July 3, 2008
Creative capitalism 2
On the Creative Capitalism website, Brad DeLong attacks Milton Friedman’s position on the social responsibility of business as “weak toast”–an expression I was unfamiliar with, but a good one which I intend to start using. Friedman famously argued that it was better for shareholders to decide what good causes to support than have managers of the companies they own decide for them. Brad asks, why?
This is weak toast. This is thoroughly unconvincing. What reason is there not to turn this around? What reason is there not to say, instead:
* If customers don’t want to pay higher prices and so buy from corporations that pursue social responsibility, they are (as long as product markets are competitive) free to do so at their option.
* If workers don’t want to receive lower wages by working for corporations that pursue social responsibility, they are (as long as labor markets are competitive) free to do so at their option.
* If investors don’t want to receive lower profits by investing in corporations that pursue social responsibility, they are (as long as capital markets are competitive) free to do so at their option.If workers, customers, and investors expect that the executives of the corporations they deal with will pursue social-responsibility objectives, where’s the foul? The executives aren’t doing anything wrong at any level — they are in fact performing a valuable function by as workers’, customers’, and investors’ trusted and honest agents by pursuing social-responsibility goals. They are helping them pool their resources to achieve what they want to see happen. This pooling-of-resources agency function is an important one–it is, after all, why we have large organizations in the first place. So why limit it to narrowly profit-maximizing goals?
I’ve posted a quick reply.
I don’t know what Friedman would have said to that, but my reply is “no foul”—in the sense, anyway, that nobody is being cheated. There would also be no foul, in that same sense, if a company said it intended to dedicate itself exclusively to good works, and had no intention of making any money at all—again, so long as everybody, including investors, was content with this. And for that matter there would also be no foul if a company said it would dedicate itself to making its workers miserable, asking its customers to pay double what they needed to, and bilking investors of every last cent—no foul, as before, so long as all interested parties were in the picture and thought it was fine. Caveat emptor, by all means.
The question is not “where’s the foul?” but “where’s the harm?” What counts is which of this potentially limitless set of no-foul organizing principles is likely to produce the best results. Friedman believed that the profit motive was hugely underrated as an organizing principle tending to produce socially beneficial results. In my view, he was surely right about that. Ordinary profit-seeking capitalism gets a terrible press. Even capitalists who have done as much as Bill Gates to advance social welfare aren’t willing to defend it. And this is where corporate social responsibility comes in. It is a response, in substantial part, to a widely held misconception about the profit motive. I think that Friedman mainly wanted to correct the misconception, and draw attention to the unintended consequences of adopting organizing principles different from, and supposedly more enlightened than, the profit motive.
If the views of workers, customers and investors are influenced by a misunderstanding about the social value of profit-seeking enterprise, it is not enough to say that nobody is being cheated by CSR. Would the wide adoption of a broader corporate goal than seeking profits really make us better off? As I argue in my previous post, if Gates had been a CSR enthusiast right from the start, I doubt that there would ever have been a Microsoft or a Gates Foundation.
Another issue worth mentioning is that it is quite difficult to serve two “masters” (commercial and charitable advancement). How is a company to lay-off workers, especially in a small community in this case? This will slow the introduction of new technologies and the ability of workers to move to more productive activities.
Secondly, bad managers will be able to blame a company’s underperformance by pointing out to the “importance” of their charitable deeds. This would be used to prevent their ousting.
Thirdly, from a political perspective, those same managers would use their charitable works to have the government defend them from takeovers or from bankruptcy. This would, in effect, cause society to subsidize underperforming companies that take on charitable deeds, which would probably be not as effective as having specialized entities in the public and private sectors do said charitable deeds.
Posted by: Ignacio | July 3rd, 2008 at 6:55 pm | Report this commentClive asks “Would the wide adoption of a broader corporate goal than seeking profits really make us better off?”
No, I don’t think it would. But try reframing the question to consider HOW the profits are being made. Ask whether a stronger corporate focus on social trends and societal needs could enhance existing sources of profitable business, and be the basis for new sources. That’s where the clever CSR money’s headed.
As Ian Davis, head of McKinsey & Co stated in 2005:
“The problem with “the business of business” mindset is rather that it can blind management to two important realities. The first is that social issues are not so much tangential to the business of business as fundamental to it. From a defensive point of view, companies that ignore public sentiment make themselves vulnerable to attack. But social pressures can also operate as early indicators of factors core to corporate profitability: for example, the regulations and public-policy environment in which companies must operate; the appetite of consumers for certain goods above others; and the motivation (and willingness to be hired in the first place) of employees.
Companies that treat social issues as either irritating distractions or simply unjustified vehicles for attack on business are turning a blind eye to impending forces that have the potential fundamentally to alter their strategic future. Although the effect of social pressure on these forces may not be immediate, this is not a reason for companies to delay preparing for or tackling them. Even from a strict shareholder-value perspective, most stockmarket value—typically over 80% in American and western European public markets—depends on expectations of companies’ cashflow beyond the next three years.”
Posted by: DKM | July 3rd, 2008 at 11:05 pm | Report this comment