Corporate Social Responsibility
Published by Yazad Jal January 6th, 2005 in EconomicsRadley Balko contrasts a “caring” capitalist with a “greedy” capitalist and comes up with a conclusion that may shock you. He’s titled his piece Altruism? Bah, Humbug, so that might give you an idea. So would this excerpt.
A corporation’s only duty is to its shareholders. Corporations must abide by the law, of course. But a company that breaks the law and incurs the fines, bad press, and compensation that will follow is not acting in the interest of its shareholders.Certainly, there’s room for a large corporation to invest in its community, to sponsor local arts, education, and charity programs. But community investment plays into “ruthless profit-seeking” too. A company that is seen as a good “corporate citizen” is a company more likely to win favor and patronage from members of the community.
Today, anti-corporatists want corporations to put some vague notion of altruism ahead of profit, innovation, and investment. That’s terribly shortsighted. Capitalism has proven to be the best way of creating wealth because it trusts that the collective wisdom millions of people voluntarily engaging in millions of mutually-beneficial transactions every day is the best way for an economy to allocate its resources.
When we’re free to pursue what’s best for us individuals, we inevitably create the kind of order and produce the wealth that is best for us as a society.
Read the whole piece. Balko also blogs at The Agitator.
The original idea behind this is from Milton Friedman’s classic article: The Social Responsibility of Business is to Increase its Profits. The Centre for Civil Society (CCS) in New Delhi has done a lot of work in this, coming out with a booklet titled Do Corporations Have Social Responsibility (pdf file) and a full fledged book Morality of Markets. Parth J. Shah of the CCS even got P. Chidambaram, India’s Finance Minister, to release the book. And yes, Parth also blogs (nowadays, who doesn’t?) at Spontaneous Order.
This is exactly what they teach us in business schools in the US (esp my school U. C. Berkeley). Even the Harvard cases that we used for ethics, maktg and competitive strategy mentioned shareholder value as the foremost objective. The rest is tied to this one basic objective. Thus, Nike’s endeavour to avoid bad publicity caused by sweat shops is solely due to its aim of avoiding dilution in shareholder value.
I’ll give you an example of another case that is an extreme. Merck had developed a cure for river blindness (affects people in remote parts of Africa). The executives felt that there was no market there since they simply would not be able to afford the drug. They had a decision to make; should they produce the drug and risk losses?
In the end, they decide to produce the drug and give it away for free! You know why? Because, the execs realized that the Merck scientists worked for a nobler purpose (of finding cures) and that they would be demoralized if the drug was not given to those who needed it most. The execs felt that a demoralized R&D would dilute shareholder value!
Now, we also studied exceptions to this rule. There are corporations that are involved in tunnelling capital. {Often happens when promoters own a majority stake *say* 60%) and the rest of the shareholders own teensy amounts) Thus, they took decisions to increase the value of the 60% while not caring about the 40%. This was rampant in Russia during the privatization era. Lots of innocent shareholders got rogered while a few cronies made off with the money.