October 15, 2004

Corporate Social Responsibility

Corporate Profits vs. Social Goals

Geoffrey Heal

Should corporations worry about their social impact? Or should they just go for profits and trust that everything else will fall into place?

Consider Apple, Intel and Microsoft: In 20 years they created an industry affecting everyone in the developed world, changing lives and businesses, creating billions of dollars in value for shareholders and tens of thousands of jobs for new employees.

These companies contributed massively to society and did so in the cause of making money for their shareholders. They illustrate well Adam Smith’s classic remark: “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.” If companies make products that consumers value and price them affordably, making money in the process, what is the need for corporate social responsibility?

Tobacco companies sell a poison that is slow acting and addictive, so they can actually make money while killing their customers. Clearly, this is a different case from the tech sector. What about auto and oil companies, which help us experience freedom by means of personal mobility, while polluting the environment and changing the climate? What differentiates the tech sector from tobacco, oil and autos?

To understand this, we have to see when the interests of corporations are fully aligned with those of society as a whole and when they are in conflict, and for this we have to go beyond Adam Smith, to the concepts of private and social costs. Markets work well for society, aligning corporate and social interests, when a firm’s private and social costs are the same, as is the case with the tech sector. But when these costs are different, markets don’t do such a good job, as is the case with tobacco and, to a lesser degree, oil and autos. This explains the conflict between corporations and society in these sectors.

Discords can arise, too, over issues of fairness. What is a fair wage for unskilled labor in Vietnam, or for that matter in the retail sector in the United States? As Nike and Wal-Mart know, these are controversial issues. Markets may be efficient, but there is no presumption that they are fair.

Corporate social responsibility needs to be an important part of corporate strategy in sectors where inconsistencies arise between corporate profits and social goals, or else discord can arise over issues of fairness. A corporate social responsibility program can make executives aware of these conflicts and commit them to taking social interest seriously. It can also be critical to maintaining or improving staff morale, to the stock market’s assessment of a company’s risk and to negotiations with regulators.

The payoff to anticipating sources of conflict can be very high — indeed it can be a matter of survival, as societies penalize companies perceived to be in conflict with underlying values. Asbestos was the tobacco of the 1950s: Where is that industry today?

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