This is the fourth post in a series about Corporate Social Responsibility (CSR) and the third which discusses whether or not companies should aspire to be socially responsible.
The previous two posts looked at two objections to CSR, namely that:
(a) Social responsibility is not the role of business; and
(b) CSR provides a distraction to effective business management.
A third objection to CSR is that it involves spending other people’s money (and resources). This is the topic of today’s discussion.
The manager works for the owner
Milton Friedman, among others, argues that managers are simply agents of shareholders who employ them. The money and resources which companies expend in CSR efforts belong to the owners of the company, not the company itself.
Management should not, Friedman says, spend shareholders’ money or other resources on social projects unless those projects are justified by business-case considerations. Instead, they should focus on maximizing profits and dividends to shareholders.
(Shareholders themselves can then go and spend money on positive social projects, if indeed that’s what they wish to do. But that’s a decision for shareholders, not managers entrusted with their money.)
This argument refers specifically to CSR projects which are outside the scope of a company’s regular business operations. I do not believe that proponents of this argument are saying that companies should disregard ethical considerations in everyday operations, such as labor relations, product excellence, corporate governance or environmental considerations.
I have considerable empathy for this viewpoint.
Managers are first and foremost responsible to their employers. Moreover, in many countries, company directors are legally bound to act in the best interests of shareholders. Company assets and resources belong to shareholders – not management. Management is mandated to make business decisions on behalf of shareholders, not social decisions.
Critics of this argument might argue that the companies themselves, and hence shareholders, benefit from corporate participation in community based projects through improved public relations and increased employee morale.
That’s certainly true, but I believe that it confuses the argument.
The argument about spending other peoples’ money does not relate to CSR projects which can be justified by business-case considerations. Participation in such projects is in the best interests of their shareholders as well as the community. Therefore, companies should participate in such projects.
But what about projects for which a strong business case cannot be made? This is where the argument about spending other people’s money comes into play.
There are, I believe, two reasonably strong counter arguments.
(a) Many investors want and expect companies to act in a socially responsible manner.
There is considerable evidence to support this argument, not least the huge growth in professionally managed Socially Responsible Investment funds (SRIs), which now account for approximately 11% of total funds under management in America, and 15% in Europe. (referEUROSIF European SRI Study 2006)
The growth of such funds, added together with increasing levels of shareholder advocacy, provide clear evidence that investors expect positive ethical behavior from firms in which they invest.
(b) Companies, not individual shareholders, charities or even governments, are often the best placed to successfully deliver many CSR projects.
Consider TNT’s 48 Hour Emergency Response Team (ERT), a joint initiative between TNT and the World Food Program (WFP). Under this initiative, TNT staff are on standby twenty-four hours per day to provide logistical support and assist WFP with any food emergency – anytime, anywhere in the world.
The company provides assistance in areas such as airport co-ordination and ramp handling, transport co-ordination, warehouse management and reports and communication.
With its vast resources and expertise in logistics management, the company is well positioned to provide this valuable service. Individual TNT shareholders, on the other hand do not have sufficient resources to arrange such a service.
This demonstrates an important point. Large companies, with their vast financial, labor and infrastructure resources, are sometimes better placed to deliver CSR projects than governments, charities or individuals.
In such cases, companies, to a reasonable degree, should be willing to undertake CSR projects regardless of business case considerations.
I have considerable empathy for the argument that management should not expend company assets on social projects which do not have strong business-case justification.
However, in cases where companies are in the best position to assist with or deliver CSR projects, they should do so to a reasonable extent.
This certainly appears to be what shareholders want their companies to do.
Over to you
Should managers think only of their shareholders, or should they consider all stakeholders in decision making?
Please feel free to share your thoughts by clicking on the ‘comments’ section at the head of this post.