Monday, 22 July 2013

PROFIT versus CORPORATE SOCIAL RESPONSIBILITY


This is a quick blog-post about two articles from the opposite side of the spectrum that I ended up liking regarding profits and Corporate Social Responsibility (CSR).

During my MBA at the London Business School, we had to take an Ethics class and, while I loved it, I remained convinced that looking for ethical behaviour from companies was nonsense... unless ethical behaviour led to higher profits or, vice-versa, unethical behaviour led to lower profits. To quote Ambrose Bierce, "Piracy is Commerce without its folly-swaddles, just as God made it".

My own idea was that companies' behaviours need to be constrained by laws and regulations so that, within those parameters, they can be left to pursue profits to their hearts' content.

I was made aware of the first article I'd like to discuss, Chris Dillow's "Profits, Norms and Power", thanks to Mark Thoma's excellent Economist's View.

Now, Chris Dillow is an avowed Marxian/Marxist, a courageous thing to admit to these days, if you're planning to be taken seriously. Still, his point in "Profits, Norms and Power" is both simple and hard to deny: When Milton Friedman famously said that "the social responsibility of business is to increase its profits", there were counter-weights to corporate power - unions, competition, regulations etc - which meant that profit maximisation was not necessarily incompatible with social welfare. But those counter-weights have been severely weaken and thus corporate power is now more or less unconstrained. In turn, this means that profit-maximisation is very unlikely to be socially responsible.

The second article comes from Mike Shedlock, a conservative blogger, "World Dumbest Idea".

In this article, he pretty much eviscerates a Forbes article by Steve Denning and restates that businesses do best when they concentrate on profit maximisation and on putting shareholders' interests first.

Indeed, he goes as far as saying that things go wrong when companies do not - when they privilege their CEO's interests, when they buy favours from the government etc.

Now, on the last point, I think Mike Shedlock is getting it wrong. Surely, buying off the government to create and extract rent is any business's wet-dream? Even if, of course, the rest of us suffer as a consequence... and thus it tends to be forbidden...

Or, at least, it tendED to be forbidden but it is less and less so... thus re-joining Chris Dillow's point.

Basically, I think both Dillow and Shedlock are right. A business ought to concentrate on profit making and on serving its shareholders' interests. Indeed, as per Mike's point, a lot of things that are wrong in today's business world are wrong because our firms' upper management tend to treat their companies as vehicles for personal wealth accumulation rather than as... well, a business to be managed in the interest of shareholders.

And this has happened because, as per Dillow's point, for various reasons, the power of the corporate elites no longer faces any countervailing force(s).

Any appeal to the better angels of our corporate leaders' nature are bound to end in failure. It's not that they are evil per se. It's that they just play their part in the Great Game of Life.

The way to bring things back under control is simple: We have to favour countervailing powers. It can take many forms. I would like unions to be revived but I am the first one to admit that they weren't perfect and that the ones that remained are stuck-in-the-mud-conservative. I certainly think that anti-trust regulations ought to be reviewed and competition encouraged a lot more. I also think that shareholders ought to be given a larger say in the way companies are run and executives are rewarded. These solutions defy easy left-right categorisations (I think) and so, hopefully, could attract interest from both sides of the political divide...