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December 21, 2006

Corporate Responsibility Must End!

I've given Democracy (a journal of ideas!) a bit of a hard time in recent months, but their latest issue is genuinely fantastic. It contains a couple of articles I want to talk about, but the most important is Aaron Chatterji and Siona Listokin's ferocious critique of the corporate social responsibility (CSR) movement. As they argue, liberals have largely abandoned attempts to change the economy through government regulation and action and begun seeking instead to convince individual corporations, by way of PR campaigns and lobbying efforts, to become better economic citizens. This is foolish, in addition to being ineffective.

As Chatterji and Listokin document, corporations have become scarily adept at using the atmospherics of CSR to escape real regulation or public outrage. Here's how it works:

Imagine a world with one voluntary code of conduct governing the operation of apparel factories. Let’s call it the Golden Code of Conduct (GCC). This is a strong code that calls for the provision of a living wage, recognition of unions, and limits on working hours. Now suppose another set of companies who do not want to abide by the code, but still care about consumer perceptions, creates their own code, called the Super Code of Conduct (SCC). Their code lacks many of detailed provisions of the GCC, but it has some vague language about treating workers with respect. Companies must decide which code to adopt, and the SCC is clearly cheaper to institute. For high-minded companies that want to live by the more stringent code, the high costs could make them uncompetitive in supplying retailers. Meanwhile, the benefits are only significant if consumers can tell the difference between the two codes. If a company can retain the benefits of an improved image but not incur the cost of improved working conditions, there is no reason to expect them to choose the less stringent code.

Meanwhile, the willingness of progressives to accept corporate self-policing diminishes demand for government action that could impose standards not just on a few individual businesses, but on whole industries. That's a far more sustainable strategy. CSR, after all, means that those who choose virtue will become almost instantly less competitive, while their competitors will see no similar change. Indeed, part of Wal-Mart's rise was exploiting the higher labor costs of older retailers who'd emerged at a moment when they were expected to compensate employees fairly and generously. By ignoring such voluntary restrictions, Wal-Mart undercut, and out-competed, an array of retailers who'd made the mistake of demonstrating some CSR. And if the shaming campaigns of Wal-Mart Watch and Wake Up Wal-Mart miraculously succeed at forcing a similar moral epiphany in Bentonville, some currently unknown retailer will emerge in a few years to start the process all over again.

The essential problem here is that liberals are trying to fix market failures by asking market creatures to ignore, well, the market. Corporations are damn good at making profits. The market is damn good at encouraging profits. If society decides, however, that the drive for profit is creating unwelcome externalities, or somehow harming the common good, it has government to step in and set limits on the market. And that's the right order of things. Corporations should do what they do best -- seek profit -- and society should set, if needed, universal and fair limits across industries, enabling useful competition, ensuring a floor of wages and labor standards, and safeguarding the environment. The progressive insistence on CSR promises a whack-a-mole future, where one battle necessitates the next, as other corporations seek to take advantage of the self-imposed standards of their competitors. Government regulation, which is both more effective and far-reaching, is a much better way to go, and progressives should rediscover that.

Update: It's worth being clear here that the critique is about using CSR as a way to regulate economic activity, it's not against using it as an organizing technique that could, for instance, shame corporations into allowing government regulation, or universal health care.

At Tapped, too.

December 21, 2006 in Big Business, Economics | Permalink

Comments

And, let's not forget that the structure of corporate law is inheritly against the idea as well. It's pretty clear that the case law in this area says company's are not there to be responsive to some amorphous "corporate social responsiblity," they are there, according to the law, to work in the interest of the owners of the corporation- namely the shareholders. Even where a block of shareholders have gotten together to try to promote 'liberal' causes this, as I remember, hasn't been allowed. So most of this, just on the level of what corporations are allowed to do under the law is just silly fantasy.

Posted by: akaison | Dec 21, 2006 1:56:32 PM

Your point is good, Ezra, but a little hard on progressives. Smart progressives try to show corporations ways to improve profits while doing good (such as by using more efficient lighting and insulation to conserve power). I don't think progressives have forgotten government regulation; they've just recognized the political realities of the last six years and have focussed on other things in the mean time. There will be more efforts at regulation now.

Posted by: Sanpete | Dec 21, 2006 2:03:20 PM

You mean that corporations, like Republicans, might be better at paying lip service to morality than actually behaving in a moral manner?

Posted by: J Bean | Dec 21, 2006 2:07:36 PM

CSR shouldn't "end," it just shouldn't be seen as the end toward which we are working. That liberals are willing to use governmental channels to effect change doesn't mean that we should forget that we have power in the market as well.

I would suggest that the minimum wage increases that were just approved last month were made possible, in part, by the attention and criticism paid to Wal-Mart's labor practices. Targeting that one extremely visible corporation gave wage increase supporters something tangible to highlight.

I do wonder if liberals abandoning governmental processes to focus on individual corporations isn't another made-up problem. Since we've been completely out of power for 6 years, and effectively out of power to really regulate corporations for over 12 years, people have turned toward whatever methods will produce results, however temporary they may be.

As the progressive movement continues to coalesce and build infrastructure, we just might see a rise in not only market-based reforms (CSR) but also an increased use of governmental authority to reassert citizens' rights and needs over corporations.

Posted by: Stephen | Dec 21, 2006 2:11:00 PM

Right on! (except.....)

In most businesses (that are public corporations), the owners (stockholders) have essentially no control over corporate responsibility, so the hired managers bend over backwards to achieve profit (and growth), since the market (Wall Street and 'investors') only rewards growth in profit and accompanying growth in sales. There is no 'soul' there. Or conscience.

But politics responds to money (for all the usual reasons - financing campaigns, etc.), so regulation of business is really hard to sustain since it interferes with profit. All this is obvious.

What isn't so obvious is how to fix things, since at bottom it is all about money being the mothers milk of both business and politics.

As much as I believe that more regulation of various kinds (market concentration, employment rules, etc.) is a good thing, and the only thing that avoids the nasty, brutish and short prescription of an unregulated economy, in the end regulation or the lack thereof is destined to be a pendulum that not just swings, but must swing to the extremes before it is corrected to less extreme - usually by swinging in the other direction, leftward, but not by much.

The market is a beautiful thing and an ugly thing. On the whole, looking worldwide, the judgement seems to be that the uglyness can be ignored mostly, and government can't really control market forces that demand untrammeled profit. Anyone who says that the market is self-correcting for excesses is a fool.

On the hopeful side: the pendulum is going to swing toward regulation again one of these decades, since the pendulum has been swinging rightward so long that it has forgotten that it has to swing left sometimes.

Posted by: JimPortlandOR | Dec 21, 2006 2:13:11 PM

As they argue, liberals have largely abandoned attempts to change the economy through government regulation and action and begun seeking instead to convince individual corporations, by way of PR campaigns and lobbying efforts, to become better economic citizens.

Maybe the reason liberals have 'largely abandoned attempts to change the economy through government regulation and action' is that, with the Republicans controlling the executive and legislative branches, those attempts wouldn't go anywhere in the first place. Just a thought.

Posted by: Tom Hilton | Dec 21, 2006 2:31:54 PM

I have noticed people here want to put the duties of corporate managers in bad terms. Ie, that their responsibility is to achieve value for the shareholder. That's their fiduciary duty. in theory, their fidutiary duty would not be a problem if people were more realistic about the roles of corporations, and what they are meant to do. The problem only happens when people, either market fundamentalists, or corporate responsibility types try to get corporation to do more than what they are designed to do. issues of fairness, etc, are issues of the general public, not corporations. the idea that you can turn corporations into something other than what they are is where you get into trouble.

Posted by: akaison | Dec 21, 2006 2:56:53 PM

Well, yes... but I think the point here is that corporations can't be expected to replace other efforts; they can, however, provide some needed support in some strategic areas. I think a lot of where one comes down on this is how much experience one has in the private sector - I think there's been a useful mind shift in not simply portraying all corporations everywhere as the enemy (it's why I think the snti-Wal-Mart campaigns, while possibly useful, aren't as effective as they could be). TRhere are a lot of good people in positions to get their corporations to do good things, and those things should be encouraged and celebrated... but they're not going to replace the work progressives need to do on issues they care about, nor should there be that expectation. I think if progressives push the Democratic party back into hardline anti-business stances, we'll once again open up the opportunity the Republicans need to rebuild thier damaged relationship with sorporate America.

Posted by: weboy | Dec 21, 2006 3:52:07 PM

if you have any experience at all in the private sector then you know how silly the idea of corporate responsibility for social issues sounds.

Posted by: akaison | Dec 21, 2006 4:17:55 PM

You wrote, "CSR, after all, means that those who choose virtue will become almost instantly less competitive, while their competitors will see no similar change."

WTF? This isn't true.

CSR strategies make a company MORE competitive. Read "The High Purpose Company" by Christine Arena, which proves this with independent and verifiable research of more than 85 companies.

Posted by: Miss Led | Dec 22, 2006 3:38:07 AM

I have noticed people here want to put the duties of corporate managers in bad terms. Ie, that their responsibility is to achieve value for the shareholder. That's their fiduciary duty. in theory, their fidutiary duty would not be a problem if people were more realistic about the roles of corporations, and what they are meant to do. The problem only happens when people, either market fundamentalists, or corporate responsibility types try to get corporation to do more than what they are designed to do. issues of fairness, etc, are issues of the general public, not corporations. the idea that you can turn corporations into something other than what they are is where you get into trouble.

DANG!! I could have written this!

Posted by: Fred Jones | Dec 22, 2006 8:55:38 AM

I strongly agree with the comments above that call anti-corporate campaigning largely ineffective. Honestly, how is a corporation to judge what is the "right" thing to do if it's something different from following law and making money for shareholders? If poor old Grandma Millie invested her last dime in the corporation, who are they not to get the best possible return for her under the law? The problem is not corporations who have a insufficient sense of the "brotherhood of all men," but government enablers and unevenly enforced laws.

Weboy, That's Lieberman talking. I don't think we should spend too much time worrying if the GOP will rekindle their presently dormant romance with big business, because it is inevitable that they will. GOP is the party of the rich. Big businesses are rich. This will not change. So instead of cutting the balls off of any pro-consumer policy just to pander to the big businesses who might like us if we were just a little easier on them, we should realize that the people who big business screws on a daily basis are our natural constituency and take care of them.

Posted by: Horatio | Dec 22, 2006 10:44:38 AM

You are perpetuating the (Friedman) myth that corporations lose money for their shareholders when they act responsibly. Where is your research?

There is research that proves your hypothesis isn't true.

Posted by: Miss Led | Dec 22, 2006 11:36:02 AM

What do you mean by "responsibly?" Who decides what that is?

Posted by: Horatio | Dec 22, 2006 1:17:53 PM

The difference Fred is the next step. Because its not the responsibility of corporations, it becomes clear to me that its someone else's. That someone else as Horatio points out is the government. Well,t he government, and private citizens as well. If one look at this in functionalist rather than idelogical terms, it begins to make more sense. I am frankly not about a lot of theories of this or that. I am more about well- what does it do? Does it work? What should it do within that range of responsibilities? Compartmentalization where companies do what they are suppose to do, the government does what its suppose to do, people do what they are suppose to do, leads to better results rather than the pretend worl in which corps are all bad, people are all bad, or government is all bad. It's abalancing act between different forces. Thats what makes me a moderate, and people like Lieberman and his followers bastardized versions of the name.

Posted by: akaison | Dec 22, 2006 2:34:58 PM

'The market is damn good at encouraging profits.'

Beg pardon?

Markets are damn good at competing away profits, that's one of the things they're for. It's when you have restrictions upon markets (for example Ezra's insistence that WalMart is a monopsonist buyer of labour and is thus able to determine the pay rates it offers and still get the labour it wants, or pharma patents, or monopolies, or tariffs to stop foreign competition) that encourage profits.

You may have noticed that if you've got 50 people all making and trying to sell the same thing then none of them make much profit.

When you've got just one person, legally protected, making something (Windows?) then you've got very high profits.

Posted by: Tim Worstall | Dec 26, 2006 10:12:26 AM

As I have told the authors, they present no evidence that progressives are steering resources away from traditional forms of regulaiton to CSR so the case is largely a straw man. I too doubt the effectiveness of CSR, but since it's not really something progressives spend much time and energy on, it's a side issue.

J.S.

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