Right-sizing corporate social responsibility

Corporate social res ponsibility and sustainability are two concepts that have become increasingly popular in recent years. Activists, politicians, and business leaders use them, and corporate and government actions are partly judged according to them.

But what exactly do these concepts mean? Are they compatible with efficient management in a free society? To what extent are they even useful?

Corporate social responsibility has been defined in various ways. Economist Howard R. Bowen defined it in the 1950s as “the obligations of businessmen to pursue those policies, to make those decisions, or to follow those lines of action which are desirable in terms of the objectives and values of our society.” So far, so innocuous.

Even a more expansive definition including further actions to promote socially desirable outcomes can still i mprove the bottom l i ne while taking further steps toward the “social good.” For i nstance, such steps could lead to increased sales through a better reputation, reduced costs through decreased resource use, better employee engagement through “green” activities, or more social licence from a better perception of the firm.

Yet some would impose on firms a definition of so- cial responsibility that extends beyond the constraints already found in laws and regulations. This implies maximizing the welfare of all “stakeholders” including workers, consumers, the wider community and even f uture generations. This more extreme definition is much more problematic for shareholders, and for society in general.

Milton Friedman famously argued that “there is one and only one social responsibility of business — to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition, without deception or fraud.” As we have known since Adam Smith, this will lead to a general increase in society’s welfare, without it being a direct goal of the profitable activity. The danger of diverting business from its pursuit of profit is the slowing, or even the reversal, of this increasing welfare.

Another widely used but loosely defined concept is sustainability, which dates back to the 1960s and early 1970s. Like corporate social responsibility, sustainability makes sense if we define it in a narrow way. In 1986, for instance, the Brundtland Report defined sustainable development as “development that meets the needs of the present without compromising the ability of future generations to meet their own needs.”

More recently, however, organizations like the United Nations and UNESCO have stretched the concept far beyond the intents of the original environmentalist thinkers, including such disparate elements as healthy lives, sport, and culture. Such broad conceptions of sustainability are inevitably accompanied by calls for all sorts of government intervention.

Yet if we stick with a narrower definition — making sure pollution is limited and we don’t run out of resources — then markets are actually an ideal institution for ensuring sustainability.

First, they signal problems with resource scarcity, through higher prices. Whenever increased scarcity drives prices up, everyone adjusts by using less, sub- stituting more abundant alternatives.

Second, a scarcer and costlier resource creates an incentive to find more. Copper is a good example, since reserves soared and prices plummeted over the past 200 years.

Third, since innovation to replace scarce resources can be very profitable, a free enterprise system usually takes care of shortages before they ever happen.

Copper is again a good example, since the need for this metal in telephone lines melted away with the invention of optic fibre and cell phones.

Finally, a free-market system promotes growth and rising living standards, and a richer society is one that can afford to tackle environmental problems. According to Yale University’s Environmental Performance Index, rich countries’ environments are in much better shape than those of developing countries.

Corporate social responsibility and sustainability are important concepts. Understood too expansively, they can cause significant harm to our economy, but properly understood, they complement rather than oppose the profit motive, and can help firms and society achieve a goal that everyone shares: a better life for all, now and in the future.

SOME WOULD IMPOSE A DEFINITION OF SOCIAL RESPONSIBILITY THAT EXTENDS BEYOND THE CONSTRAINTS ALREADY FOUND IN LAWS.