Straight Talk about Corporate Social Responsibility

Critical thinking about "corporate social responsibility" (CSR) is needed, because there are few topics where discussions feature greater ratios of heat to light. With this in mind, two of my Harvard colleagues -- law professor Bruce Hay and business school professor Richard Vietor -- and I co-edited a book, Environmental Protection and the Social Responsibility of Firms: Perspectives from Law, Economics, and Business.

At issue is the appropriate role of business with regard to environmental protection. Everyone agrees that firms should obey the law. But beyond the law -- beyond compliance with regulations -- do firms have additional responsibilities to commit resources to environmental protection? How should we think about the notion of firms sacrificing profits in the social interest?

Much of what has been written on this question has been both confused and confusing. Advocates, as well as academics, have entangled what ought to be four distinct questions about corporate social responsibility: may they, can they, should they, and do they.

First, may firms sacrifice profits in the social interest -- given their fiduciary responsibilities to shareholders? Does management have a fiduciary duty to maximize corporate profits in the interest of shareholders, or can it sacrifice profits by voluntarily exceeding the requirements of environmental law? Einer Elhauge, a professor at Harvard Law School, challenges the conventional wisdom that managers have a simple legal duty to maximize corporate profits. He argues that managers have freedom to diverge from the goal of profit maximization, partly because their legal duties to shareholders are governed by the "business judgment rule," which gives them broad discretion to use corporate resources as they see fit.

If a company's managers decide, for example, to use "green" inputs, devise cleaner production technologies, or dispose of their waste more safely, courts will not stop them from doing so, no matter how disgruntled shareholders may be at such acts of public charity. The reason is that for all a judge knows, such measures -- particularly when they are well publicized -- will add to the firm's bottom line in the long run by increasing public goodwill. But this line of argument contradicts the very premise, since it is based upon the notion that the actions are not sacrificing profits, but contributing to them.

This leads directly to the second question. Can firms sacrifice profits in the social interest on a sustainable basis, or will the forces of a competitive market render such efforts transient at best? Paul Portney, Dean of the Eller College of Management at the University of Arizona, notes that for firms that enjoy monopoly positions or produce products for well-defined niche markets, such extra costs can well be passed on to customers. But for the majority of firms in competitive industries -- particularly firms that produce commodities -- it is difficult or impossible to pass on such voluntarily incurred costs to customers. Such firms have to absorb those extra costs in the form of reduced profits, reduced shareholder dividends, and/or reduced compensation, suggesting that, in the face of competition, such behavior is not sustainable.

This leads to the third question of CSR: even if firms may carry out such profit-sacrificing activities, and can do so, should they -- from society's perspective? Is this likely to lead to an efficient use of social resources? To be more specific, under what conditions are firms' CSR activities likely to be welfare-enhancing? Portney finds that this is most likely to be the case if firms pursuing CSR strategies are doing so because it is good business -- that is, profitable. Once again, a positive response violates the premise of the question. But for more costly CSR investments, concern exists about the opportunity costs that will be involved for firms. Further, in the case of companies that behave strategically with CSR to anticipate and shape future regulations, welfare may be reduced if the result is less stringent standards (that would have been justified).

Finally, do firms behave this way? Do some firms reduce their earnings by voluntarily engaging in environmental stewardship? Forest Reinhardt of the Harvard Business School addresses this question by surveying the performance of a broad cross-section of firms, and finds that only rarely does it pay to be green. That said, situations do exist in which it does pay. Where one can increase customers' willingness to pay, reduce one's costs, manage future risk, or anticipate and defer costly governmental regulation, then it may pay to be green. Overall, Reinhardt acknowledges the existence of these opportunities for some firms - examples such as Patagonia and DuPont stand out -- but the empirical evidence does not support broad claims of pervasive opportunities.

So, where does this leave us? May firms engage in CSR, beyond the law? An affirmative though conditional answer seems appropriate. Can firms do so on a sustainable basis? Outside of monopolies and limited niche markets, the answer is probably negative. Should they carry out such beyond-compliance efforts, even when doing so is not profitable? Here -- if the alternative is sound and effective government policy -- the answer may not be encouraging. And the last question -- do firms generally carry out such activities -- seems to lead to a negative assessment, at least if we restrict our attention to real cases of "sacrificing profits in the social interest."

But definitive answers to these questions await the results of rigorous, empirical research. In the meantime, we ought to prevent muddled thinking by keeping separate these four questions of corporation social responsibility.

Comments

[trimom]

Even under our current regulatory regime, companies over comply with environmental regulations in order to reduce risk and as a part of implementation of lean or waste reduction programs.

[JnrNorman]

You see any corporate execs saying "LEGALIZE HEMP"?
8X more bio-diesel that Canola or Soy
while giving the best turkey&chicken feed at
the same time it yeilds 6x more fiber than cotton.



Bloomberg lies to NYC FireFighters

http://www.brasschecktv.com/page/616.html

[ntmessage]

Part I
Totally agree. However, on the financial industry we are closing the barn door after everything is gone. Right now, we have a real opportunity to act proactively and before the worst happens. Remember the egregious acts by executives at United Health Care, or Cardinal, or HCA?

We must fix Health Care and we must fix it within reasonable costs. Everyone must be covered and all in; all costs must not exceed 10% of GDP. Other countries without innovation and a more elderly population than us have costs around 7% and have better health care than we have. This still allows 2-3% of GDP (a staggering figure) for innovation.

How can we continue to have an industry go around with a straight face and lie to us how unattainable something is when their solutions thus far are marginally incremental, like 1.5% less growth? When the economy has been deflating for over two years they still feel entitled to grow many multiples faster (and our costs mind you) than inflation.

Everyone knew that when GM went in front of congress and said there would be 15 million cars sold by the end of the year and the Volt was ready for production the carmakers were smoking something and now the facts have proved themselves.

These Health Care lobbies and executives act nicer in public. In practice are more greedy than the energy, financial and auto companies put together. Look at how much they take out of the economy.

[ntmessage]

Part II
We still die without energy as might happen without health care so there is no moral superiority. The health care industry proposes fantasy solutions when looked at objectively by anyone that can count, think nothing to keep gouging the country

Anyone figure out why admission to any health care facility by anyone with insurance is subject to a swarm of sales people dressed as health care workers pushing test and procedures. Those without insurance are pushed to sign papers that will eventually bankrupt many of them, by those sales people, even if the tests and procedures are not warranted

How is this any different from countrywide brokers (also sales people) that sold whatever they could regardless of the consequences to anyone with a pulse?

Do we see another disaster on our hands? Clearly, without limits, transparency and regulations on the providers we are destined to replay the financial crisis, except in Health Care. Next!

We did not hear transparency, regulation or executive pay limits on the industry as we heard with the banks. Both function in the same manner and they both have a history of greed and egregious acts to the country, there is no difference when profit continues to be the sole motivation by these corporations. Health Care industry we will find out has been acting even worse than many of those in the financial and auto businesses.

Let us get a clue and know when we are making deals with the devil.

[strac73]

you have to take into consideration that we live in a global market. forcing or expecting American companies, employing Americans, to add cost to a product, can make them uncompetitive in todays market.

[pm247]

In this article, academic reasoning corroborates the obvious common sense conclusion: environmental protection cannot be left up to voluntary corporate action.

Corporate social responsibility is an oxymoron. A corporation may legally be a "person," but it is a person without conscience: a sociopath. Thus they have created a worldwide sociopathic hegemony, enslaving the human race and threatening to destroy the planet.

[OtayPanky]

Exactly so. Capitalism is at the brink of being revealed as the epic fail that it is.

If we're going to muddle our way to a sustainable future, we're going to have to re-think and re-tool the entire macro-economic structure. Otherwise, we're just farked.

[kendraro]

An excellent argument for strict environmental regulations.