Ethical Performance
inside intelligence for responsible business
 

analysis

balancing profits and social responsibility

July 2001

Critics charge that corporate social responsibility is a business distraction and distorts the market by deflecting companies from their primary role of making profits. But CSR is a response to market forces, not a challenge to them

A new critic of corporate social responsibility has emerged. David Henderson, a visiting professor at the Westminster Business School, London, has written ‘Misguided virtue, false notions of corporate social responsibility’, a pamphlet published last month by the New Zealand Business Roundtable.

Henderson believes that the ‘wide-ranging consensus’ in favour of CSR is ‘dangerously wrong’ and has the potential to do harm. The 108-page pamphlet details his reasons, but the former head of the economics and statistics department at the Organization for Economic Co-operation and Development has singled out three aspects in a letter to Ethical Performance (which can be accessed here).

First, he charges that many corporations have failed to contest, or weakly surrendered to, the arguments and demands of anti-business activist groups, and have failed to ‘make an informed case’ for the market economy. He also says the contribution of the business world to the debate has been inadequate.

Second, Henderson argues that the supporters of CSR often present a misleading picture of recent trends in the world economy and their implications for public policy. It is wrong, he says, to maintain that globalization has led to marginalization and shifted power to multinational enterprises.

Neither of these arguments go to the heart of the debate about CSR. Business may, or may not, ‘have weakly surrendered’ to the demands of activists, but that is a question for their public relations strategists. Some supporters of CSR may be presenting a ‘misleading picture of recent trends in the world economy’, but this does not mean that CSR is ‘dangerously wrong’.

Henderson is on his strongest ground when he attacks the role of non-governmental organizations in seeking to influence the way companies behave. As he points out, companies have long had to take account of public opinion and expectations, but many NGOS are single issue pressure groups with no democratic mandate beyond their often small memberships.

However, it is not only NGOs, but also customers and investors, who are driving the CSR agenda.

His third charge is that CSR raises costs within businesses because it entails more elaborate reporting systems, time-consuming consultation and the adoption of ‘self-imposed’ standards. This is likely to increase the regulatory burden on business, as the companies concerned appeal to their governments to compel competitors to adopt similar practices.

This argument deserves closer examination, especially in light of the fact that it was picked up in May by the economic commentator Martin Wolf, who drew on Henderson’s pamphlet for a polemical piece in the Financial Times which concluded that ‘the role of well run companies is to make profits, not save the planet.’

Wolf’s article prompted a large number of letters to the FT’s editor, with most of the correspondents choosing to focus on the question of whether CSR policies, in the words of Wolf, ‘distract business from its primary role of profit generation’. Almost all agreed that companies’ overriding objective was to make profits. But unlike Wolf and Henderson, correspondents argued that CSR was good for profits and a response to market demands, rather than being anti-profit and anti-market.

Andrew Harrison, principal lecturer in economics at Teesside Business School, wrote: ‘The pressure for corporate social responsibility does not only come from unrepresentative pressure groups. It is increasingly coming from consumers. So companies that adopt social objectives are, to an extent, responding to market forces.

‘Ignoring the consumer is no way to create profit. Nor is it distorting the market. In fact, to ignore social responsibility is to miss out on a positive externality, or to allow a negative externality to persist. This would be an example of market failure.’

Craig Mackenzie, director, governance and socially responsible investment at fund manager Friends Ivory & Sime, wrote: ‘These days, companies take social responsibility seriously in order to make profits.’

CSR is no more, and no less, than a business tool that can help companies to operate under changing market conditions. Its rise is a response to market forces, as companies develop new ways of managing their operational and reputational risks. Craig Smith, associate professor of marketing and ethics at the London Business School, summed up the response of most critics when he wrote: ‘Mr Henderson’s profit-maximization model of business success is appealing in its simplicity, but out of touch with reality.’




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