Monday, August 01, 2005

Ideological short circuit

I work in the field of corporate governance (as defined here; also see here), so I often deal with the relationship between shareholders and directors/managers. I strongly believe that in many instances corporate governance needs to be improved (in the interests of shareholders) and it irks me that corporate governance is often conflated with corporate social responsibility, as I agree with this magisterial survey that the Economist ran a few months ago.
The one thing that all the nostrums of CSR have in common is that they are based on a faulty—and dangerously faulty—analysis of the capitalist system they are intended to redeem. Admittedly, CSR is now so well entrenched and amply funded that to complain about it may be pointless. We are concerned that it may even be a socially irresponsible use of scarce newsprint. Nonetheless, if businessmen had a clearer understanding of the CSR mindset and its defects, they would be better at their jobs and everybody else would be more prosperous.
Simply put, advocates of CSR work from the premise that unadorned capitalism fails to serve the public interest. The search for profit, they argue, may be a regrettable necessity in the modern world, a sad fact of life if there is to be any private enterprise. But the problem is that the profits of private enterprise go exclusively to shareholders. What about the public good? Only if corporations recognise their obligations to society—to “stakeholders” other than the owners of the business—will that broader social interest be advanced. Often, governments can force such obligations on companies, through taxes and regulation. But that does not fully discharge the enlightened company's debt to society. For that, one requires CSR.
This is wrong. The goal of a well-run company may be to make profits for its shareholders, but merely in doing that—provided it faces competition in its markets, behaves honestly and obeys the law—the company, without even trying, is doing good works. Its employees willingly work for the company in exchange for wages; the transaction makes them better off. Its customers willingly pay for the company's products; the transaction makes them better off also. All the while, for strictly selfish reasons, well-run companies will strive for friendly long-term relations with employees, suppliers and customers. There is no need for selfless sacrifice when it comes to stakeholders. It goes with the territory.
Thus, the selfish pursuit of profit serves a social purpose. And this is putting it mildly. The standard of living people in the West enjoy today is due to little else but the selfish pursuit of profit. It is a point that Adam Smith emphasised in “The Wealth of Nations”: “It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest.” This is not the fatal defect of capitalism, as CSR-advocates appear to believe; it is the very reason capitalism works.
Do read the whole thing. Also see here for some more, well-informed, CSR bashing. At any rate, this story (via Instapundit) is of particular interest to me.
Internet equipment maker Cisco Systems is fighting a shareholder action that urges the company to adopt a comprehensive human rights policy for its dealings with the Chinese government, and with other states practicing political censorship of the internet.
This poses a dilemma for me. On the one hand I completely agree that Cisco's activities in China are problematic (see Rebecca McKinnon's RConversation blog which has assiduously reported on this subject; also see this recent Anne Applebaum column in the Post). On the other hand, as noted above, I generally feel that this should be addressed by the company itself only to the extent that it affects its image (and therefore shareholder value); otherwise it should be dealt with by the government.
However it seems that we are moving toward an ideal middle ground. The activists (whose ultimate goal I may not agree with) say that their immediate objective is to garner attention. If they are so successful that Cisco's image will be affected unless it shapes up it would serve the direct interests of the shareholders to change policy (notwithstanding the evident costs the company would incur as a result). This will hopefully have the positive effect of changing Cisco's behavior in the short term and also bringing the attention of Congress to this problem, which should institute long-term solutions that would apply to all market actors.

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