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.