Corporate Social Responsibility part 4 – Third Objection to CSR

Corporate Social Responsibility 9 Comments

Introduction

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.

 
Counter arguments

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.

 
Conclusion

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.

 

9 Responses to “Corporate Social Responsibility part 4 – Third Objection to CSR”

  1. Brad Shorr Says:
    June 20th, 2008 at 10:58 pm

    Andrew, this is certainly a complex issue and it’s unlikely a consensus opinion will ever develop. Shareholders invest in company stock for different reasons. If SRI’s represent 11%-15% of invested funds, that suggests to me CSR is an extremely important motivator for investors. Sometimes, in the eye of the investor, what a company chooses not to do is as important as what it does. For instance, Ave Marie Funds, which select corporations which adhere to Catholic values, would not invest in a firm that supported Planned Parenthood. This makes the whole issue even more complicated. As to the question of whether companies should consider stockholders only, I think the answer is “no”. If employees and other stakeholders aren’t considered, the company is doomed, and so are the stockholders. Ultimately, though, if shareholders aren’t satisfied with their returns, management will change. As the unfolding situation with Yahoo suggests, you have to consider them first.

  2. Karen Swim Says:
    June 21st, 2008 at 2:34 am

    Andrew, kudos for presenting both sides of an extremely complex issue. While delivering value to shareholders equates to profitability and growth, the factors driving that growth are equally important. CSR may not have a definitive business case but is there a “soft” business case which ties to global branding/image that adds value to the company as a whole? Companies need to consider shareholders but do so in light of the bigger picture.

  3. Andrew Says:
    June 21st, 2008 at 3:16 pm

    Karen

    I suspect that in many cases, ‘Soft’ factors are not given their true weight in business case considerations.

    Participation in effectively managed social projects has a range of potential benefits for the company over the long term, and such ‘Soft’ factors cannot be captured in bottom line accounting numbers, particularly over the short term, and so some managers may be tempted to sacrifice such considerations in decision making.

    However difficult as it is, ‘soft’ factors should be given their due weight business case considerations, and managers must be willing to make subjective judgement about the long term value of such considerations.

    Brad,

    In many cases, refraining from certain activities is just as important, if not more important, for a company’s reputation as positive actions such as corporate donations or participation in social projects.

    Banks should refuse to lend to certain clientele (e.g. drug dealers), manufacturers of alcoholic beverages should not market to underage drinkers, automobile manufactures should not glorify fast speeding in their advertisements .. and so on and so on. In cases where companies do not refrain from certain unethical practices, then all the corporate donations or social projects in the world will probably not help them.

    About your point of the company being doomed unless all stakeholders are considered, I don’t think any critics of CSR would argue with you there. The long term impact upon all stakeholders should ultimately figure in business case considerations.

    I think what critics are driving are cases where the long term expected long term business benefits from the donations or social projects concerned are insufficient to justify the company resources expended.

    Cheers

    Andrew

  4. Ron Robins Says:
    June 21st, 2008 at 10:53 pm

    Proof that corporate social responsibility works is the fact that companies who are the most profitable and best of sector performers are nearly always the ones who have the best CSR performance!\

    See my ethical investing/CSR research page for info at http://investingforthesoul.com/Main%20Pages/ethical-investing-CSR-research-studies.htm#Ethical-Investing

    Best wishes, Ron Robins

  5. Andrew Says:
    June 22nd, 2008 at 5:50 pm

    Hi Ron,

    Welcome to my blog and thanks kindly for your comment.

    I will be very interested to look at your research. As a matter of fact, I am currently preparing a short series of discussions relating to Socially Responsible Investing (SRI), which will immediately follow the current series. So I look forward to reading about your thoughts and insights into the topic.

    Cheers

    Andrew

  6. isabella mori Says:
    June 27th, 2008 at 1:42 pm

    interesting series; i’m curious about where it’s heading :)

    so there is this viewpoint that managers are primarily responsible to shareholders. and it’s an interesting point of view.

    a few times a week, i work with a very progressive (christian) organization, and we spend a lot of time reflecting on our work. the other day we did an exercise where we each answered the question, “to whom are we accountable?” we had varying interpretations of what it means to be accountable. we also each came up with a list of at least 12 entities, and many of them were different. many of us observed that we were firstly accountable to god an ourselves.

    isabella moris last blog post..meditation on a wordless wednesday

  7. Andrew Says:
    June 27th, 2008 at 6:40 pm

    Hi Isabella,

    I’m glad to hear that you are enjoying this series.

    In regards to the direction of this series, (this applies to all readers) if you have a particular topic in mind which you would like to see covered, then please let me know and I will try to include it.

    Otherwise, the remainder of the series will include discussion on:

    (1) The advantages and disadvantages of corporate participation in social projects as opposed to mere corporate donations; (2 posts)

    (2) The role of governments in promoting ethical business behavior; (1 post)

    (3) Why ethical consumerism is not as significant as many believe promoting responsible corporate behavior; and

    (4) Some basic principles toward designing, implementing and managing effective CSR policies.

    It’s interesting to hear perspectives from outside the corporate world as to the question of accountability. As I am a Christian, from my own personal perspective, I see myself as being primarily accountable to god first and foremost. After that I see myself as being accountable to a range of others, including family, students & colleages (in my role as a teacher), friends and society at large.

    At a corporate level, on one view, managers are responsible first and foremost to their employers, the shareholders. However, others take a broader veiw of management responsibility. Since management are custodians of societies productive resources, perhaps their primary responsibility should be the broader interests of society.

    Cheers

    Andrew

    Andrews last blog post..Corporate Social Responsibility part 5: The case for community business partnerships

  8. isabella mori Says:
    June 27th, 2008 at 10:59 pm

    as a christian, how much do you feel should you separate the personal from the corporate?

  9. drew Says:
    June 28th, 2008 at 7:09 am

    Isabella,

    I think they are inseparable in this respect.

    From my understanding of the bible, as a Christian, I should seek to honor god in all of my life, personal and corporate.

    Fortunately, as I see it, honoring my obligations to all relevant stakeholders is rarely in conflict with my objective to conduct my professional life in a manner which is honorable to god. Indeed, I see the act of honoring obligations to others (within certain boundaries) as also being an act of honoring the lord.

    Cheers

    Andrew

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