Motivating Socially Responsible Corporate Behavior

Will the market make corporations "ethical" on its own, or are governments needed to force them into social responsible positions? Jonathan Guthrie argues that consumers alone cannot discipline corporations. The implicit argument is that individual rationality leads each person to seek the lowest price since the individual's actions in isolation have little impact on the firm's bottom line. However, the threat of government intervention to solve such market failures is enough to regulate corporate behavior:

Jonathan Guthrie: Ethics, enterprise and expediency, by Jonathan Guthrie, Commentary, Financial Times: Monaco’s main conference centre was the ... venue for a debate on how business could help the poor and save the planet last week. ... Debates on corporate social responsibility [CSR] thrill me as little as talks on diesel locomotives by bobble-hatted trainspotters... The event, however, was surprisingly compelling. The organisers ... had intelligently recruited two panellists guaranteed to fight like rats in a sack. Their scrapping triggered a rare lucid moment in which I realised that CSR has become so pervasive that opposition to it is ... pointless...

John Hilary of War on Want, a traditional lefty, thundered: “We cannot accept unbridled free market capitalism.” Richard D. North of the rightwing Institute of Economic Affairs, countered: “Capitalist firms do well for the world when they are selfish and honest about it.”...

Like Mr North, I believe the sole social responsibility of companies is to make profits, some of which governments trouser to pay for schools, hospitals and welfare. But while pundits such as Mr North may often triumph rhetorically, they have lost the sale. Businesses increasingly espouse ethical goals as an adjunct to good old-fashioned moneymaking.

A few years ago CSR was primarily an activity for big US consumer brands, such as Nike and Gap, whose reputations had been damaged by allegations that some Asian suppliers ran sweatshops. They needed to ensure goods were sourced ethically to claw back sales.

Since then, ethics have spread across business like a nasty rash. HSBC, the world’s third biggest bank, boasts it has achieved carbon neutrality, a goal rather harder for its manufacturing clients to achieve. The motto of Google ... is “Don’t be evil” (but don’t stand up for freedom of speech in China either). Al Gore ... now chairs a fund ... whose investments are “sustainable”, even if its returns are not. David Cameron, the leader of the once commerce-friendly UK Conservatives, has told British business to “shed its evil image”...

The entrepreneurs from 32 countries assembled in Monaco last week were as inclined to talk about their pet social projects as their business empires. ... But at the same time, CSR is often just a new bottle into which the old wine of philanthropy is decanted. If you have accumulated more wealth than you can easily enjoy, it is natural to swap some of it for public gratitude, even if you do not concur with US steel baron Andrew Carnegie that “a man who dies rich dies disgraced”.

For most companies, renouncing the devil and all his works involves adopting ethical policies on employment, sourcing and the environment and helping local charities. ... A CSR vigilante force, consisting of vociferous non-governmental organisations and fee-hungry consultancies, keeps businesses up to the mark.

The oft-quoted business case for CSR is that customers prefer to buy from companies exhibiting “good corporate citizenship”. The evidence for this seems pretty patchy. Low prices continue to lure millions of Americans to Wal-Mart, despite the opprobrium the store chain’s employment and sourcing policies provoke in ethical campaigners.

A much better argument ... is that businesses can forestall regulation by behaving with conspicuous virtue, thereby keeping a lid on costs. ... The beauty of this “compliance- plus” approach is that it fits seamlessly into the Friedmanite conception of businesses as entities that should be single-minded in their pursuit of profit. Being good becomes simply another lever for jacking up the bottom line...