Can companies do well by doing good? Yes—sometimes.
But the idea that companies have a responsibility to act in the public interest and will profit from doing so is fundamentally flawed.
Large companies now routinely claim that they aren’t in business just for the profits, that they’re also intent on serving some larger social purpose. They trumpet their efforts to produce healthier foods or more fuel-efficient vehicles, conserve energy and other resources in their operations, or otherwise make the world a better place. Influential institutions like the Academy of Management and the United Nations, among many others, encourage companies to pursue such strategies.
It’s not surprising that this idea has won over so many people—it’s a very appealing proposition. You can have your cake and eat it too!
But it’s an illusion, and a potentially dangerous one.
Very simply, in cases where private profits and public interests are aligned, the idea of corporate social responsibility is irrelevant: Companies that simply do everything they can to boost profits will end up increasing social welfare. In circumstances in which profits and social welfare are in direct opposition, an appeal to corporate social responsibility will almost always be ineffective, because executives are unlikely to act voluntarily in the public interest and against shareholder interests.
Irrelevant or ineffective, take your pick. But it’s worse than that. The danger is that a focus on social responsibility will delay or discourage more effective measures to enhance social welfare in those cases where profits and the public good are at odds. As society looks to companies to address these problems, the real solutions may be ignored.
Well and Good
To get a better fix on the irrelevance or ineffectiveness of corporate social responsibility efforts, let’s first look at situations where profits and social welfare are in synch.
Consider the market for healthier food. Fast-food outlets have profited by expanding their offerings to include salads and other options designed to appeal to health-conscious consumers. Other companies have found new sources of revenue in low-fat, whole-grain and other types of foods that have grown in popularity. Social welfare is improved. Everybody wins.
Similarly, auto makers have profited from responding to consumer demand for more fuel-efficient vehicles, a plus for the environment. And many companies have boosted profits while enhancing social welfare by reducing their energy consumption and thus their costs.
But social welfare isn’t the driving force behind these trends. Healthier foods and more fuel-efficient vehicles didn’t become so common until they became profitable for their makers. Energy conservation didn’t become so important to many companies until energy became more costly. These companies are benefiting society while acting in their own interests; social activists urging them to change their ways had little impact. It is the relentless maximization of profits, not a commitment to social responsibility, that has proved to be a boon to the public in these cases.
Unfortunately, not all companies take advantage of such opportunities, and in those cases both social welfare and profits suffer. These companies have one of two problems: Their executives are either incompetent or are putting their own interests ahead of the company’s long-term financial interests. For instance, an executive might be averse to any risk, including the development of new products, that might jeopardize the short-term financial performance of the company and thereby affect his compensation, even if taking that risk would improve the company’s longer-term prospects.
An appeal to social responsibility won’t solve either of those problems. Pressure from shareholders for sustainable growth in profitability can. It can lead to incompetent managers being replaced and to a realignment of incentives for executives, so that their compensation is tied more directly to the company’s long-term success.
