Corporate social responsibility, an oxymoron?
I live in San Francisco, a famously liberal city (if you want to be disgusted with rabid onservatives, live in Bush's America, if you want to be disgusted by wild-eyed liberals, live in San Francisco). I realized last week I was living a stereotypical North Californian instant: I was driving to get my groceries from Costco, and listening to NPR on the car radio, which was running some kind of talk show. A caller who works for the National Park Service in Florida was asking for advice on how to invest his retirement savings in a socially and environmentally responsible way (the talk show hosts did not give him any useful advice in any case). Later, as I was picking up my groceries, I got a box of "Newman's Own" brand cereal, which donates all its profits to charity, and Costco is a store that is famous for its progressive social policies such as giving full benefits to all employees, in stark contrast with Wal-Mart, which has to say the least a spotty record in labor relations. The car I was driving was a relatively fuel-efficient (albeit not a hybrid) Toyota from a rental company, not a full-time car, and thus used only as necessary rather than just because it is there.
Now, is this just a heart-warming tale of a granola-munching tree-hugger? Not really, as I tend to have a rather utilitarian approach to environmental issues: I don't believe animals have "rights", and that environmental protection is for the benefit of humans, not animals. The granola-like Newman's Own cereal is pretty tasty, on the other hand...
The question is, does this behavior actually make any sense from a rational point of view, or just a sign of mushy thinking? Let us explore the issues, from the perspective of a consumer, and investor and a manager.
First, I purchased products from a socially responsible company (Newman's Own), just as the gentleman from Florida was wondering how to support socially responsible companies while still getting a decent return on his investment. Is it a good idea to let ethical judgments influence economic decisions such as what products to buy or which companies to invest in? It actually makes a big difference whether you are a consumer or an investor.
As a consumer, I buy Newman's Own products first and foremost because they are good (I started buying their spaghetti sauce when I was a post-grad at Yale and had to learn to feed myself or starve), not because they donate to charity. Many products use donations as a sales argument: "buy 5 cans of brand X soup, and we will donate 3 cents to charity Y". I have little patience with this kind of kind of manipulative marketing, and I would rather give money directly to a charity than have some small fraction of profits go to a good cause merely as a promotional gimmick. In the case of Newman's Own, however, the decision to buy is also eminently rational from an economic point of view: as all their profits go to charity, they have absolutely no incentive to adulterate their product and use misleading marketing to squeeze some more profits so executives can have plusher bonuses. Donating all your profits to charity actually is a signal of quality, as brands or long warranties would be in other contexts.
The Floridan investor has a more difficult challenge ahead of him. There actually is a Vice Fund that deliberately invests in "sinful" industries like tobacco or weapons manufacturers. They assume ethical investors are forgoing potentially interesting opportunities that less scrupulous ones can arbitrage into higher returns (oddly enough Level 3 communications is part of their portfolio - what do they know about the telecommunications industry we don't?).
Investment money is fungible, and "ethical investors" would thus be mostly hurting themselves, not the companies they boycott. This is certainly a strong argument. One must make a distinction between companies that are in murky businesses and companies run by unethical managers. If you assume there is a correlation between the two, then it would also folow that unethical managers at unethical companies are more likely to defraud investors.
The good conscience ethical investors feel is in itself something that has value, even if it can't be quantified in purely economic terms. Most people are slightly altruistic and give a few percent of their incomes to charities, so they are not the purely selfish economic agents economic theory posits, but you can factor this feel-good factor, and expect ethical investments to have a slight discount in returns due to this effect.
For managers, let us distinguish between good labor relations and the more nebulous concept of "social responsibility". The first question is whether it makes any sense for a company like Costco to keep its worker-friendly policies when ruthless competitors like Wal-Mart do the opposite. Costco's shares have not performed as well as Wal-Mart's, but the company is profitable and their prices are certainly low, so this featherbedding (as Wall Street would call it) isn't done on the backs of customers. Cotsco argues their friendly policies mean they have much less employee turn-over, better morale and less theft as a result, and better customer service as well.
The Economist regularly publishes articles lambasting the trendy form of social responsibility that periodically sweeps large corporations, and they always come back to Adam Smith's argument that your baker does not make bread for you out of the goodness of his heart, but because it is in his self-interest to do so. Private greed (one of the seven mortal sins) leads to a public good (the availability of food). I tend to agree. Corporate donations to charity are more often than not a form of embezzlement - executives spending the shareholders' money to acquire social capital for themselves. In one extreme example, Conrad Black, the disgraced head of press group Hollinger made donations with his company's money but claimed the credit for himself. Shareholders are perfectly capable of making charitable or political contributions by themselves.
The final argument against corporate social responsibility is that self-regulation doesn't work, as abundantly shown by the recent ChoicePoint privacy fiasco. What is given by corporate grace can be withdrawn equally abruptly by corporate fiat. Socially negative decisions like pollution are usually the sign of what economists call a negative externality - the person making the decision is not the one paying the price, which is often the diffuse public at large. There is a solid mechanism to address this, it is called regulation, and the proper way to make these decisions is by elected government, not by unelected corporate executives. Countries like the US or UK who have a legal system grounded in Common Law (which leaves judges wide leeway to interpret laws and reason on precedent) are reluctant to regulate than countries based on Roman Law (which tries to anticipate all contingencies are provide unambiguous guidelines for them, with little room for interpretation). There can be a compromise - while European countries are usually over-regulated, the US too often suffers from the opposite extreme.
Now, is this just a heart-warming tale of a granola-munching tree-hugger? Not really, as I tend to have a rather utilitarian approach to environmental issues: I don't believe animals have "rights", and that environmental protection is for the benefit of humans, not animals. The granola-like Newman's Own cereal is pretty tasty, on the other hand...
The question is, does this behavior actually make any sense from a rational point of view, or just a sign of mushy thinking? Let us explore the issues, from the perspective of a consumer, and investor and a manager.
First, I purchased products from a socially responsible company (Newman's Own), just as the gentleman from Florida was wondering how to support socially responsible companies while still getting a decent return on his investment. Is it a good idea to let ethical judgments influence economic decisions such as what products to buy or which companies to invest in? It actually makes a big difference whether you are a consumer or an investor.
As a consumer, I buy Newman's Own products first and foremost because they are good (I started buying their spaghetti sauce when I was a post-grad at Yale and had to learn to feed myself or starve), not because they donate to charity. Many products use donations as a sales argument: "buy 5 cans of brand X soup, and we will donate 3 cents to charity Y". I have little patience with this kind of kind of manipulative marketing, and I would rather give money directly to a charity than have some small fraction of profits go to a good cause merely as a promotional gimmick. In the case of Newman's Own, however, the decision to buy is also eminently rational from an economic point of view: as all their profits go to charity, they have absolutely no incentive to adulterate their product and use misleading marketing to squeeze some more profits so executives can have plusher bonuses. Donating all your profits to charity actually is a signal of quality, as brands or long warranties would be in other contexts.
The Floridan investor has a more difficult challenge ahead of him. There actually is a Vice Fund that deliberately invests in "sinful" industries like tobacco or weapons manufacturers. They assume ethical investors are forgoing potentially interesting opportunities that less scrupulous ones can arbitrage into higher returns (oddly enough Level 3 communications is part of their portfolio - what do they know about the telecommunications industry we don't?).
Investment money is fungible, and "ethical investors" would thus be mostly hurting themselves, not the companies they boycott. This is certainly a strong argument. One must make a distinction between companies that are in murky businesses and companies run by unethical managers. If you assume there is a correlation between the two, then it would also folow that unethical managers at unethical companies are more likely to defraud investors.
The good conscience ethical investors feel is in itself something that has value, even if it can't be quantified in purely economic terms. Most people are slightly altruistic and give a few percent of their incomes to charities, so they are not the purely selfish economic agents economic theory posits, but you can factor this feel-good factor, and expect ethical investments to have a slight discount in returns due to this effect.
For managers, let us distinguish between good labor relations and the more nebulous concept of "social responsibility". The first question is whether it makes any sense for a company like Costco to keep its worker-friendly policies when ruthless competitors like Wal-Mart do the opposite. Costco's shares have not performed as well as Wal-Mart's, but the company is profitable and their prices are certainly low, so this featherbedding (as Wall Street would call it) isn't done on the backs of customers. Cotsco argues their friendly policies mean they have much less employee turn-over, better morale and less theft as a result, and better customer service as well.
The Economist regularly publishes articles lambasting the trendy form of social responsibility that periodically sweeps large corporations, and they always come back to Adam Smith's argument that your baker does not make bread for you out of the goodness of his heart, but because it is in his self-interest to do so. Private greed (one of the seven mortal sins) leads to a public good (the availability of food). I tend to agree. Corporate donations to charity are more often than not a form of embezzlement - executives spending the shareholders' money to acquire social capital for themselves. In one extreme example, Conrad Black, the disgraced head of press group Hollinger made donations with his company's money but claimed the credit for himself. Shareholders are perfectly capable of making charitable or political contributions by themselves.
The final argument against corporate social responsibility is that self-regulation doesn't work, as abundantly shown by the recent ChoicePoint privacy fiasco. What is given by corporate grace can be withdrawn equally abruptly by corporate fiat. Socially negative decisions like pollution are usually the sign of what economists call a negative externality - the person making the decision is not the one paying the price, which is often the diffuse public at large. There is a solid mechanism to address this, it is called regulation, and the proper way to make these decisions is by elected government, not by unelected corporate executives. Countries like the US or UK who have a legal system grounded in Common Law (which leaves judges wide leeway to interpret laws and reason on precedent) are reluctant to regulate than countries based on Roman Law (which tries to anticipate all contingencies are provide unambiguous guidelines for them, with little room for interpretation). There can be a compromise - while European countries are usually over-regulated, the US too often suffers from the opposite extreme.
posted by Fazal Majid at 2:00 PM
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