Thursday, October 06, 2005

Corporate Social (Ir)responsibility?

For those unfamiliar with the modern Corporate Social Responsibility (CSR) movement, this initial piece is designed to introduce the movement. Those of us that believe society is best when people and markets are free, ignore this movement to the peril of the freedom we hold dear. This growing movement threatens the very foundations of a free society.

Consider that currently 1 out of 7 dollars invested in the U.S. is somehow linked to a “CSR-type” fund. Furthermore a practical “Who’s Who” list of companies has begun to kowtow to the CSR movement including Citigroup, JP Morgan as well as GE. As of October 6th, yet another corporate powerhouse has been scoped by these activists: Wells Fargo. According to www.csrwatch.com, “The Global Finance Campaign today announced that organizers would begin activating its grassroots network to prepare for a sustained campaign to reform Wells Fargo. Over one hundred environmental and social justice activists launched the effort by marching backwards at noon through San Francisco’s financial district to the bank’s landmark Montgomery Street branch and unfurling a giant third story-banner reading “Wells Fargo: Lootin’ and Pollutin’ since 1852” to draw attention to the out-dated practices of “America’s most backwards bank.”

So what is CSR and what do its adherents want? CSR activists make two basic claims: corporations are responsible to a broader audience than their shareholders (they must do more) and CSR leads to enhanced profits. These claims should supposedly compel corporate management to embrace the complexity and bureaucracy that is CSR. This piece will introduce the first claim. Later pieces will expand on these fallacies as well as debunk the growing consensus the modern managers must embrace the CSR concept in order to more effectively grow their business (enhance profits).

Looking at the first issue, what does CSR mean that corporations are responsible to a broader audience than its shareholders? In short, even though a corporation is the wholly-owned property of its shareholders, it must serve “the greater good of society” not just the interests of its owners. But, how do you define “society’s” greater good? No worries. CSR activists have a definition ready – their definition. Societies greater good is wonderful sounding rhetoric such as a clean environment or fair labor standards; and who could be against such wonderful sounding ideals? Several problems with this perspective are readily apparent to anyone willing to put just a little bit of thought into this.

First, managing through CSR principles inevitably leads companies to self-impose government-type regulations on its activities. Regulations do not come without a cost, however. Typically, the cost is diminished economic growth that may very well limit the ability of billions of people across the developing world to lift themselves out of poverty. For instance, Citigroup recently bowed to pressure from the Rain Forest Action Network (RAN). The company will now review all lending policies in Latin America to ensure that Citigroup funds no project that does not fit RAN’s definition of an environmentally sound project. Denying needed credit to Latin America is not a sound economic development strategy for the region. It may not be good environmental stewardship either.

There is also little evidence that RAN’s environmental policies are actually correct, leading us to the second problem. Environmental policy, like any regulatory policy, is a public issue. It is the domain of the political process to implement the policy that best reflects the views and concerns of a country’s citizens. It is also the medium where the scientific evidence can best be debated and a consensus reached. Private businesses may know how to make and sell their product, but they are not capable of performing this function. Nor do they have the right to make such decisions – especially with other people’s money (i.e. the shareholders). By hoisting such decisions on companies, CSR activists are doing an “end-run” around the political process that can best address these concerns.

As Milton Friedman famously noted, businesspeople have neither the knowledge nor the right to answer such important societal issues. CSR activists attempt to bypass this critique by claiming they have already answered these questions. Their answers should strike fear in the hearts of people that cherish a free society, the sanctity of private property, or the importance of institutions playing their proper role in society.

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