Why Just Business is Just Business

By Azhar Ghani

INTRODUCTION Despite having gained a foothold in mainstream business thinking, the practice of corporate social responsibility (CSR) if not the idea itself continues to be debated in business, government and academic circles. At times confused and often times confusing, one key discussion has swirled around the various conceptualisations of CSR. Indeed, the term CSR has been defined in various ways. Carroll (1979) and Hemphill (2004) looked at it in terms of economic, legal, ethical and discretionary strands of responsibility, and good corporate citizenship respectively. Friedman (1962), on the other hand, drew the line at the narrow economic perspective of increasing shareholder wealth. His 1970 critique of the CSR concept in the New York Times Magazine1 is very persuasive and has a cult-like following among free-marketeers. As defined by Friedman, social good is maximised when business focuses strictly on profits, leaving to government the task of regulating public goods, including non-economic risks. In his words, the responsibility of corporate executives is to make as much money as possible2. In the Wealth of Nations, Adam Smith noted that by pursuing his own interest, an individual promotes (the interest) of society more effectually than when he really intends to promote it3. This suggests that good can be better served by an amoral profit motive, and makes a mockery of the popular CSR mantra of doing well by doing good. Yet, Smiths invisible hand which guides the self-interest that inadvertently

See Milton Friedman, The Social Responsibility of Business Is to Increase Its Profits, New York Times Magazine (1970) 2 Ibid 3 As cited in Profit and the Public Good, in The Good Company, Economist, January 22, 2005.

serves the public good, does not work in a vacuum but is part of a body of rules and norms that North (1990) call institutions. North wrote: Institutions are the rules of the game in society or, more formally, are the humanly devised constraints that shape human interaction. In consequence they structure incentives in human exchange, whether political, social, or economic. 4 By understanding the rules of the game and how they structure incentives, this paper aims to show why doing good is part of doing business, more so than the converse.

(A)MORAL APPROACH For a start, proponents of the good will follow good business might like to revisit Friedmans 1970 essay. In exhorting corporate executives to make as much money as possible, Friedman did submit that this act of discharging their responsibilities should be done while conforming to the basic rules of the society, both those embodied in law and those embodied in ethical custom5. Friedman did not elaborate on why they should do so, but one easily can see how, by not conforming to these rules, businesses would be faced with disincentives in the form of legal penalties or informal sanctions like public avoidance of their products and services. Indeed, practices of good have long become synonymous with good practices. If one were to treat ones employees well, and not engage in corruption, the likely dividend could be a well-run and profitable company built on the back of a more motivated and productive workforce, as well as more business generated from a positive public image.

See North (1990, 3 -5) See Milton Friedman, The Social Responsibility of Business Is to Increase Its Profits, New York Times Magazine (1970)
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If doing good is good business, why does the evidence not show this causation, or even more worryingly, correlation? Blodget (2007), for instance, pointed out that tobacco giant Philip Morris a company that produces products that sicken or kill millions of people a year would have netted an investor the highest possible returns if he had put money in the company some 50 years ago. The implication, of course, was that a company which is responsible for a great social ill has been so profitable that its financial performance has left other companies in a trail of dust and smoke. Some might argue that the calculus would have been different if the harmful effects of tobacco were known earlier, but a more recent study appears unable to provide any comfort to CSR proponents either. The empirical investigation, covering a total of 520 financial firms in 34 countries, between the years 2003 and 2005, found that financial performance and CSR are not related (Hsuang et al, 2009). It does not help either that measuring good, for example like environmental protection and social justice, is fraught with subjectivities; and it does not get easier when one tries to measure the impact of doing good on profits6. For example, even the simple approach of focusing on the ethical constraints and duties that a business has to refrain from wrongfully harming other human beings and the natural environment in its operations is not easy. While some basic principles are relatively uncontroversial, specification of these duties is not easy. There is positive duty along Kantian lines, for example, to treat people with basic respect. This duty applies to all areas of human endeavour and business decisions should not be exempted. A strong deontological argument supports a firms decision to employ global safety standards that would, in principle, respect the lives of all its employees and other affected people or perhaps even future generations equally. Yet, apart from these broad principles, specifying concrete measures would remain a challenge without the guidance of established institutional norms.
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See The world according to CSR in The Good Company, Economist, January 22 2005.

PRICING MORALITY Indeed, applying Norths institutional framework of analysis, together with Smiths invisible hand theory, one can surmise that the incentive structure offered by the current set of institutions is not providing the kind of guidance that do-gooders hope to see. In this respect, the empirical study by Hsuang and his colleagues (2009) is instructive. While it had shown that financial performance and CSR are not related, it had interestingly and rather strikingly also found that firms would actually act in more socially responsible ways to enhance their competitive advantages when the market competitiveness is more intense, and that firms in countries with stronger shareholder rights tend to engage in less CSR activities. The first, indicate that firms will do what it takes to gain competitive advantages in order to gain more profits for their shareholders. The second, however, provide a clear indication that shareholders have yet to be convinced of the competitive advantage offered by CSR activities. As the behavior of firms is determined by the remit given to them by shareholders, it is clear that the latter hold the balance in whether a company joins the ranks of those which walk the doing good is good business talk. Indeed, corporate executives who wish to sacrifice profit to some limited extent in order to advance other goals of social responsibility face economic and legal constraints, in markets for goods and services, and in the legal structures of corporate governance that give shareholders significant powers to monitor, and in some cases, even to replace corporate managers, in pursuit of other goals deemed by society as worthy. And goals are deemed worthy by society based on the norms and values of the day. Doing good, therefore, is subject to institutional constraints. Also, something that is deemed worthy would be priced accordingly and is thus admitted into the ranks of incentivised activities.

The cost of making a bad decision is not low either. Firms that participate in costly CSR activities that are not valued by society, and thus not priced at the correct level, will have to raise prices, reduce wages and other costs, accept smaller profits, or pay smaller dividends. That is not all. They also have to accept the economic consequences, which may include loss of market share, increased insurance costs, increased borrowing costs, and loss of reputation. In the long term, the firm may face shareholder litigation, corporate takeover, or even closure. CONCLUSION The question therefore is not whether doing good is good for business. Doing good is part of doing business insofar as to how the need to conform to norms and the ability to appeal to the values of consumers have an impact on the bottomline. The ambivalence surrounding CSR could arguably be attributed to a mismatch of values (very likely a lag) between those at the forefront of the battle to promote good corporate citizenry, like the charities, non-government organizations and other elements of civil society, and the general public who shape institutional norms and the incentive structure. CSR activities, even bad ones that could result in the demise of companies, play a part in shaping institutions that are ever evolving. Thus, doing good is part of doing business. Whether one ultimately profits from it depends on how well one understands the institutional framework one operates in.