For the past two decades or so, the idea of corporate social responsibility (CSR) has gained widespread respectability. It’s attained such currency that most large firms nowadays feel compelled to pay at least some deference to it in their public pronouncements.
CSR basically argues that firms ought not simply focus on maximizing profits for shareholders. Rather, corporate executives should also take the public good into consideration by heeding the interests of various stakeholders — which include not just shareholders, but suppliers, employees, creditors, local communities, and governments.
As such, CSR is really a form of corporate socialism. While retaining the forms of private property, CSR requires those who decide how that property is used at the corporate level to treat it as a communal good. Instead of socializing the means of production, CSR socializes the mindset of those who oversee those means.
Just like its more traditional statist version, corporate socialism is ill-conceived. While corporate managers will be familiar with all the details of their industry, this does not necessarily make them public policy experts. There are no prices that executives can consult to make calculations of the community’s interest the way there are to gauge the firm’s private interest.Â As Milton Friedman also argued in a widely cited 1970 New York Times Magazine article, any corporate decisions taken with a view to social objectives that lower profit represents a tax on shareholders who have not consented to such use of their invested capital.
Another oft-cited argument against CSR is that it is little more than a public relations exercise. After all, Enron was a prominent exponent of CSR. So was British Petroleum.
A new paper by Matthew Kotchen & Jon Jungbien Moon lends support to this view. Entitled “Corporate Social Responsibility for Irresponsibility”, the paper demonstrates that firms who engage in morally controversial activities are more likely to undertake CSR as a way to enhance their image.
Corporate socialism thus comes to sight as impression management.
With a hat tip to Kevin Lewis at National Affairs, here is the abstract:
Matthew Kotchen & Jon Jungbien Moon
NBER Working Paper, July 2011
This paper provides an empirical investigation of the hypothesis that companies engage in corporate social responsibility (CSR) in order to offset corporate social irresponsibility (CSI). We find general support for the causal relationship: when companies do more “harm,” they also do more “good.” The empirical analysis is based on an extensive 15-year panel dataset that covers nearly 3,000 publicly traded companies. In addition to the overall finding that more CSI results in more CSR, we find evidence of heterogeneity among industries, where the effect is stronger in industries where CSI tends to be the subject of greater public scrutiny. We also investigate the degree of substitutability between different categories of CSR and CSI. Within the categories of community relations, environment, and human rights-arguably among those dimensions of social responsibility that are most salient-there is a strong within-category relationship. In contrast, the within-category relationship for corporate governance is weak, but CSI related to corporate governance appears to increase CSR in most other categories. Thus, when CSI concerns arise about corporate governance, companies seemingly choose to offset with CSR in other dimensions, rather than reform governance itself.