated - in corporate governance, for instance, there is little evidence that companies that separate chief executive and chairman's role or that have a preponderance of outside directors on the board do better than those that do neither. The codes may (possibly) deter wrongdoers, but they don't make it easier for companies to be entrepreneurial.

But what brought about such regulation? Not companies pursuing CSR, but firms such as Enron and WorldCom that single-mindedly maximised profits - the preferred economic approach - at the expense of other stakeholders. Less spectacularly, Shell and Marks & Spencer have fallen from grace not because they neglected their profit-making function but because they put it before the maintenance of their values. As always, when the financial target becomes the corporate purpose, real priorities suffer.

Ironically, CSR only exists as the obverse of the misguided strict economic approach. It is the understandable response of managers and companies that feel obliged by conventional wisdom to focus on the economic imperative but are uneasily aware that their actions are increasingly having harmful effects, such as obesity, climate change, declining fish stocks, growth of allergies, asthmas and chemically induced ill nesses. No wonder CSR is growing so fast: it's corporate guilty conscience.

As CK Prahalad points out in his stirring new book, The Fortune at the Bottom of the Pyramid , CSR is a sideshow compared to the need - and opportunity - to bring the world's 4 billion poor into the global economy.

That requires firms to recommit themselves to their proper vocation of innovation - rather than philanthropy - to meet social need. In the same way, it's not CSR that requires managers to be as frugal as possible in their use of resources and their emission of harmful wastes: it's their duty as trustees of the company's long-term future, a role of which Henderson approves.

'The search for profit is fully compatible with professionalism, humanity, and the wish to act honourably,' he writes. But current economic doctrine, by putting the need to make profit first, explicitly absolves managers from any sense of moral responsibility.

As the late Sumantra Ghoshal wrote in his last published piece, what we badly need are theories that acknowledge the patent reality that 'companies survive and prosper when they simultaneously pay attention to the interests of customers, employees, shareholders and perhaps even the communities in which they operate'.

In other words, those that bring responsibility in from the cold and place it inside the firm. At that point, we all can happily agree that CSR is an irrelevance: it no longer needs to exist.

The Observer, 22 August 2004


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