Home > Action, Corporations > Corporate Responsibility and the Man in the Mirror

Corporate Responsibility and the Man in the Mirror

Last week, Dr. Aneel Karnani, a University of Michigan business school professor, presented “The Case Against Corporate Responsibility” in the pages of the Wall Street Journal. The core of Karnani’s argument, that “the idea that companies have a responsibility to act in the public interest and will profit from doing so is fundamentally flawed,” comes in two early paragraphs:

Very simply, in cases where private profits and public interests are aligned, the idea of corporate social responsibility is irrelevant: Companies that simply do everything they can to boost profits will end up increasing social welfare. In circumstances in which profits and social welfare are in direct opposition, an appeal to corporate social responsibility will almost always be ineffective, because executives are unlikely to act voluntarily in the public interest and against shareholder interests.

Irrelevant or ineffective, take your pick. But it’s worse than that. The danger is that a focus on social responsibility will delay or discourage more-effective measures to enhance social welfare in those cases where profits and the public good are at odds. As society looks to companies to address these problems, the real solutions may be ignored.

Karnani’s thesis strikes me as unremarkable. What are interesting, however, are two related topics, one of which he does not explore, and the other of which he underexplores. The first is the relationship between a corporation and an individual in the responsibility context, and the second is Karnani’s concern that “the real solutions” may be lost with a focus on corporate responsibility.

A corporation is an organization of humans engaged in a business enterprise. People incorporate as a way to order their affairs and be treated under the law in a way that is tied to the nature of their activity. While the law commands that corporate governors act to maximize profits, the incentives for individual actors are not so different. For people, as for corporations, there often is a cost to acting in a socially responsible manner, and individuals who commit themselves to environmentally friendly behavior, for example, may find themselves in a difficult financial position. Substituting “people” for “corporations” in Karnani’s article would have challenged us to look more critically at our own life choices.

Additionally, those who pursue environmental, health, and other responsibility goals should consider the fact that the behavior they aim to encourage usually is more expensive for people than their current behavior. Healthier food and hybrid cars are more expensive than the less responsible alternatives. Leaders need to decide whether to try to align incentives– through government regulation or mobilization of collective action, for example– to achieve health and environmental goals or, more radically, to break out of a cost-benefit analysis altogether.

The second point, that a focus on corporate responsibility will distract from “the real solutions” to social problems, is an important contribution that could come out of a discussion like the one Karnani initiated, but Karnani doesn’t do much with it. Expecting corporations to act responsibly with respect to social problems “will delay or discourage more-effective measures to enhance social welfare in those cases where profits and the public good are at odds,” he writes. This is the obvious conclusion that flows from the premise that corporations only act to maximize profits. More interesting is whether, when profits and the public good are not at odds, the corporate-provided solution is suboptimal or incomplete, for example. This might happen because a corporate solution arises in response to consumer demand, but because the mass of consumers are not experts and may manifest their demand imprecisely, the “solution” will not respond to the actual underlying problem, but rather the consumers’ reaction to their understanding of that problem. It might also happen because corporations, ever profit-maximizers, choose cheap solutions to problems that require more thorough treatment or choose to make a big deal out of resolving a relatively minor issue while distracting consumers from more serious– and more expensive– issues that go untreated. See also here (discussing the danger of distorting discourse through a disproportionate focus on relatively minor issues). On the other hand, perhaps it’s the case that consumers can gain a sufficient understanding of problematic issues like health and environmental degradation and can communicate their desires for more responsible corporate behavior in a way that forces an appropriate response. Karnani did not pursue this avenue in his article, so the thoughts in this post are merely speculation.

Karnani’s article, as interpreted and expanded upon here, is a helpful reminder that people, not disembodied concepts like “corporations” and “the government,” must be the ones to act in response to social problems.

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Categories: Action, Corporations
  1. Paxton
    August 30, 2010 at 9:29 am

    Alec, this is really an interesting argument and idea. But I believe that this deserves greater thought, especially after reading the entire WSJ article.

    I’d suggest you take a look at 3M’s Pollution Prevention Pays, one of the most famous and successful “CSR” efforts.

    http://solutions.3m.com/wps/portal/3M/en_US/3MSustainability/Global/Environment/3P/

    Since I can’t pretend not to love the wiki, “License to Operate” is not mentioned, but should be http://en.wikipedia.org/wiki/Corporate_social_responsibility#License_to_operate

    Lastly, negative externalities (using the catch-all word “pollution”) is not accounted for here and often seems to be conveniently forgotten or ignored by economists.

    Paxton

    • AD
      August 30, 2010 at 3:35 pm

      Thanks, Paxton. I acknowledge that this post is a bit under-theorized, and it is on the fringe of my areas of familiarity. I wanted to post a timely response to the original article and provide just enough so that people like you with greater knowledge could chime in.

      I don’t think that Karnani is denying that corporations engage in sustainable practices. His point, at least insofar as publicly traded companies are concerned, is that because the law requires corporate governors to maximize profits, corporations won’t practice green behavior unless it is compatible with profit maximization.

      My intermediate point was a simplistic one: compliance with good environmental practices can be costly for individuals and corporations alike, and while individuals are not under the legal mandates that bind corporate leaders, they can feel similar pressures of a world of limited resources.

      I agree that externalities are among the things we are not good at pricing or otherwise accounting for. On one hand, our general behavior is more expensive than we currently think because we fail to internalize costs like pollution. On the other hand, I wonder if a full accounting would make responsible behavior look less expensive, rather than being more expensive as I wrote above.

      My concluding point above was that, rather than blaming abstract entities like “corporations” for environmental problems or relying on them for solutions to our problems, we need to remember that humans comprise these organizations and, tying in the intermediate point, humans must act (whether as individuals, corporations, or governing institutions) to solve these difficult problems. In light of your reference to your mention of 3M’s program, I would add that it is worth remembering that humans acting in a corporate structure can make a positive difference. This reconnects with the vague question I asked midway through the post: Are we better off working toward a system that aligns green practices and profits or stepping outside a system driven by financial incentives?

      The other, related question that remains outstanding is whether market-driven “solutions” are adequate and desirable, or whether the market is an inefficient or ineffective filter for demanding responses to complicated, long-term problems.

      Finally, I agree that I should have made reference to “license to operate,” and I encourage readers to peruse the two links in your comment.

  2. AD
    August 30, 2010 at 3:52 pm

    Karnani responds: Elaine Cohen of CSR-Reporting posted an email that Professor Karnani wrote to her defending his original article (the basis for my post above) in the face of widespread reaction to it. His email is available on Cohen’s website: http://csr-reporting.blogspot.com/2010/08/scoop-karnani-responds.html

  1. August 29, 2010 at 6:26 pm
  2. August 30, 2010 at 1:11 am
  3. September 11, 2010 at 12:45 pm

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