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Making a Case for Corporate Social Responsibility

November 30, 2010

Rousseau's The Social Contract

Corporate Social Responsibility (CSR) is a hot topic these days, and it’s attracting much attention – some positive, some negative. CSR is an interesting concept. The very term implies that corporations are party to the same social contract as the individuals who compose, run, and own them. It implies that corporations, like individuals, should check their unmitigated pursuit of self-interest when their actions – even if not illegal – inflict serious damage on their community or society at large. Depending upon one’s political, economic, and philosophical views this suggestion may sound like common sense or, like naive rubbish.

Yet, most would agree that law and regulations are derivative of the same understanding that underlies the social contract: sacrificing a small amount of individual freedom (or profit) in the short-term can generate significantly larger gains in net social welfare, which an individual (or a corporation) will share in. As members of a society, we do not resist stealing from our neighbors simply because doing so violates the law (i.e. fear of consequences). We sanction and abide that law for a better reason:  if everybody ran about stealing, our short-term private gain of getting something for nothing would be massively outweighed by the long-term losses suffered in an unstable society where accumulation of wealth and security would be impossible.

Similar logic explains why society sanctions other laws that restrict personal freedoms, and why it sanctions regulations that prohibit companies from endangering their employees, sickening their consumers, or dumping toxins in rivers. Those regulations might constrain profits and reduce shareholders’ dividends in the short-term, but without them those same shareholders would face unsafe working conditions, contaminated drinking water, and a good chance at a mean case of salmonella in the future. Hence regulation and legislation are – ideally – the product of rational cost-benefit analysis: private gain weighed against the public good.

But just as law cannot anticipate and guide every circumstance in which the interests of the individual will conflict with those of society, it is impossible for government regulation to anticipate all scenarios in which private gain will harm the public good. And it’s doubtful that corporations or legislators have any interest in trying to make it do so. Hence, CSR seems to fill an important gap – acting as a sort of larger moral code, like that which individuals consult when law does not apply, or cannot be enforced (i.e. do you steal if you know you won’t get caught?). CSR asks corporations to weigh private value creation against the related public costs (sometimes called “negative externalities”), and where the latter grossly outweighs the former, to modify their actions accordingly. CSR also implies that corporations should identify and act on opportunities to increase social welfare when doing so does not impose sever burdens upon them (just as individuals are expected to hold the door, wait in line, help a stranger in need, etc).

Last August, The Wall Street Journal published a thought-provoking article by Dr. Aneel Karnani, in which Dr. Karnani questions the relevance, effectiveness, and wisdom of campaigning for robust corporate social responsibility initiatives. The article, “The Case Against Corporate Social Responsibility”, has solicited numerous rebukes from bloggers in the nonprofit and social enterprise sphere – including Scott Henderson on Profit and Purpose, Tim Mohin on Business Ethics, and Natalie Holder-Winfield on the Huffington Post. The brewhaha was such that the socially progressive PR firm Fenton Communications hosted a webinar dedicated to responding to the article!

Before adding to the choir of opposition, I must first endorse the intent and primary message of Dr. Karnani’s piece: CSR initiatives cannot and should not be expected to replace true systemic regulation, as administered by government. On this Dr. Karnani and I agree. Just as human society needs legislation to codify the “natural laws” or moral codes that guide us, the private sector needs consistent and binding regulation that decreases uncertainly, eliminates free-riding, and reduces the competitive cost of “doing the right thing.” It is crucial that activists and regulators be vigilant, and scrutinize CSR programs to ensure they represent substance, and not smokescreens . But, it does not follow that campaigning for CSR are at best irrelevant or ineffective, as Karnani suggests.

As the following post will discuss, CSR does indeed have a role to play in ushering in a new business as usual among private sector firms, and outside pressure will be necessary to support and sustain this change – even when such change is in firms’ financial self-interest. Furthermore, as Scott Henderson has observed, new tools of media and information are changing the relationship between firms and their markets, and are making CSR an integral part of short and long-term value creation. So check back soon, as I try to make a rational case for corporate social responsibility.

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