Thursday, March 19, 2015

The Problem with Corporate Social Responsibility

Milton Friedman famously argued:
There is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.
This position is frequently derided.  However, I believe that if we deconstruct this a bit, we see that Friedman's position is the only truly cosmopolitan, liberal position.

The confusion comes from the fact that social responsibility is often confused with conspicuous social responsibility.  Our public postures and signals of identity and loyalty tend to capture an undue amount of our attention, because these are the activities that define us within our social communities and among antagonistic factions.  So, while the viewers of MSNBC and Fox News agree on 90% of how we live - things that may make modern Americans different than ancient hunter-gatherers or Middle Eastern nomads, or African peasants, or Japanese workers - the things we talk about are the 10% of things we disagree about.  And, we are impassioned about those things.  We get angry about the people that disagree with us.  For the most part, we don't even notice the 90%.  It takes real effort to notice it.

That 90% is what Friedman is talking about when he says "so long as it stays within the rules of the game".  That is all that we can expect of them.  In fact, they could do no more and no less.  The natural equilibrium of the relationships a firm will establish with its owners, its employees, and its customers will have to incorporate that 90%, or problems will tend to erupt.  The firm will have legal or public relations problems.

This 90% isn't a universal standard for local firms, because Americans do differ by the other 10%.  So, the equilibrium level of social responsibility is different for a food co-op in Berkeley than it is for a gun shop in Bismark.  But, it generally holds for national firms.

There are many examples of firms doing more than the equilibrium amount of social responsibility.  The owners of Chick-fil-A and Hobby Lobby surely thought that they were being especially socially responsible.  But, that meant that they chose issues that are in the 10%.  And, what did it get them?  Protests and boycotts.

There are many endowments and funds that now engage in conspicuous social responsibility.  Avoiding investments in fossil fuels or vices, for instance.  These are also issues that tend to fit in the 10%.  They play well for identity politics, but they frequently are based on decisions that even their backers wouldn't want to see applied universally.

The advocates of corporate social responsibility really are asking for corporate conspicuous social responsibility.  Corporations are already engaged in social responsibility - just as you and I are.  We all accept many standards of behavior and compromise in order to be a part of modern, cosmopolitan, liberal societies.  We are, and most firms are, the true cosmopolitans - the true liberals.

Advocates for conspicuous social responsibility don't actually want corporations to follow their own consciences in being conspicuously socially responsible.  That would get them boycotted.  What these advocates want is for corporations to act out the advocates' preferred conspicuous social responsibility.  The advocates are not liberal at all.  Quite the contrary.  The advocates are sectarian.  They want control over other people.  They want to deny firms the right to their own idiosyncratic moral notions, while pressuring firms to act on the advocates' idiosyncratic moral notions.  Like all sectarians, the advocates don't accept the distinction between their own moral notions and universally accepted moral notions.  They make the mistake of assuming that imposing their moral framework on everyone else is a moral advancement for everyone.  They vastly underestimate the importance of the 90% of agreed upon norms, and focus unhealthily on that other 10%.  Yet, obviously, that 10% applied universally and coercively is almost never appropriate. (Though we hold firmly in our hearts those rare times when it was.)

A second order effect of sectarianism is that sectarians develop an unrealistic view of the validity and practicality of their impositions, and thus develop negative caricatured opinions of those who are imposed upon.  So, for instance, firms which provide some opportunities for low skilled workers, but do not single-handedly and completely counteract the imperfect set of opportunities of those workers can be an eternal source of self-satisfying indignation.  Willful ignorance, together with angry demands, is its own reward.

13 comments:

  1. Personally, I think that companies have a fiduciary responsibility to act in the interests of shareholders, but I think that where Friedman gets it wrong is in assuming that their *only* interest is profits. To the extent that shareholders *are* interested in "social responsibility," then it is not in the place of company executives to ignore those wishes.

    Where Friedman gets it right, however, is that companies don't have any "social responsibility" outside of their desire to act in the interests of shareholders.

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    1. I think it's sort of a semantical error that Friedman made. The way he describes it understates the level to which corporations overwhelmingly act under community norms in ways that don't have anything to do with profits. There is an unavoidable ongoing negotiation between employees, employers, and consumers regarding what is culturally important. The irony is that a public corporation, whose ownership is a reflection of the country itself, will much more reliably match those expectations than a closely held firm that isn't so tied to the Friedmanite notion of profit-maximization. It is no accident that the firms that have caused controversy have been closely held firms like Chick-Fil-A and Hobby Lobby.

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    2. I agree with Mark Cancellieri, that the duty of executive managers is to act in the best interests of shareholders. The way I translate that to CSR, though, is by recognizing that most shareholders have diverging interests of what charities (for example) to support. So the best thing to do is maximize shareholder wealth, and return the money in the form of dividends and buybacks, so that shareholders can follow their own consciences.

      I'm engaged in some research on this angle from an investment point of view, and I can tell you that the firms that follow a "socially-responsible" investment pattern underperform the market significantly. I know it's not the same thing, but it's similar.

      Jeff

      P.S. In a business school, pretty much everyone (except for the economists and finance profs) buys into the "stakeholder" view of the corporation. It ain't pretty.

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    3. Yes. The "stakeholder" view of the corporation always somehow means that shareholders make compromises for the other "stakeholders". Isn't it funny how that never applies to the other "stakeholders". Nobody in the business school adopts a "stakeholder" frame of view where the first order effect is that creditors and workers and community leaders chip in to pay the bills when a downturn hits.

      There is a deep human distaste for earning income by putting capital at risk. I don't know if we will ever overcome it. The fact that Milton Friedman, for a short time, created a window where we could have public conversations about it is a testament to the strength of his charisma. Of course, he was always taking in hostility from people.

      It's ironic that one of the great achievements of the modern, capitalist system is that the vast majority of incomes are relatively stable from week to week and month to month. A few generations ago, the farmer saw his near-term fortunes rise and fall with each rain. But, today because so many professionals have traded their risk away without explicitly realizing it, their only experience with risk is with idiosyncratic shocks, like unemployment. They have no experience with the sort of ongoing, never-ceasing risk that is basically the source of equity holders' income. And they have little idea that they have accepted a discount to their income for avoiding it.

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    4. This: "They have no experience with the sort of ongoing, never-ceasing risk that is basically the source of equity holders' income. And they have little idea that they have accepted a discount to their income for avoiding it." is a very prescient observation.

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  2. TravisV here.

    Funny that this was just posted: "He thinks it is time to expand the “narrow definitions of capitalism” that threaten the underpinnings of our society and develop a new model for corporate profit that includes justness and responsibility."

    http://www.zerohedge.com/news/2015-03-19/paul-tudor-jones-warns-disastrous-market-mania-will-end-revolution-taxes-or-war

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    1. People like him will win the rhetorical battle. It's amazing that we've managed to maintain relatively functional markets for as long as we have. It does seem like the witch hunt mentality among the intelligentsia has gotten worse in the past decade. I'm hoping this is cyclical and the 90's was like the 50s & 60s. I'm hoping we are now in the late 70s. It was crazy time then too. Watch some of those old videos of Milton Friedman taking questions or talking to Phil Donahue. People were insane. When Friedman explains to Donahue that interstate trucking regulations were just lining the pockets of rentiers, Donahue looks like he's having visions of semi-trucks running headlong into one another at state borders. He just can't imagine this sorcery Friedman is preaching. Of course, it was Friedman's policy preference that removed the legislative rents, and the do-gooders who supported them. Same as it ever was. Like how FDR forced farmers to burn their crops and created cartels to fix prices, and was the working-man's hero when the pendulum swung to crazy-land the previous time. People are nuts. I just hope the pendulum is still tethered.

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    2. TravisV here.

      Thanks, I laughed out loud at this!

      "When Friedman explains to Donahue that interstate trucking regulations were just lining the pockets of rentiers, Donahue looks like he's having visions of semi-trucks running headlong into one another at state borders. He just can't imagine this sorcery Friedman is preaching."

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  3. Interesting, Schumpeter had an article about this today: http://www.economist.com/news/business/21646742-old-debate-about-what-companies-are-has-been-revived-business-business

    On one issue where businesses are forced to pay for a social good (health insurance), it has led to one of the most expensive, inefficient systems on the planet.

    I'm fine letting business make the money. If we want to enact a welfare program, let's tax ourselves efficiently and do it. Not only is it inefficient to have businesses supporting social causes, it's downright creepy as well.

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    1. It's too easy to pretend that people who are concerned about things like efficiency are heartless. Politics is hopeless. I just say thanks each day that we have had as functional a marketplace as we have for as long as we have. It's been a 300 year miracle. I don't see how humankind ever had the wherewithal to allow it.

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  4. Tom Woods recent podcast guest was great on CSR: http://tomwoods.com/podcast/ep-360-corporate-social-responsibility-or-how-business-ethics-is-taught-these-days/

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