The Failure of Corporate Social Responsibility

The Economist has an excellent piece on corporate social responsibility.

OVER the past ten years or so, corporate social responsibility (CSR) has blossomed as an idea, if not as a coherent practical programme. CSR commands the attention of executives everywhere—if their public statements are to be believed—and especially that of the managers of multinational companies headquartered in Europe or the United States. Today corporate social responsibility, if it is nothing else, is the tribute that capitalism everywhere pays to virtue.

It would be a challenge to find a recent annual report of any big international company that justifies the firm's existence merely in terms of profit, rather than "service to the community". Such reports often talk proudly of efforts to improve society and safeguard the environment—by restricting emissions of greenhouse gases from the staff kitchen, say, or recycling office stationery—before turning hesitantly to less important matters, such as profits. Big firms nowadays are called upon to be good corporate citizens, and they all want to show that they are.

But as the report goes on to say, CSR is usually just a dog and pony show. There is very little substance behind it, and companies just pay it lip service. Of course, this may not be a bad thing.

Does this give cause for concern? On the whole, no, for a simple reason. Capitalism does not need the fundamental reform that many CSR advocates wish for. If CSR really were altering the bones behind the face of capitalism—sawing its jaws, removing its teeth and reducing its bite—that would be bad: not just for the owners of capital, who collect the company's profits, but, as this survey will argue, also for society at large. Better that CSR be undertaken as a cosmetic exercise than as serious surgery to fix what doesn't need fixing.

Companies don't exist to do the will of special interest groups. They exist to make a profit. But, to make a long-term profit you have to solve a problem for consumers. You have to make the world a better place or else your company will probably go under. It is built on hype rather than customer needs, you will end up like so many dot-coms. The article sums up with this:

There is another danger too: namely, that CSR will distract attention from genuine problems of business ethics that do need to be addressed. These are not in short supply. To say that CSR reflects a mistaken analysis of how capitalism serves society is certainly not to say that managers can be left to do as they please, nor to say that the behaviour of firms is nobody's concern but their own. There is indeed such a thing as "business ethics": managers need to be clear about that, and to comprehend what it implies for their actions.

Also, private enterprise serves the public good only if certain stringent conditions are met. As a result, getting the most out of capitalism requires public intervention of various kinds, and a lot of it: taxes, public spending, regulation in many different areas of business activity. It also requires corporate executives to be accountable—but to the right people and in the right way.

I've always said that I favor government intervention when it increases information or corrects negative externalities. These things make capitalism work better. All too often though, it isn't about making capitalism more efficient – it's about getting rid of it because some people believe profit is an ugly word.

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