Thursday, July 28, 2005

CSR and corporate self interest

I have written a longer post below because it raises themes that should be discussed and not just left to those defending private companies under guise of allowing them to act with impunity with the pretense that whatever they do is for society's good and that Adam Smith said so.

Corporate Social Responsibility (CSR) is about requiring private companies to consider ways in which they can do more than maximise their profits. The ‘more’ bit is controversial, with governments, political parties, trade unions, consumer groups and single issue campaigners all adding to the pile of additional objectives for companies to add to their traditional role of maximising shareholder value.

Some companies (Shell, BP, for example) have gone with the flow and directed some of their expenditures into projects that provide good public relations; other sponsor all kinds of events which also attract welcome publicity (Royal Bank of Scotland sponsors UK rugby) and the ‘feel warm’ factor towards them.

The history of company behaviour since the original Joint Stock Companies of the 18th century, and their successors in the capitalist era from the 19th century, shows that intervention by the law has been necessary to curb, even prohibit, unwelcome practices to which many of them were wont to engage in when left alone (laissez faire) to do whatever was in their self interest. The list is long and can be represented by mentioning the ‘Truck Acts’ (against paying workers in kind or in good from company shops at company determined prices, instead of cash); restrictions on the employment of women and children in coal mines; shorter hours (the 10-hour day took a mighty effort to pass); the careless use of hazardous chemicals; the dumping of pollutants and effluent into rivers or in piles on land; and more recently, legislation against discrimination, unfair dismissals, and unsafe working practices.

I raise these by way of introduction to a contribution on CSR by Johnny Munkhammar, a Director at Timbro, a free-market institute in Sweden, in Tech Central Station (‘where free markets meet technology’) on 27 July 2005. I think that Johnny Munkhammar writes clearly about the issues, but by not referring to the history of imposing on private companies, he sanitises and ends up with a slightly confused response to the very questions he poses at the head of his article.

He writes:

“In recent years, the CSR trend has become very strong. Political decisions and public opinion are building momentum behind the concept. Since companies are the route to prosperity, the debate is essential. And since companies are the core of capitalism - the expression of man's creativity protected by private property and freedom - it is also a discussion about principles.”

Fair enough. We know where we are going. Or do we?

He continues:

“A basic starting-point for a discussion of CSR could be a famous quote which states a principle for a free society and its effects:

"…every individual necessarily labours to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. …He intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good."
--Adam Smith, The Wealth of Nations, 1776”

Oh, dear! By neglecting to quote the entire passage (Wealth of Nations, page 456: Book IV.ii.9), the resultant quote appears as a general principle applying to the entire range of behaviours of individuals and companies in all circumstances and all periods. This enables self interest to be elevated to a axiom when in fact it needs to circumscribed with appropriate qualifications to prevent us assuming that self interest (and the invisible hand) is of divine purpose.

Yet a moment’s reflection cautions against such a conclusion and an acquaintance with the philosophy and political economy of Adam Smith leads us in a different direction. Smith was talking about how a preference for the home market led individuals to boost national annual revenue and thereby the exchange value of national revenue (the two being equal), whereas a preference for distant investments abroad would not be as productive for the national economy. He was not giving a carte blanche to companies, or individuals, to do what they liked under the misbelieve that somehow divine providence intervenes and mysteriously makes the most selfish acts beneficial to society.

A large part of Wealth of Nations is a polemic against ‘merchants and manufacturers’ promoting their self interests at the expense of society through monopolies, price cartels, restrictions on outsiders (from the next village and abroad) entering local markets. He railed against feudal lords and their incredible selfishness (he called the history of the rulers of mankind ‘vile’ in their tyrannical self interest). This is why Smith never wrote in favour of laissez faire. He advocated the State should take over the guaranteeing of weights, the quality of precious metals, the ending of cheating workers of their wages by paying in company tokens exchangeable at company run stores, the education of children and expenditures against ‘noxious’ diseases.

Johnny Munkhammar writes:

“The pursuit of self-interest creates wealth. That is what changed after thousands of years of misery and poor conditions for people. Today, the average person in the US or Europe lives better than the kings and queens of the Middle Ages.”

The one-sided pursuit of self-interest does not produce wealth. If it did then we would have a history of wealth creation despite the ravages of barbarianism against wealth creating societies for millennia. Markets create wealth when individuals trade their output for the output of others. Violence (self interest in the extreme!) does not create wealth; only the division of labour and the propensity to ‘truck, barter and exchange’ creates wealth. That, after all is what Smith’s ‘Inquiry in the Natural and Causes of the Wealth of Nations’ was about.

Markets are free. They operate in harmony as individuals mediate their self interest with the self interest of others. They appeal not to their own self interest in trying to conclude a bargain, but to the self interest of the other party. Companies, a more modern phenomenon that post-dates Smith’s life (1723-90), must mediate their self interest with consideration of the self interest of their customers, and in a more general sense, with the self interest of the society that enables them to manage their private property under the protection of the law. For this to work, they must obey the law and operate within its constraints. Laws are passed by democratic parliaments in free market countries.

“Companies, focusing on their main aim, promoted the general interest,” write Johnny Munkhammar, as if he has proven his point, but by neglecting the full Smithian agenda, he slides into that carte blanche again. Recent history of corporate fraud shows how little has changed from when ‘merchants and manufacturers’ were left to their ‘main aim’, profit maximisation, in Smith’s day.

Munkhammar continues:

“What does this have to do with CSR? To me, CSR is about making companies and their owners focus on other things besides their self-interest. They should not only concentrate on producing the best clothes, for example, but also on social matters. And they should not be allowed only to seek profit, if that is what they wish, since that is not ‘responsible’.”

No, no, and no again. They must always go beyond their self interest if they are to serve their customers and compete fairly with others. It’s in Book I of “wealth of Nations” and applies throughout the other four books. To do so is not to sacrifice legitimate profit as mediated within their markets. They could make more profit by reversing laws that intervene on their private greed but protect society as a whole.

He finishes with a flourish:

“All the goods and services, all the jobs and all the prosperity in the world, come from companies. If companies try to give more by being less focused on their self-interest, they could end up giving less. In that case all of society loses. The defense of companies and their right to pursue their self-interest is not only the defense of capitalism. It is also the defense of a society in which there is constant progress - and that includes social progress.”

Companies are not separate from society. They operate within it and are subject to its laws. Without these laws, no company would operate for long with impunity. The barbarian is always at the gate and sometimes creeps surreptitiously into the very citadel.

No company has the absolute ‘right’ to ‘pursue its self interest’; its rights are to pursue the self interests of its customers, because by doing so it benefits its own self interest best. And what is true for companies is also true for every individual too. That is the true meaning of Adam Smith’s legacy (and CSR).


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