More on Corporate Social Responsibility

I recently wrote an article for SHRM on Corporate Social Responsibility, which took further the address at the Humane Capitalism Conclave and the SHRM event which I've already posted earlier. This one explains a bit more about my viewpoint on CSR.


CORPORATE SOCIAL RESPONSIBILITY: CHASING A CHIMERA?


This is not an article on economic theory. But, in order to understand why I believe that Corporate Social Responsibility (CSR) is an unsustainable concept in the context of the capitalist system within which business today operates, it is necessary to look at what economic theory says about capitalism itself. While the analysis of economic theory that follows is a bit simplistic, it will be sufficient to explain the factors that underpin the capitalist system.

Let us begin the journey with Adam Smith. In The Wealth of Nations (1776), Smith presented the capitalist system as the interplay of capital, labour and land (the factors of production) and profits, wages and rent (returns on the factors of production respectively), within a structure of market exchanges involving production, income and expenditure. Smith described an “invisible hand” at work, created by the market forces of supply and demand, which in turn are the result of the independent decisions of countless individuals. Smith posited that it is this invisible hand that drives markets to a state of equilibrium. Underlying these decisions is the pursuit of self interest (by consumers) and the pursuit of profit (by owners of capital). The point to note is that owners of capital will productively employ capital where it yields the maximum profit.

Karl Marx believed that this theory was flawed. According to him, capitalism has inherent contradictions that are not explained by Smith’s theory. Marx postulated that capitalism promotes the production of commodities that have an “exchange value”, over the satisfaction of human needs through commodities that have a “use value”. This is the conflict that is inherent in capitalism and it is driven by the pursuit of profits. According to Marx, the biggest failure of capitalism is the inability to maximise collective welfare as a result of the pursuit of individual interest in the market.

Max Weber, in his work General Economic History, defines capitalism as a system in which enterprises engage in industrial production in the pursuit of “net profit” which is rationally calculated. By introducing the notion of net profit as an accounting concept, Weber further accentuates the profit motive inherent in an enterprise operating in a capitalist system.

Joseph Schumpeter introduced the concept of “creative destruction”, wherein an entrepreneur exists not to compete, but to change the nature of competition. Through innovation, either the productivity of the factors of production is enhanced or new goods are produced. This leads to profit. This process of creative destruction sweeps away old industries and methods of production, creating new markets or segments in the pursuit of profit. In this scheme of things, entrepreneurs innovate, not for the greater social good or to satisfy human needs, but to build a competitive advantage in the pursuit of greater profits.

Finally, John Maynard Keynes, whose thoughts have been resurrected in the wake of the global economic downturn, explained the role of money and the capital and labour markets in the capitalist system, in his seminal work, The General Theory of Employment, Interest and Money (1936). Without going into the details of this theory, which explained the role of money and interest rates in capitalism, one assertion stands out: capitalism is a monetary production economy which operates with the objective of realising profits.

What do we conclude after this quick look at economic theory over the last two hundred and thirty years? While we’ve just skimmed the surface, there are three inescapable conclusions.

First, capitalism is driven by a single minded obsession with profitability. Second, capitalism is not based on social or collective action, but on the pursuit of self interest. Third, the primary objective for the existence of an enterprise is generating profit for its shareholders, the owners of capital.

And that means that everyone in the system--whether it is enterprises or individuals like you and me—is driven by self interest.

Is it any surprise, then, that larger objectives like social and environmental issues and the quality of life have been subordinated to the pursuit of profit?

I can see some readers saying that this conclusion is not new. We’ve all known all along that the pursuit of profit lies at the heart of capitalism. We really didn’t have to study the theories of five famous economists to reach this conclusion.

True. But the point I am making is this: we’ve just seen how economic theory, irrespective of the ideology of the economist in question, supports the profit motive as the basis for an enterprise operating in the capitalist system.

But, where is the economic theory that supports the contention that pursuing social good or--as it is termed nowadays--social responsibility, is a key objective of an enterprise in the capitalist system?

And that brings me to the problem I have with the concept of CSR. It has an inherent conflict with the concept and operation of the capitalist system.

Don’t get me wrong. I have nothing against the objectives of CSR. Indeed, they are laudable. It is in the implementation of the concept that I see an inherent weakness that will prevent CSR from ever becoming a tool that will reshape the factors influencing social and environmental welfare.

This is not to say that CSR has not had or will never have any beneficial impact on social welfare or the environment. Far from that. However, I believe that this impact, however positive, will be limited in its scale and magnitude. From that perspective, the concept of CSR has been hyped beyond its limitations.

Moreover, quite apart from the limitation of the ability of CSR to impact social and environmental welfare on a large scale, there are drawbacks inherent in the concept, which dilute its effectiveness as a tool of welfare.

To begin with, take the words “social responsibility”. If, after the preceding discussion, anyone still believes that the words “social responsibility” have a place in capitalism, I will urge them to delve deeply into the economic theories I have referred to, before reading the rest of this piece. The only responsibility an enterprise has, in capitalism, is to deliver profitability to the owners of capital. I think that, too, has been conclusively established.

The problem with CSR is that it tries to modify the behaviour of a capitalist enterprise by imposing a social objective that is in conflict with its objective of profit. And this can never be as simple as it sounds. CSR is, in essence, an attempt to change the nature of the capitalist system. It espouses the philosophy that an enterprise exists in a community and therefore has a responsibility for the well being of the community. The philosophy is noble and I have no quarrel with it. However, capitalism is not a social or collective socio-economic system as I have demonstrated earlier. Depending on your perspective, you may view that as a serious flaw in the system or the critical factor that makes it the dominant system in the world today. But that doesn’t change the nature of the beast. Let’s face the truth: there is no place in capitalism for social objectives, unless they are profitable in themselves.

The second issue I have with CSR is that this philosophy of giving back to the community is linked closely to the reputation and image of the enterprise. I believe that this is rather a tenuous basis for the pursuit of socially responsible initiatives. While capitalist enterprises strive to be viewed as ethical in their pursuit for profits, that endeavour stems from the fact that their profitability would be adversely impacted if their ethical image were to suffer, since other enterprises would not do business with them for fear of the risk involved in dealing with a firm that is viewed as being less than ethical. There is nothing else in the concept of reputation and image, apart from this profit driven ethical orientation, which would motivate a capitalist enterprise to value reputation or image, especially when it is linked to social responsibility.

The third drawback of CSR is the fuzziness of definition. Ask a clutch of enterprises to define CSR and you will get a variety of definitions. In many cases, CSR really boils down to philanthropy, especially where the enterprise is driven by a promoter family with philanthropic beliefs. And, philanthropy is not a responsibility. It is a philosophy, a way of life.

It is this variability in the definition of CSR and the flexibility of interpretation that opens it up to misuse and affects its implementation. Misuse, because enterprises often pay lip service to CSR and ignore situations where there is a genuine human need, concentrating instead on situations that offer them the opportunity to enhance their reputation and image as a socially responsible organisation. What this means is that, in the pursuit of image and reputation, genuine social or environmental welfare is often neglected, and CSR fails to achieve its objective.

Even where enterprises are genuine about their CSR initiatives, they often focus on areas that are far removed from their core business. This leads to problems of consistency and sustainability of the initiatives. If the CSR activity is not integrated with the business, it becomes difficult to sustain in the long term, unless there is a strong philanthropic motive driving it. Moreover, in such cases, the CSR activity is often driven by the vision of the CEO. It is quite common to find that the nature of the activity and the beneficiaries change when the CEO changes. And, in the long term, no one really benefits.

In summary, therefore, CSR has great objectives, but the concept itself is open to misuse, and because of the variability of interpretation inherent in its definition, it can often be poorly implemented. Finally, as a concept that is imposed on an enterprise, it conflicts with its core business objective, and ends up being a poor tool for driving social and environmental welfare.