Economic Theory

Why businesses don’t need “corporate social responsibility” to be ethical

Would anybody ever be brave enough to oppose “corporate social responsibility” (CSR)? Certainly, it is a good marketing strapline. And CSR proponents have been very successful at putting up and knocking down straw men in which they claim their opponents believe.

For example, it is argued that those who do not believe that companies should have an explicit social mission instead support the pursuit of shareholder value at all costs. This is not true. Even Milton Friedman, in making the case that management should pursue the interests of shareholders, said that this should be subject to the law and ethical codes as determined by the culture of society. Indeed, as a Christian, I would argue very strongly for all business people to behave ethically and would have a wide view of what I regarded as ethical behaviour. But where does CSR fit into all this?

At its worst, CSR can be corporate window dressing designed to improve a company’s image, sales and profitability. Indeed, a government report in 2007 argued in favour of CSR on the grounds that it would improve “competitiveness” and create a “trading advantage in global markets”. An ethical approach to business, properly understood, might improve a company’s bottom line, but the point about an ethical code is that you follow it regardless of the cost.

Whatever qualifications we add relating to ethics or the law, we should not forget that shareholder primacy is based on the ancient principle that the stewards of property (the managers) should manage that property in the interests of the owners (the shareholders). And CSR can lead to managers’ goals being followed instead of those of shareholders.

And what are the alternatives to a model of shareholder primacy? Some argue that corporations have a “licence to operate” from society and so should pursue broader social goals. But if companies follow social goals set by government, this will not just entail providing nice things like better working conditions, it will involve cooperating with all the nasty things that governments try to do too. Close links between business and government can be implicated in the cronyism and corruption that pervade many South and Central American states – not to mention Fifa.

The other model that is often proposed is a more “long-termist” management-driven model. But we saw in the banking crisis what happened when Fred Goodwin and other senior managers were able to put their interests ahead of those of shareholders. Disaster followed. Of course, this experience provides an argument in favour of more shareholder discipline as well as against the state bailing out banks.

Finally, there is the classic Anglo-Saxon CSR model, whereby companies promote community engagement and related projects. Companies can do that if their shareholders wish. And some corporations will have mixed social and profit-making objectives. However, the main social function of business is to provide goods and services of value to consumers. Businesses should not feel morally obliged to pursue other goals which are the legitimate functions of civil society institutions, charities, and so on. And, of course, the great proponents of CSR such as Enron and RBS do not have a glorious history.

Britain needs ethical, shareholder-run businesses. But behaving ethically is not the same as having a CSR policy or explicitly promoting general social goals.

Philip Booth is professor of finance, public policy and ethics at St Mary’s University, Twickenham, and editorial and programme director at the Institute of Economic Affairs.

This article first appeared in City AM.

Academic and Research Director, IEA

Philip Booth is Senior Academic Fellow at the Institute of Economic Affairs. He is also Director of the Vinson Centre and Professor of Economics at the University of Buckingham and Professor of Finance, Public Policy and Ethics at St. Mary’s University, Twickenham. He also holds the position of (interim) Director of Catholic Mission at St. Mary’s having previously been Director of Research and Public Engagement and Dean of the Faculty of Education, Humanities and Social Sciences. From 2002-2016, Philip was Academic and Research Director (previously, Editorial and Programme Director) at the IEA. From 2002-2015 he was Professor of Insurance and Risk Management at Cass Business School. He is a Senior Research Fellow in the Centre for Federal Studies at the University of Kent and Adjunct Professor in the School of Law, University of Notre Dame, Australia. Previously, Philip Booth worked for the Bank of England as an adviser on financial stability issues and he was also Associate Dean of Cass Business School and held various other academic positions at City University. He has written widely, including a number of books, on investment, finance, social insurance and pensions as well as on the relationship between Catholic social teaching and economics. He is Deputy Editor of Economic Affairs. Philip is a Fellow of the Royal Statistical Society, a Fellow of the Institute of Actuaries and an honorary member of the Society of Actuaries of Poland. He has previously worked in the investment department of Axa Equity and Law and was been involved in a number of projects to help develop actuarial professions and actuarial, finance and investment professional teaching programmes in Central and Eastern Europe. Philip has a BA in Economics from the University of Durham and a PhD from City University.

4 thoughts on “Why businesses don’t need “corporate social responsibility” to be ethical”

  1. Posted 03/06/2015 at 15:32 | Permalink

    “Of course, this experience provides an argument in favour of more shareholder discipline as well as against the state bailing out banks.”

    Shareholders – by which I mean the ultimate beneficiaries, not the portfolio managers – effectively delegate the responsibility of scrutinising what companies do to government. This might mean CSR but usually it means financial regulation and, more recently, calls for limits to boardroom pay.

    There is a perception that these (ultimate) shareholders want share price performance, but many also want companies not to take excessive risks with cash (banks), pollute rivers or deal with oppressive regimes. Given the practicalities of engaging with thousands of companies that your average holder of pension funds, insurance policies and other collective investments might have, a single governmental body is probably the most efficient way of dealing with company behaviour.

    Regarding CSR in particular, I have to say its the part of the annual report I skip over. Yes, it mostly appears to be a box-ticking exercise.

  2. Posted 03/06/2015 at 19:58 | Permalink

    I know it ain’t very constructive to say so, but this is complete rubbish. Modern “CSR” is essentially about businesses ensuring they take steps to avoid, prevent or mitigate risks of harm to others & environment, either through its own operations or through its business practices… “CSR” as you’ve described it –
    the box-ticking exercise or “philanthropy” style community projects – is so outdated in the modern era with benchmarks like the UN Guiding Principles on Business and Human Rights and the OECD Guidelines for MNEs… Call it what you will (“CSR”, “responsible business conduct”, “integrity” “business ethics”), but I’m a practitioner of corporate responsibility for a bank, and it’s exactly this dismissive attitude that makes my job so difficult. Your argument is typically academic, and a useful thought exercise to make the bosses feel better about ignoring the environmental and social risks raised by their ESG practitioners… I mean, really? Shareholder primacy at its root meets social goals??? Uhhhhhh… what about the financial crisis??? or 40+ years of endless reports on exploitation of labour, human rights abuses, environmental damage, etc.??? And the point that CSR can be manipulated to pursue management goals… What???? Perhaps in very rare cases to justify anti-competitive behavior (e.g. cartels or collusion in the guise of industry collaboration to meet social goals), but still this tends to benefit shareholders even more so. And, in almost all corporate governance regimes, fiduciary duty totally overrides any CSR objectives, hence the rise of the B Corp. Also, aside from the bigger, consumer-facing brands, management normally just ignores CSR all together.

  3. Posted 05/06/2015 at 22:53 | Permalink

    @anonymous – I am not sure why you think this is “complete rubbish”. If you are a CSR officer, I think you should take the issue more seriously. I debated this on the evening of writing the article and three practitioners all used the straw man arguments I cite in paragraph 2, so that is certainly not rubbish. Paragraph 3 merely quotes a government report as recently as 2007 and criticises that approach. Surely, you can’t disagree with 4, 5 and 6 which are not about CSR but about shareholder primacy. 7 may be debatable I guess. I suppose you could argue that the article is irrelevant but then given the arguments I encountered in the debate they seem to me not to be. And, what about the financial crash? That is certainly an argument against unethical behaviour and managers running wild unconstrained by shareholders. If you happen to think that modern CSR policies are about natural law ethics, fair enough. That is something worth saying because natural law ethics is what I believe in and I would be pleased if CSR policies were oriented towards them.

  4. Posted 06/06/2015 at 10:35 | Permalink

    I commend you on your brave post considering the size and strength of the modern day CSR/Sustainability practitioner field. I’ve been in it for almost ten years now both as a practitioner and academic. Some years ago I was a true believer in Strategic CSR/Sustainability Strategies/Shared Value/Win-Win etc that business can do wonders for society and the environment and its bottom line.

    Your examples of Enron and RBS demonstrate the importance of ethics and not strategic risk-management focused CSR, which is where its heading today. All the talk about human rights, climate change, social license to operate etc is being translated by companies as Risk Management and dealt with in just that way i.e. via quantifying everything with KPIs, due diligence, controls, processes and a plethora of well meaning policies. The big accounting/auditing firms are now in on the act too.

    However, does any of this make a difference to the climate, communities bearing the brunt of huge so called development projects and working conditions of workers, the amount of tax corporations pay, the amount of corporate influence on governments and governmental decisions/regulation? No, not really. From a certain perspective CSR and all its other names could be summarized as just “rearranging the deckchairs on the Titanic.” Its now certainly a much more professional rearranging of the deckchairs though nonetheless the Titanic still has the same fate.

    The reason being is down to corporate power and a lack of consideration of ethics. The fact that CSR chooses to ignore ethics and obsess with the “business case” only makes this whole scenario worse. In fact should we not ask ourselves whether CSR is and ought to be ethical (from the perspective of those affected by businesses)?

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