“Adam Smith’s invisible hand often seems invisible because it’s not actually there,” said Professor Joseph Stiglitz in his keynote address to the annual Business for Social Responsibility (BSR) conference. BSR is a nonprofit organization that provides companies with information and advisory services on corporate social responsibility. More than 1,000 participants attended the conference, which was held November 9–12, 2004 in New York.

Stiglitz explored the relationship between the social responsibility of business and international development, and the need for business to address a range of stakeholders. “Modern economic theory helps explain why, contrary to Adam Smith, maximizing shareholder value does not necessarily lead to economic efficiency, nor achieve other objectives such as social justice, the preservation of the environment or respect for human rights,” he said. While governments can address some market failures and externalities, corporate social responsibility is needed to compensate for imperfect information, incomplete markets and regulation’s limited ability to mitigate externalities.

He cited examples of corporate greed in the 1990s, such as distorted financial reports and other abuses that took advantage of imperfect and asymmetric information. The involvement of major investment banks, accounting firms and mutual funds, he said, indicates a need for morality to guide the economic behavior of business. “Self-interest is an imperfect guide,” Stiglitz said, but while economists prefer legislation in cases of market failure, “self-regulation such as codes of conduct and morality can be more flexible than legislation.”

Corporate social responsibility in the form of competition laws, good governance and environmental legislation has a significant role to play in developing countries that have imperfect regulatory structures and where norms of behavior abroad differ from one’s own country. “Moral values often stop at national borders,” Stiglitz said. For example, companies should place the same value on human life and the environment in developing countries as they do at home.

Stiglitz then outlined particular areas of corporate social responsibility that are relevant to developing countries:

Promoting development: This can consist of transferring knowledge and skills through training; supporting affirmative action to reduce the disparity between different groups in a country; and supporting government actions to increase efficiency and efficacy of public programs. “Failures in the public sector are at the heart of failures in economic development,” he said.

Competition, corporate governance and securities markets: Stiglitz told the audience that the general principle should be that companies should not take advantage of a lack of adequate regulation in areas such as the environment, consumer protection and antitrust, even if profits increase in the short run and possibly even in the long run. While setting prices is illegal in the United States, in developing countries this becomes a matter of social responsibility.

Environment: While it is often unclear what the norms should be, the general principle is clear: companies should not spoil the environment. In regard to climate change, American companies should recognize that greenhouse gases are an externality and excessive emissions are irresponsible. While the Kyoto Protocol may or may not be the right system, Stiglitz said, protecting the environment is an issue of social responsibility.

Transparency, corruption and conflict: While the Foreign Corrupt Practices Act applies to U.S. companies, there is still a need for peer pressure and norms of behavior to take an active stance to reduce corruption. Companies should support initiatives, such as that led by the UK-government for transparency in the extractive industry, and support policies against sourcing “conflict diamonds.” In some cases government can help by creating common rules. Stiglitz suggested that the financial sector could act responsibly to lobby for government legislation to “tie everyone’s hands” on the issue of secret bank accounts, which have facilitated corruption, tax evasion and net outflows from Africa and other regions.

Human rights: Unlike some governments that have been undermining their commitment to human rights, business should play a role in showing commitment to standards and norms.

Stiglitz concluded by noting that while markets are crucial to successful development in poorer countries, they often suffer from a lack of confidence in business and markets due to a history of colonialism, abuse and exploitation. He cited the example of the opium war in China, where the country was forced to keep its markets open in order for traders to sell opium in return for Chinese goods. “Restoring confidence in markets will depend on how responsibly businesses behave,” he said.