(Continued. Part 1 of this post can be read here, and part 2 here)

Ethics and ideology

In the last article in “The Good Company”, the Economist remarks that “Business ethics, in short, is not an empty box. But what exactly is in the box?” (TGC p.12). Judging by the contortions that free market economists go through to bury, hide and distort the answer to that question, you’d think that only Pandora knows the answer.

Not so. The problem is simply that ethics, understood fully, throws open to question the nature and prioritization of an executive’s responsibilities. Ethics – or moral philosophy – is an inquiry into how we should behave. The philosophical questioning that ethical consideration embodies respects no ideological boundaries. There are no sacred cows. From an ethical viewpoint, social or environmental considerations may well trump profit maximization in a given decision.

The Economist laments that CSR appears to have won the battle of ideas, but what is really at stake is the fight for philosophy over ideology.

Every subject needs its philosophy. For every manual telling us how things should be done, we need an anti-manual asking why things must be done that way and seeking answers through clear thinking.

Is CSR the anti-manual of free market capitalism? Of shareholder primacy?

Not exactly, no. CSR is no replacement for philosophical questioning and clear thinking.

Then is CSR a straw man after all? Should we put the boot in and get rid of CSR for good?

Again, no. The problem with philosophy is in getting it to make the leap from the lecture hall into the structures and decision-making processes of an ideologically resistant, short-term-obsessed, complex, global organization.

On one side you have philosophy: conceptions of business – its assumptions, definition and purpose, ethics to help you decide how the business should behave, political philosophy for resolving conflicts between values.

On the other side you have the reality of the corporation as experienced by employees, consumers, investors, suppliers, and neighboring communities, among others.

If CSR has a role, it must be in bridging this gap between what should be, and what is.

Inside and outside the firm, within an inhospitable landscape infused with the prevailing free market ideology, CSR is the banner under which we create the public space and fertile conditions for the fundamental questioning of business activity. It is also the banner under which we take the insights gained and operationalize them through corporate organization and decision-making, and make the opaque, complex and distant company accountable for its ethical performance.

CSR’s critics (and many of its supposed proponents) may have separated ethics from their own conceptions of CSR, but you should never kick a straw man when he’s down.
 

(Continued. Read the first part of this post here)

What of the next line of attack: that activities that benefit society at the expense of shareholders amount to “borrowed virtue”, which company executives have no right to undertake in the name of CSR or anything else?

Buried virtue

Here the critics’ focus turns to the kind of corporate philanthropy that has insufficient reputational payback to be regarded as a good business investment. The Economist asks:

“What is wrong with a company giving part of its profits to help victims of the disaster in Asia, for example – a good cause if ever there was one? Not so fast. Remember that corporate philanthropy is charity with other people’s money – which is not philanthropy at all.” (TGC p.4)

I’m not advocating, any more than CSR’s free market critics, that a business must have an expressly social purpose, or do “good works” in addition to its profit purpose in order to justify its existence, although there’s a wealth of management literature evidencing the value of pursuing a “high purpose”. The prudent pursuit of enterprise can benefit society without such goals.

And then, too often, corporate good works are nothing more than what I call “goodwash” – activities designed purely to enhance reputational value at the expense of addressing the real ethical elephants-in-the-room.  It’s difficult to feel anything but suspicion towards a CEO who professes membership of the “giving back” school of CSR. Surely it’s better not to do harm in the first place than to give a little spare change back afterwards. It’s all too reminiscent of the man who regularly comes back home drunk and angry and beats up his wife, then tries to make it all better the next day by buying her flowers.

But the Economist is going further here by mixing together legal and ethical duties (which, I might add, they are at pains to keep separate elsewhere in the survey). True, the board owes a fiduciary duty to shareholders, but it doesn’t follow that there could never be a case where it may be ethical to sacrifice shareholder value to prevent some harm, or even to further a specific good.

Hidden within this category of what the Economist terms “borrowed virtue” is the subject of ethics itself. And here lies the real problem with the critics’ argument against the need for CSR: their handling of ethics.

Alexander Dahlsrud, a PhD Fellow at the Norwegian University of Science and Technology in Trondheim, analyzed 37 definitions of CSR to find the most common dimensions of CSR definitions in use. Three of the dimensions commonly appearing in definitions relate to impacts: definitions frequently make reference to one or more of environmental, social or economic impacts - essentially the range of impacts a business has on society.

In addition to identifying the range of impacts, the definitions that Dahlsrud analyzed had something to say about how those impacts should be addressed. Most of his most commonly cited CSR definitions refer to “responsibility” or some other variant of “ethics”.

CSR’s critics, however, go to great lengths to keep CSR and ethics separate, creating a straw man version of CSR.

Ethics trumps profit

Even Milton Friedman, who argued that the social responsibility of business is to increase its profits, thought that those running a business had to conform not just to laws but to “ethical custom”.

In various instances in The Good Company, the Economist, too, appears to support the idea that ethics might trump the law:

“Now and then, depending on the circumstances, it is wrong to obey the law. And merely following the law does not exhaust a firm’s ethical responsibilities, any more than it does an individual’s. Some things that are legal are unethical; and many things required by ethics are not required by law.” (TGC p.12)

If ethics can trump the law, it can surely trump profit maximization. Sure enough:

“Sometimes the aims of the business and rational self-interest will clash with ethics, and when they do, those aims and interests must give way.” (TGC p.12)

These simple statements conjure up a vision of a world in which difficult choices have to be made. We may find ourselves having to make trade-offs between choices that have equally strong ethical claims, and yet are mutually incompatible. It describes a complex, nuanced, inter-dependent world that we can readily recognize in the real world around us.

Perhaps this is why free market advocates devote so much effort to distancing themselves from these simple assertions.

Here are some of the favoured arguments by which they do so:

Ethics trumps profit, except when it doesn’t

Even after having admitted the possibility of ethical choice, free marketers often loop back on themselves and argue that unethical conduct will be discouraged by the market in any event.

“This pressure of outsiders’ perceptions is an indispensable force. Without it, companies in a private-enterprise system would be nasty, brutish and very short-lived” (TGC p.6).

So, they argue, ethics needs to be understood in relation to the “proper” goal of the firm: profit maximization.

But ethics that is consistent with profit maximization sounds very much like simple “good management”, which the Economist has already argued persuasively needs no grander title than that.

The boiling frog

Free market economists acknowledge that business operations can have side-effects - “externalities” - that are not reflected in market prices. The classic example is a polluting factory.

Clearly, laws and regulations are needed to correct cases where incorrect prices are causing big economic errors. But what if the laws are not up to the task? While critics, including the Economist, acknowledge that just because a practice is legal, it may not be ethical, they often completely duck the possibility that ethical decision-making may be required to fill a regulatory gap concerning externalities.

The Economist, for example, appears instead to equate ethics with regulation by arguing that “spending on environmental protection beyond what regulators demand” goes “well beyond the requirements of [ethics] or business necessity” (TGC p.3).

Critics argue that corporate initiative is no substitute for wise government policies in these areas, but apparently complete inaction is a good substitute - even in the face of overwhelming scientific evidence regarding, say, the contribution of carbon emissions to global warming.

The off-grid executive

If your conscience ever troubles you at work, free marketers say, stop your belly-aching:

“If a manager believes that the business he is working for is causing harm to society at large, the right thing to do is not to work for that business in the first place. Nothing obliges someone who believes that the tobacco industry is evil to work in that industry. But if someone accepts a salary to manage a tobacco business in the interests of its owners, he has an obligation to those owners. To flout that obligation is unethical.” (TGC p.12)

While not all businesses are tobacco companies, all businesses give rise to ethical issues that have significant or even substantial implications for profitability. It is simply not possible to go and find an employer without ethical challenges, unless free marketers are urging everyone with a conscience to simply drop out of the market economy. To expect people to spend a substantial part of their lives in an environment without freedom of conscience is an affront to human rights (I’ll come back to this in a later post).
 

(continued in part 3, here)

If corporate social responsibility did not exist, would we need to invent it?

The more vigorous proponents of free market economics would argue that we don’t.

But then of course, it depends on what we mean when we talk about CSR. It’s clear that the term “CSR” is used to mean different things, depending on the agenda of the person using it. If we’re going to continue to talk about CSR, we need to define it. To arrive at a definition we are first going to have to remove some of the clutter.

Take, for example, the Economist newspaper. In their extensive survey of the subject – "The Good Company" (TGC) - published in January 2005, they spend many pages explaining how CSR as practised is, at best, merely good management. When selling “green” products or  doing “right” by customers and workers also creates shareholder value, it doesn’t need a distinct name.

Worse, they say, is CSR that amounts to philanthropy at the expense of shareholder value – what  they term “borrowed virtue” because yes, it advances social welfare, but it does so on somebody else’s dime. If you want to give your money to social causes, they say, make sure it is your money to give.

In "The Good Company"  the Economist express the arguments against various incarnations of CSR as comprehensively, articulately and concisely as anyone of that school. The Economist is a highly influential commentator on business issues, and its reasoning exemplifies the free market libertarian school of economic thought. Which is why I’ve used their case to frame the discussion in this, the fourth post in The Missing Link course-by-blog on CSR.

Business case blinkers

The first line of attack, then, is that much CSR is “just good business”;  it doesn’t need a special label signifying anything more than that.

On this, the critics are right. There’s no need for a distinct term if CSR is simply identifying profitable opportunities and translating them into shareholder value. A well-run company already does this.
By this logic, so-called “green” products and services are just another marketing niche; cause-related marketing and strategic community investment are merely ways of buying reputational credit; energy efficiency commitments are simply sensible cost-cutting fair-trade practices in the supply chain are essential to secure dwindling supplies of crop inputs; flexible working practices  for a better work-life balance are just a sensible means of attracting top talent when the recruitment market is tight.

Much of the CSR industry – consultants, authors, even academics – are guilty of basing their entire pitch on the difference their toolkit can make to the company’s bottom line. Call this approach what they will, it is indistinguishable in principle from the company’s customary toolkits: marketing, product development, operations management, human resources management.

This is not to say that being good cannot generate a healthier financial bottom line. In the context of a specific decision it is even possible to demonstrate a causal connection between being good and boosting profits. For example, your preferred candidate for a job has made it clear he or she is having difficulty balancing work and home commitments and seeks a flexible working arrangement. The benefit to the financial bottom line is readily made by virtue of this person’s superior talents, in the same way that a higher pay offer would do.

When you step up to the level of a whole company, being good may well be closely correlated with financial performance but that is a far cry from proving a causal connection between goodness and performance. An equally valid explanation is that competent managers manage to achieve both.

The problem with good management, the motivation of being good does you good, is not some perverse, hair-shirted idea that you haven’t done anything good unless you have felt the pain. Instead it is based on a simple logical flaw: if your motivation for doing the right thing is that you can profit from it, what does this imply you will do when the equation is tipped in the other direction, when doing the right thing will cost you?

The outcome of such motivation will be indistinguishable from the company’s other, non-CSR activities. The CSR tag signifies nothing.
 

(Continued in part 2, here)

There are so many competing definitions of corporate social responsibility (CSR). We need to define what we are talking about in The Missing Link.

My next post will explore the crowded field of CSR definitions and attempt to narrow down that field. To get the most out of that post, however, I recommend reading some of the following materials in advance, asking yourselves the questions set out below.

One of the main documents for discussion comes from The Economist.

Back in January 2005 The Economist created a stir in the business world by publishing a 14 page supplement entitled “The Good Company – A survey of corporate social responsibility”. For my purposes it constitutes a comprehensive and articulate statement of the case against CSR - or at least CSR as The Economist defines it.

The supplement itself can be found in full here.

The second key reading text is a recent scholarly article:

Dahlsrud, Alexander. 2007. “How Corporate Social Responsibility is Defined: an Analysis of 37 Definitions.” Corporate Social Responsibility and Environmental Management. Vol. 15 Issue 1, Pages 1 - 13.

The third text is a blog post by Chris MacDonald, who writes The Business Ethics Blog:

MacDonald, Chris. “Down With CSR! Up With Business Ethics!” The Business Ethics Blog. February 14, 2009.

There are plenty of other articles out there setting out definitions of CSR, contesting others, or simply talking about CSR in a way that assumes a particular definition, even then promising to take CSR “to the next level”.

The Economist survey itself acknowledges its own debt to:

Henderson, David. 2001. “Misguided Virtue: False Notions of Corporate Social Responsibility.” Institute of Economic Affairs.

Reading questions

Please consider the following as you read through the texts.

1/ How does The Economist appear to define CSR?
2/ Does The Economist’s two-by-two matrix in “The union of concerned executives” appear to encompass all the activities and approaches to business that you understand by the idea of CSR?
3/ How does The Economist view business ethics and its relevance to CSR? How does Chris MacDonald view this relationship?
4/ Dahlsrud includes “ethical” within his “voluntariness” dimension of CSR definitions. Do you agree with that inclusion?

It is said that the current economic crisis has triggered a crisis of capitalism. Not so; there are multiple crises prompting a crisis of capitalism.

Welcome to the second post of The Missing Link blog (TML 2), a course-by-blog on corporate social responsibility.

It’s considered good practice at the start of a course, I believe, to impress upon students why the course is important; what real-world problems the course content might help students to understand and address.

If I had been writing this blog a few years ago my job would perhaps have been harder.

Imagine trying to do so back in the beginning of 2005. Memories are short, and the last crisis of capitalism – the wave of corporate accounting scandals that began with the demise of Enron and the forcible ethical rewiring Worldcom - were all but forgotten, confidently dismissed as “one-offs” and “aberrations”.

At the same time, back in 2005, it was too soon for the banks, the government (but I repeat myself) or the fourth estate to have added their voices to those of the minority of commentators already predicting financial apocalypse.

While a crisis of capitalism has been brewing for a long time, it was not possible to talk about systemic problems while such an apparently benign financial environment continued.

Now, however, we have begun to experience financial meltdown; the global economy is experiencing a “Great Recession”; and there is no shortage of obvious villainous features and practices that helped to bring us to this state.

Case closed. Capitalism is in crisis – in crisis in the sense that we might say a fortysomething executive is experiencing a “mid-life crisis”.

Not that capitalism has zipped on its gleaming new leathers, donned a shiny black helmet and sped off with a judder into the sunset on a brand new motorbike leaving family and responsibilities behind.
Rather, a critical mass of people engaged in capitalism are feeling compelled to sit back and question whether it has all been worthwhile, or whether we are in fact on the wrong track entirely.

And yet, while the economic crisis has produced the loudest call for reflection, it is not the only, nor the most important call.

It’s not just the economy, stupid

If we are going to spend this period of questioning profitably, and especially if in this course-by-blog we are going to get to the root of what we mean by corporate social responsibility and address it effectively, then we have to open up our field of enquiry beyond the economic crisis.

We have plenty of scope.

Here, for starters, and because crises are so compelling, are four other contemporary crises that could join the economic crisis in provoking a crisis of capitalism:

• The environmental crisis (or rather crises)
• The psycho-sociological crisis
• The ethics crisis
• The political crisis.

Note that these are interconnected and sometimes overlapping themes, not distinct examples of cause and effect.

The environmental crises

The world’s climate over the next few decades is changing, with predictions of a rise in planetary temperatures that will prove disastrous. The cause is economic activity.

In addition, our living environment is being degraded by industrial activity.

The link between these is what economists term the “externalities” problem. There can be insurmountable difficulties in quantifying and attributing the cost of environmental degradation to a particular polluter. These costs thus remain entirely outside the prices determined by the markets, so the prices do not represent the actual costs of resources used.

International Scientific Congress on Climate Change. “Key Messages from the Congress.” March 12, 2009.
Grist. “The ‘invisible hand’ is blind to climate externalities and the value of natural resources.” December 18, 2008.

The psycho-sociological crisis

We have experienced high rates of economic growth since the Second World War, but following the satisfaction of basic needs that growth has not been accompanied by increasing happiness. More worryingly, it has been achieved at increasing cost to psychological and social health.

James, Oliver. “Selfish capitalism is bad for our mental health.” The Guardian. January 3, 2008.
Kasser, Tim, Steven Cohn, Allen D. Kanner and Richard M. Ryan. 2007. “Some Costs of American Corporate Capitalism: A Psychological Exploration of Value and Goal Conflicts”. Psychological Inquiry. Vol. 18, No. 1, 1–22.
Friedman, Thomas L. “The Inflection Is Near?.” New York Times. March 7, 2009.

The ethics crisis

Any public-speaking business leader, politician or business school professor will insist upon the importance of ethics in the conduct of business. But the dominant legitimizing narrative for action – and the principal measure of success - within the corporation is contribution to shareholder value. Compliance with the law is calculated on a cost-benefit basis, linked to the probability and magnitude of sanction. We even talk about the business case for doing the right thing.

While we may feel disappointment, we can hardly feel surprised when we discover that ethical concerns are subordinated to profit.

We may despair at declining trust, but we should be even more concerned by the decline in trustworthiness.

Reuters. “Global Trust In Business Plummeted In 2008: Edelman Survey.” Jan 27, 2009.
Mayer, Roger, James H. Davis and F. David Schoorman. 1995. “An integrative model or organizational trust.” Academy of Management Review. Vol. 20, No. 3, 709-734.
Ghoshal, Sumantra. “Business schools share the blame for Enron.” Financial Times. July 17, 2003.
Goodpaster, Kenneth E. 2004. “Ethics or excellence? Conscience as a check on the unbalanced pursuit of organizational goals.” Ivey Business Journal. March/April.

The political crisis

If someone exercises power that impacts me, that power had better be exercised legitimately or I will likely resist it. The question is whether largely unaccountable corporate power has effectively usurped that of governments in areas that impact us. Corporate lobbying and political contributions have undermined the efficient functioning of markets, as well as the protection of communities beyond the economic exchange.

Multinationals can shift around their headquarters according to which nation offers the most advantageous tax base irrespective of the public services they benefit from; or move to jurisdictions offering the weakest corporate liability laws and softest regulatory approach, prompting a race to lower standards. They can all but disappear, for legal liability purposes, when a part of their far flung empire engages in or becomes complicit in human rights abuses.

Johnson, Simon. “The Quiet Coup.” The Atlantic. May, 2009.
Stiglitz, Joseph. “Making globalisation work.” The Guardian. September 7, 2006.
TheTyee. “Canadian Mining Firm Financed Violence in Ecuador: Lawsuit.” March 3, 2009.

Next post: CSR: Confusing Social Responsibility