Dr. P.V. Viswanath

pviswanath@pace.edu

The good company

Jan 20th 2005, From The Economist print edition

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.

On the face of it, this marks a significant victory in the battle of ideas. The winners are the charities, non-government organisations and other elements of what is called civil society that pushed for CSR in the first place. These well-intentioned groups certainly did not invent the idea of good corporate citizenship, which goes back a long way. But they dressed the notion in its new CSR garb and moved it much higher up the corporate agenda.

In public-relations terms, their victory is total. In fact, their opponents never turned up. Unopposed, the CSR movement has distilled a widespread suspicion of capitalism into a set of demands for action. As its champions would say, they have held companies to account, by embarrassing the ones that especially offend against the principles of CSR, and by mobilising public sentiment and an almost universally sympathetic press against them. Intellectually, at least, the corporate world has surrendered and gone over to the other side.

The signs of the victory are not just in the speeches of top executives or the diligent reporting of CSR efforts in their published accounts. Corporate social responsibility is now an industry in its own right, and a flourishing profession as well. Consultancies have sprung up to advise companies on how to do CSR, and how to let it be known that they are doing it. The big auditing and general-practice consulting firms offer clients CSR advice (while conspicuously striving to be exemplary corporate citizens themselves).

Most multinationals now have a senior executive, often with a staff at his disposal, explicitly charged with developing and co-ordinating the CSR function. In some cases, these executives have been recruited from NGOs. There are executive-education programmes in CSR, business-school chairs in CSR, CSR professional organisations, CSR websites, CSR newsletters and much, much more.

But what does it all amount to, really? The winners, oddly enough, are disappointed. They are starting to suspect that they have been conned. Civil-society advocates of CSR increasingly accuse firms of merely paying lip-service to the idea of good corporate citizenship. Firms are still mainly interested in making money, they note disapprovingly, whatever the CEO may say in the annual report. When commercial interests and broader social welfare collide, profit comes first. Judge firms and their CSR efforts by what the companies do, charities such as Christian Aid (a CSR pioneer) now insist, not by what they say—and prepare to be unimpressed.

By all means, judge companies by their actions. And, applying that sound measure, CSR enthusiasts are bound to be disappointed. The 2004 Giving List, published by Britain's Guardian newspaper, showed that the charitable contributions of FTSE 100 companies (including gifts in kind, staff time devoted to charitable causes and related management costs) averaged just 0.97% of pre-tax profits. A few give more; many give almost nothing (though every one of them records some sort of charitable contribution). The total is not exactly startling. The figures for American corporate philanthropy are bigger, but the numbers are unlikely to impress many CSR advocates.

Still, you might say, CSR was always intended to be more about how companies conduct themselves in relation to “stakeholders” (such as workers, consumers, the broader society in which firms operate and, as is often argued, future generations) than about straightforward gifts to charity. Seen that way, donations, large or small, are not the main thing.

Setting gifts aside, then, what about the many other CSR initiatives and activities undertaken by big multinational companies? Many of these are expressly intended to help profits as well as do good. It is unclear whether this kind of CSR quite counts. Some regard it as “win-win”, and something to celebrate; others view it as a sham, the same old tainted profit motive masquerading as altruism. And, even to the most innocent observer, plenty of CSR policies smack of tokenism and political correctness more than of a genuine concern to “give back to the community”, as the Giving List puts it. Is CSR then mostly for show?

It is hazardous to generalise, because CSR takes many different forms and is driven by many different motives. But the short answer must be yes: for most companies, CSR does not go very deep. There are many interesting exceptions—companies that have modelled themselves in ways different from the norm; quite often, particular practices that work well enough in business terms to be genuinely embraced; charitable endeavours that happen to be doing real good, and on a meaningful scale. But for most conventionally organised public companies—which means almost all of the big ones—CSR is little more than a cosmetic treatment. The human face that CSR applies to capitalism goes on each morning, gets increasingly smeared by day and washes off at night.

Under pressure, big multinationals ask their critics to judge them by CSR criteria, and then, as the critics charge, mostly fail to follow through. Their efforts may be enough to convince the public that what they see is pretty, and in many cases this may be all they are ever intended to achieve. But by and large CSR is at best a gloss on capitalism, not the deep systemic reform that its champions deem desirable.

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.

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But this is not the end of the matter. Particular CSR initiatives may do good, or harm, or make no difference one way or the other, but it is important to resist the success of the CSR idea—that is, the almost universal acceptance of its premises and main lines of argument. Otherwise bones may indeed begin to snap and CSR may encroach on corporate decision-making in ways that seriously reduce welfare.

Private enterprise requires a supporting infrastructure of laws and permissions, and more generally the consent of electorates, to pursue its business goals, whatever they may be. This is something that CSR advocates emphasise—they talk of a “licence to operate”—and they are quite right. But the informed consent of electorates, and an appropriately designed economic infrastructure, in turn require an understanding of how capitalism best works to serve the public good. The thinking behind CSR gives an account of this which is muddled and, in some important ways, downright false.

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.

CSR cannot be a substitute for wise policies in these areas. In several little-noticed respects, it is already a hindrance to them. If left unchallenged, it could well become more so. To improve capitalism, you first need to understand it. The thinking behind CSR does not meet that test.

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