Posts tagged CSR

Column on Corporate Socialism

Corporate Socialism

Tibor R. Machan

The idea that making a profit is somehow ignoble has ancient roots. Partly it stems from the utterly fallacious notion that when someone wins, someone else must lose. So if you go to the mall and purchase a sweater you really like, you must rip off the store where you do this. It is only after modern economics got going full blast that it became clear that when there is a purchase, both sides win. Or at least they understand themselves as having won. You got the sweater, they got the money, you both got a deal!

The myth of the zero-sum exchange, however, continues and politicians and social agitators capitalize on it all the time. So when people in business make profits, the social commentators–advocates of the alleged social responsibility of corporations and business in general–insist they are engaging in illicit exploitation, kind of the way a drug pusher does when selling drugs to a junkie. (Junkies have hardly any will power, so there the idea makes some sense.)

Now this zero-sum idea has been an influential one within the fields of political economy and business ethics. It gives rise to such silly notions as that people doing successful business must “give back to their communities,” as if they had stolen their profits. So every time one is part of an exchange one finds satisfactory, one must have made gains illegitimately and needs to atone for it by “giving back”.

An entire movement has sprung from these ideas. It is called the corporate social responsibility (CSR) movement. It basically advocates that successful people in business have an obligation to do pro bono work in their communities, to do service free of charge, to settle up with the folks there whom they have ripped off. Never mind that all those folks who supposedly were ripped off actually made good deals as they traded with the businesses that are supposed to owe them! Another name for it is “stakeholder corporate management” in line with which managers of companies aren’t supposed to work for the owners and investors and deliver products or services at a good price to costumers so all are pleased with the results. No. Management is supposed to work for the community, for anyone who has his or her hand out for free goodies, for stuff that the business is supposed to pay for, not those to whom the business is providing work on mutually acceptable terms.

So what we have here is the slow but fundamental transformation of a commercial system into a socialist one where profit is demeaned, treated as something evil, and where people must become servants to each other and may not earn a profit from the work they do for others. This isn’t supposed to be something to be expected in an emergency–say when there’s a flood or earthquake–but the norm, the way businesses are supposed to carry on routinely.

We have here the basic idea that men and women aren’t supposed to embark upon good deals through which they can prosper in their lives. No, they are supposed to be part of a huge organism in which everything is shared and no one is ever to be compensated for the work done for someone else. As if everyone were part of one’s family or circle of intimates or even a bee hive. That’s the central idea behind corporate social responsibility once clearly understood, as well as behind socialism.

And now it is getting worse. CSR might be advocated as a voluntary policy by those running businesses. The same with stakeholder management. Though still destructive of business, at least no one is being forced to serve others. But now in several states across the U.S.A.–among them California, Vermont, Maryland and others–politicians have created, by legislation, “benefit corporations” in which managers may proceed to do pro bono work without having to answer to shareholders whose resources are being used for this.

Normally if managers mis-allocate company resources, they could be sued by the owners for malpractice but with this law they will become immune. The only recourse by shareholders will be to sell their stocks and of course these stocks will have lost a goodly portion of their value given that the company isn’t committed to making a profit any longer; nor does the management have to answer to the owners for abandoning this task.

Imagine if one were to hire a doctor to help with one’s medical condition and this doctor decided that during the hour one has set aside to go for a visit several nonpaying patients will come to the office and take up the time one needs to get one’s medical help. Such a doctor–indeed, any professional who is supposed to do work for clients–would be leaving his or her post, breaching his or her oath of office, which is to fulfill the terms of the contract with clients.

I teach classes at a university and my students can count on me to be there for them, given that they have been accepted by my institution on mutually satisfactory terms. But then imagine that I am told by local politicians and bureaucrats that instead of grading their papers, meeting them during office hours, and teaching them during class time, I must provide service to people in the neighborhood and if I do not, I will be in violation of the law!

We are certainly moseying toward a socialist system in which the decisions of professionals and clients are irrelevant and what matters is what the politicians want from us.

To Whom Is a Business Manager Morally Responsible?

Over the last several decades the field of business ethics has become very popular in colleges and universities, including business schools, around the world. Actually, other professional ethics courses have also gained entry into the medical, legal, engineering, and other curriculums. (Oddly, though, the ethics of education and scholarship have not joined this trend!)

In the field of business ethics the focus has tended to be on what has come to be called the theory of Corporate Social Responsibility (CSR). This view takes it as a given, not in need of a lot of argument, that what corporations ought to do, first and foremost, is to benefit society and not those who own the firm. One explanation of this focus is that in the field of economics, which is regarded a social science, it is widely accepted that what corporate managers will do—not so much what they ought to do—is to improve the company’s bottom line.

Back in 1970 the late Milton Friedman did write a widely reprinted article for The New York Times Magazine, “The Social Responsibility of Business Is to Increase its Profits,” insisting that the moral responsibility of corporate managers is to strive to make the company profitable. Up until that time it was simply taken for granted that this is what corporate mangers would be doing—this follows from the general assumption in economics that in the marketplace everyone embarks upon the maximization of utilities, which is pretty much the same thing as trying to make a profit. But Friedman changed the account somewhat by claiming that this is not only what corporate managers do but it is also what they are morally obliged to do. Why? Because that is what they promised to do to the company’s shareholders and investors.

In response to Friedman a great many people who came from the field of philosophical ethics began to write extensively about business ethics and insisted that, on the contrary, what corporate managers ought to do is to manage companies so they would benefit stakeholders. In other words, the moral responsibility of corporate managers is not to improve the bottom line but to help all those who could benefit from what the company is doing, all those who have a stake in the company’s fortunes. This became the CSR movement. And today there are journals, magazines, conferences, and many books that advance the idea that the moral responsibility of corporate managers is to benefit society, not the owners—shareholders, investors, stockholders—of the company.

This line of thinking is a not altogether subtle attack on the nature of the capitalist economy. In a capitalist system, companies are owned by those who buy shares and invest in them, and their managers’ purpose is to make them succeed in the marketplace. Such success is measured, naturally, by how profitable they are, how good a return they bring in from their owners’ investment. The details depend on the kind of firm in question, obviously, but this is the general understanding of capitalist business.

Of course, from the beginning the idea of capitalism—a term first used by critics!—has been demeaned by many people because it treated profit-making as a good thing. Going into the marketplace with the intention of bringing home a good return on one’s investment just appeared too greedy, too avaricious. Never mind that, in fact, once one makes a good return on one’s investment, it is an open question as to what one will do with the wealth one has accumulated. So the practical impact of rejecting the capitalist model is not so much a rejection of wealth but a rejection of the private allocation of wealth. Critics of capitalist business, in other words, do not want private individuals to be in charge of spending the profits made in business. They would like society or the public—which for practical purposes translates into government—to decide what happens to the wealth.

This used to be called socialism, but by now that grand experiment as a political economic system has had innumerable setbacks across the globe, so the term “socialism” has been dropped. Instead we have CSR or stakeholder theory. If such an idea can catch on, it will have the same impact that socialism does—to undermine the rights of individuals to allocate their own wealth and place this power into the hands of politicians and bureaucrats. All this without having to fess up to favoring socialism.

What needs to be debated in the field of business ethics is whether ownership confers the rightful authority to allocate resources. There should be no question-begging presumption that companies must serve society (all others in the realm)—after all, if they do their business well, they do that anyway while they are seeking to make profits. How profits should arguably be used should be left to those who earned them.

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Tibor R. Machan, Ph.D., Professor of Business Ethics and Free Enterprise, gave a speech at Franklin College on June 6, 2007, entitled “Business Ethics and Corporate Responsibility: Shareholders versus Stakeholders.” Professor Emeritus of Philosophy at Auburn University, he also holds the R. C. Hoiles Chair in Business Ethics & Free Enterprise at the Argyros School of Business & Economics, Chapman University, in Orange, CA. He is the author, most recently, of The Morality of Business, A Profession for Human Wealthcare (Springer, 2007). He also co-authored, with James E. Chesher, The Business of Commerce: Examining an Honorable Profession (Hoover Institution Press, 1999). In the autumn of 1983 and again in 1985-1986 Dr. Machan was the Harwood Professor at Franklin College.