This post also appears on my own personal blog.

Why the former chair of the US President’s Council of Economic Advisers (and a few others) should watch a ‘Perverts Guide to Ideology’ and a few other thoughts on Corporate Social Responsibility and ‘Ethical Business’

Reading Project Syndicate…

This week Project Syndicate published a piece by Laura Tyson, a former chair of the US President’s Council of Economic Advisers and a professor at the Haas School of Business at the University of California, Berkeley, on the eternal debate on Corporate Social Responsibility.

Tyson, wades in apparently on the ‘progressive’ side of this debate.  She responds to earlier comments by Robert Simons of Harvard Business School that American companies were guilty of going soft by following CSR strategies and embracing “a long list of gauzy, feel-good values, such as social responsibility, environmental sustainability, and inclusiveness”.

…CSR as fundamentally subversive…

Simons’ critique is a familiar one and echoes Milton Friedman’s 1970 assertion that CSR was a “fundamentally subversive doctrine” because it polluted the proper objective of business which is to seek profit, respond to their shareholders’ demands and customer needs.

…but what if its more complicated than that…

Tyson’s response is that this is too simplistic a formulation.  She has five specific objections which, she argues, make the (business) case for CSR:

1. That Friedman himself acknowledged that business should “…make as much money as possible while conforming to the basic rules of society…”.  Society expects ‘ethical’ practice.

2. That in reality shareholders are people and have a variety of motivations and values that may include, but may not be reducible to, the profit motive, and even then will embody different time horizons.  Some will balance profit motives with other concerns, some will prefer short-term and others long-term profits.  Businesses need to balance these competing demands.

3. Businesses can take the lead in shaping shareholder motivations and the ‘ethical’ stance that they take will draw particular types of shareholder/investors to them over time.  Ethical businesses may therefore attract investors with synergistic motivations.

4. Businesses also affect the wider societies in which they operate and therefore have an interest in affecting society in ways that will be good for their own interests over the long-term.  They therefore have an interest in societies where consumers can afford their products, where employees are hard working and accept the legitimacy of business activity.  The Friedman-Simons’ critique forgets that governments cannot provide all of these conditions for business, and so it follows that business itself should contribute to the creation of prosperous, stable and business-friendly societies.

…the understandable but misplaced logic of business school frustration with ‘toothless’ CSR…

All of this reminded me of the friendly engagement (see the book) between myself and a number of colleagues (Prof. Ralph Tench, Dr. William Sun, Dr Brian Jones) at Leeds Business School who are frustrated with the ‘impotence’ of CSR at actually changing business behaviour.

The business case position put forward by Tyson (and earlier by a range of academics including, but not only, Peter Drucker), they argue, has ultimately failed to lead to significant change in business practice.  Arguing for a reconfiguration of CSR to CSI – Corporate Social Irresponsibility – they argue that the time has come for more explicit targeting of unethical and damaging business practice to embarrass them and force a change.

On the surface of things there are reasons to be sympathetic with this case.  CSR practices are attractive to those companies – as Tyson acknowledges – that can extract brand value from them.  But Tench, Sum and Jones worry that this leaves a wide range of negative business practice unaffected.

Over the last year high profile examples of unethical corporate practices have abounded, such as dangerous sweatshop conditions in Bangladesh among suppliers of high street outlets like Primark; phone tapping at News International and other newspapers; and the poor labour conditions in Foxconn factories that assemble Apple iPhones and iPads.  Ofcourse these are just some of the well reported cases, worse and more will remain forever unreported.

…its not a matter of choice – it’s a structural problem …

My position on this is that both Tyson and my colleagues are forgetting the structural conditions in which capitalist enterprises operate.  Ironically, in this case Friedman is closer to being right.

Tyson and my colleagues argue as if the adoption of CSR and ‘ethical business practice’ were simply a matter of choice.  Friedman knew that it was not.  Neither side in the debate (want to?) highlight the structural or systemic conditions that drive business practice.

You can read my fuller argument here, but for the purposes of this blog post let the following summary suffice:

1. Businesses operate in a competitive environment.  Unless they compete, they will go out of business.  There is always a rival firm that will produce more cheaply if it can, for that will mean more profits or market share.  If a business chooses not to do this, they will soon lose market share (because they are more expensive) and/or they will be starved of new investment.

2. That competitive logic will impel businesses to cheapen their production costs (including most importantly their labour costs) and that of their suppliers and curtail unnecessary costs associated with containing any negative effects they might have on society (what economists call externalities – pollution, waste etc).

3. This competitive pressure also creates social problems in the aggregate.  Some of these are obvious – poor working conditions, poverty, unemployment etc.  Some of them are less obvious but equally important.  The drive to compete makes capitalism a fundamentally expansive system.  It needs always to grow to satisfy the demands of capital for profit.  So one of the aggregate problems generated by competition is resource depletion, environmental damage etc.

Now, none of this precludes business behaviour that superficially appears to be ‘ethical’:

• Sometimes individual managers or operatives will exploit institutional and organisational opportunities to pursue objectives other than those suggested by the demands of competitiveness.
• Sometimes there will be a coincidence between apparently ethical behaviour and the demands of competitiveness.  This is the ‘business case’ argument.  Some businesses will carve out an ethical niche consciously and others will be forced to amend their behaviour from more negative ‘market pressures’.  In the first instance ethical brands will seek to draw in consumers motivated by the values and quality of their product or service.  This strategy is usually highly dependent on visionary owner-operators, is necessarily small scale (niche!) and fraught with danger. As Green and Blacks, Bodyshop (see here for a discussion) and over the last week the Cooperative Bank have all found out, such strategies are always susceptible to being overtaken by the need to secure larger scale finance.  Similarly, poor working conditions in suppliers is occasionally an embarrassment to retailers and big brands who will then respond to the episodic appearance of widespread consumer concerns.  The recent announcement of pay increases in Bangladeshi textile firms is one example of this.
• Finally, competition doesn’t always hold. There are markets and circumstances where monopoly conditions or only weak competitive pressures hold (who else makes the much in demand iPads and Macbooks…).  In these conditions, businesses can exercise more choice, but the case of Apple suggests that they may not.

…What a Perverts Guide can teach business school professors…

What all this suggests is that those who worry about corporate behaviour should shift their attention from the actions of individual firms to the system in which they operate.  The trouble is that this is very difficult to do.

This weekend I went to see the recently released Perverts Guide to Ideology, and was reminded of Slavoj Zizek’s oft repeated but brilliantly insightful comment that it is much easier for most people to imagine the end of the world than it is for them to imagine an economic, social and political system other than capitalism.

I don’t agree with everything Zizek says either.  But Laura Tyson, Peter Drucker and my colleagues would do well to watch the film and think about what Zizek has to say.