Is CSR a Distraction From Solving Social Ills?

Here we go again for another round of the endless debate about whether corporations are responsible for performing socially beneficial actions. Milton Friedman famously argued that the social responsibility of business is to increase its profits and nothing more. That is, corporations as artificial persons according to law were not obliged to address "social responsibilities." Rather, it was up to individuals outside of their roles as corporate actors to address social issues:

Of course, the corporate executive is also a person in his own right. As a person, he may have many other responsibilities that he rec­ognizes or assumes voluntarily-–to his family, his conscience, his feelings of charity, his church, his clubs, his city, his country. He may feel impelled by these responsibilities to devote part of his income to causes he regards as worthy, to refuse to work for particular corpo­rations, even to leave his job, for example, to join his country's armed forces. If we wish, we may refer to some of these responsibilities as "social responsibilities." But in these respects he is acting as a principal, not an agent; he is spending his own money or time or energy, not the money of his employers or the time or energy he has contracted to devote to their purposes. If these are "social responsibili­ties," they are the social responsibilities of in­dividuals, not of business.

Now, Aneel Karnani at the University of Michigan has been one of the most vocal modern-day critics of corporate do-gooding. He thinks microfinance misses its mark. He also thinks there is no such thing as a fortune at the bottom of the pyramid. Although I am not in agreement with Karnani on either count, he is back with yet another naysaying missive, this time in the pages of the MIT Sloan Management Review. Here, Karnani makes an even more damning suggestion than the late Milton Friedman. Whereas Friedman merely said that CSR was better suited to individuals, not corporations, Karnani suggests CSR actively harms the process of addressing social ills:

Very simply, in cases where private profits and public interests are aligned, the idea of corporate social responsibility is irrelevant: Companies that simply do everything they can to boost profits will end up increasing social welfare. In circumstances in which profits and social welfare are in direct opposition, an appeal to corporate social responsibility will almost always be ineffective, because executives are unlikely to act voluntarily in the public interest and against shareholder interests.

Irrelevant or ineffective, take your pick. But it’s worse than that. The danger is that a focus on social responsibility will delay or discourage more effective measures to enhance social welfare in those cases where profits and the public good are at odds. As society looks to companies to address these problems, the real solutions may be ignored.

In cases where profitability and achieving social objectives are in opposition, Karnani suggests a three-pronged government regulation, watchdogs and advocates, and self-control:

So how can that balance [between profits and the public good] best be struck? The ultimate solution is government regulation. Its greatest appeal is that it is binding. Government has the power to enforce regulation. No need to rely on anyone’s best intentions.

But government regulation isn’t perfect, and it can even end up reducing public welfare because of its cost or inefficiency. The government also may lack the resources and competence to design and administer appropriate regulations, particularly for complex industries requiring much specialized knowledge. And industry groups might find ways to influence regulation to the point where it is ineffective or even ends up benefiting the industry at the expense of the general population.

Outright corruption can make the situation even worse. What’s more, all the problems of government failure are exacerbated in developing countries with weak and often corrupt governments. Still, with all their faults, governments are a far more effective protector of the public good than any campaign for corporate social responsibility...

Civil society also plays a role in constraining corporate behavior that reduces social welfare, acting as a watchdog and advocate. Various nonprofit organizations and movements provide a voice for a wide variety of social, political, environmental, ethnic, cultural and community interests...

Overall, though, such activism has a mixed track record, and it can’t be relied on as the primary mechanism for imposing constraints on corporate behavior--especially in most developing countries, where civil society lacks adequate resources to exert much influence and there is insufficient awareness of public issues among the population...

Self-regulation is another alternative, but it suffers from the same drawback as the concept of corporate social responsibility: Companies are unlikely to voluntarily act in the public interest at the expense of shareholder interests. But self-regulation can be useful. It tends to promote good practices and target specific problems within industries, impose lower compliance costs on businesses than government regulation, and offer quick, low-cost dispute-resolution procedures. Self-regulation can also be more flexible than government regulation, allowing it to respond more effectively to changing circumstances.

The challenge is to design self-regulation in a manner that emphasizes transparency and accountability, consistent with what the public expects from government regulation. It is up to the government to ensure that any self-regulation meets that standard. And the government must be prepared to step in and impose its own regulations if the industry fails to police itself effectively.

And then he goes back into neo-Friedmanite mode. Instead of just alluding to following laws as Friedman does, Karnani places priority on devising laws in such a way that corporate malfeasance imposes too high a cost. In so doing, untoward acts are avoided since, well, they eat into profits:

In the end, social responsibility is a financial calculation for executives, just like any other aspect of their business. The only sure way to influence corporate decision making is to impose an unacceptable cost—regulatory mandates, taxes, punitive fines, pubic embarrassment—on socially unacceptable behavior. Pleas for corporate social responsibility will be truly embraced only by those executives who are smart enough to see that doing the right thing is a byproduct of their pursuit of profit. And that renders such pleas pointless.

I have several issues with Karnani's reasoning. First, laws cannot be devised as to foretell every form of corporate malfeasance. As we have seen, corporations have been cunning in working around regulation given that the resources at their disposal are usually greater than those of governments. Second, different nations have varying institutional capacities to enforce the law. That is, laws may look pertinent and stringent on paper, but implementation is another matter entirely. Third, it is entirely conceivable that a corporation can follow the letter of the law but act in bad faith.

While Karnani is worth listening to in order to sharpen arguments as to the merits of CSR, his alternatives are not quite the solutions we're looking for. With regard to the current topic, it's repackaged Freidmanite reasoning.