When There’s a Choice
Still, the fact is that while companies sometimes can do well by doing good, more often they can’t. Because in most cases, doing what’s best for society means sacrificing profits.
This is true for most of society’s pervasive and persistent problems; if it weren’t, those problems would have been solved long ago by companies seeking to maximize their profits. A prime example is the pollution caused by manufacturing. Reducing that pollution is costly to the manufacturers, and that eats into profits. Poverty is another obvious example. Companies could pay their workers more and charge less for their products, but their profits would suffer.
So now what? Should executives in these situations heed the call for corporate social responsibility even without the allure of profiting from it?
You can argue that they should. But you shouldn’t expect that they will.
Executives are hired to maximize profits; that is their responsibility to their company’s shareholders. Even if executives wanted to forgo some profit to benefit society, they could expect to lose their jobs if they tried—and be replaced by managers who would restore profit as the top priority. The movement for corporate social responsibility is in direct opposition, in such cases, to the movement for better corporate governance, which demands that managers fulfill their fiduciary duty to act in the shareholders’ interest or be relieved of their responsibilities. That’s one reason so many companies talk a great deal about social responsibility but do nothing—a tactic known as greenwashing.
Managers who sacrifice profit for the common good also are in effect imposing a tax on their shareholders and arbitrarily deciding how that money should be spent. In that sense they are usurping the role of elected government officials, if only on a small scale.
Privately owned companies are a different story. If an owner-operated business chooses to accept diminished profit in order to enhance social welfare, that decision isn’t being imposed on shareholders. And, of course, it is admirable and desirable for the leaders of successful public companies to use some of their personal fortune for charitable purposes, as many have throughout history and many do now. But those leaders shouldn’t presume to pursue their philanthropic goals with shareholder money. Indeed, many shareholders themselves use significant amounts of the money they make from their investments to help fund charities or otherwise improve social welfare.
This is not to say, of course, that companies should be left free to pursue the greatest possible profits without regard for the social consequences. But, appeals to corporate social responsibility are not an effective way to strike a balance between profits and the public good.
The Power of Regulation
So how can that balance best be struck?
The ultimate solution is government regulation. Its greatest appeal is that it is binding. Government has the power to enforce regulation. No need to rely on anyone’s best intentions.
But government regulation isn’t perfect, and it can even end up reducing public welfare because of its cost or inefficiency. The government also may lack the resources and competence to design and administer appropriate regulations, particularly for complex industries requiring much specialized knowledge. And industry groups might find ways to influence regulation to the point where it is ineffective or even ends up benefiting the industry at the expense of the general population.
Outright corruption can make the situation even worse. What’s more, all the problems of government failure are exacerbated in developing countries with weak and often corrupt governments.
Still, with all their faults, governments are a far more effective protector of the public good than any campaign for corporate social responsibility.
