Monday, July 04, 2005

A Response To The Economist Article

Bad arguments against the good company?

A response to The Economist regarding the relationship between business and society.
Source; Ethical Corporation

We should be grateful to The Economist. The extensive diatribe published in their special survey of 22nd January - “The good company – A sceptical look at corporate social responsibility” – has issued an intellectual call to arms to those concerned about the failure of markets to produce responsible corporate behaviour.This is Ethical Corporation’s contribution to the debate, not a statement for the movement. We could never speak for this young and evolving field with the same self-assurance with which The Economist applies a strand of 18th century Enlightenment theory to the complex global issues of political economy being faced in the real world in our own time.

Clearing the decks
The debate is overdue. Fudging the intellectual basis for responsibility ensured The Economist did not have to stretch far to score points. A response must begin by slaying a sacred cow that they attacked at length: that there is a business case for corporate responsibility.Academic studies have indeed gone some distance towards indicating that good companies do better over the long-term by, for example, reducing transaction costs through higher trust, and that meeting stakeholder concerns through, for example, investing in renewable energy, does not necessarily represent a cost to shareholder value, particularly over the longer term. Recent research published in Business Ethics even claims to have found “absolute, definite proof that responsible companies perform better financially”.The business case analysis is amoral. True, stakeholder dialogue may drive innovation by revealing alternative courses of action. If a company justifies all actions by reference to the primacy of maximising shareholder value, a possible action might both meet stakeholder concerns and provide shareholders the greatest net present value of future cash flows. But it also might not. And where meeting stakeholder concerns comes into conflict with greatest shareholder value, this company is telling us that the shareholder will win every time. The business case cannot sustain an argument for conscience, but, as will be argued later, this does not mean that responsibility is solely dependant on the innate ethical motivation of individual decision-makers.The remainder of The Economist’s attack can be interrogated in three steps.

1. Business fulfils its role in society just by pursuing its own self-interest
The primary objective of business, states The Economist – the objective that serves the greatest public good – is maximising profits. Not so. The primary purpose of business is the efficient production and distribution of goods and services that society needs. The right to take profit from this social function demands justification.

Tell it to the hand
Self-interest makes capitalism work for the public good, an idea articulated, it is said, in Adam Smith’s metaphor of the invisible hand. But economics is concerned with efficient resource use, not social behaviour, and Smith knew that self-interest has to be pursued by people of conscience if public good was to be served. In Smith’s time, the dominant form of enterprise was the partnership, in which ownership and management were fused. When the spread of public limited companies separated ownership from management, managers lost the freedom to act with conscience. Social accountability disappeared.Remarkably, The Economist acknowledges the primacy of conscience, noting that sometimes the aims of business and rational self-interest will clash with ethics, “and when they do, those aims and interests must give way.” The Economist makes no attempt to integrate this assertion into their analysis of “borrowed virtue”, or of the need to focus on profit as the only measure of performance.

Meanwhile, back in the real world
The pricing mechanism, repeats The Economist, is the means by which markets ensure that resources are allocated efficiently to activities with social value. The value we attach to the environment, or the rights of stakeholders, will push up the cost of production to a point where as customers we are not prepared to pay it.This works, however, only if certain stringent conditions are met. Nobel Prize winning economist Joseph Stiglitz proved that where the market lacks perfect information or perfect competition – in other words always - the pursuit of self-interest may indeed be in conflict with the interests of shareholders and others touched by the corporation’s activities.The Economist acknowledges the real world problem of building “externalities” into the pricing mechanism. These public goods – including a clean environment, water for life, a stable climate, biodiversity, beautiful countryside – are often not priced at all into goods that consume those resources. The resource – often a resource without substitute - is consumed with impunity. Although, as The Economist argues, the challenge is to find ways to price in these externalities, in many cases this will remain a pipedream.

2. Problems of social justice and market failure are best solved by governments
Government exists to intervene through public spending, taxes, and regulation where necessary to achieve social justice, or to correct market failures. The Economist acknowledges, however, citing the example of global warming, that governments are sometimes loath to pressure for change.Government weakness is worse than they describe. Globalisation prompts governments everywhere to race for the bottom. The UK government’s recent climbdown on corruption rules relating to export credit guarantees is a case in point. Governments lack the political will to act against problems of social justice that transcend borders, even where those problems originate at least in part from within their borders. We lack the necessary global institutions to counteract this reluctance, and global businesses have the power to exploit it.

3. Unilateral corporate action cannot bridge the gap left by weak government
It is unethical, argues The Economist, for directors to act against the profit interests of the owners to whom they owe a fiduciary duty. Is ethics that simple?

Freedom of conscience
The law protects shareholders because they have lent money to the company, but they are not alone in lending resources. Loyal consumers reserve for a company a space in their minds; employees lend their commitment beyond the job description; communities extend their toleration – the licence to operate. Our anachronous legal conception of the company fails to acknowledge these participants in the enterprise. The Economist reminds us that not everything that is legal is ethical. This anachronism is a case in point.Ethical obligations to shareholders will, on occasion, conflict with ethical obligations to other parties with whom the business has relationships. In such cases, the ethical solution may well not fulfil the legal duty. Are company directors to be denied freedom of conscience?Go and work somewhere where your conscience is not offended, retorts The Economist. Yet no industry is free of ethical issues requiring a trade-off between the interests of shareholders and other stakeholders.

Masquerading Machiavellis
Making ethical trade-offs between divergent stakeholder interests amounts to making social policy. Who wants companies to make social policy in any event, sparks The Economist. Companies lack the competence and the democratic accountability.In many of the more hostile business climates in the developing world, however, it can be hard to find a government that places the interests of the electorate before their own self-interest. Business’ embeddedness in society may also make it well placed - indeed sometimes better placed than a developing world government that lacks resources or reach - to enter into the dialogues – mediated through civil society - that will unearth the right trade-offs. Such political skills are fast becoming core competencies of the new generation of business leaders.

Citizen Inc.
The common thread running through these arguments is that being a corporation does not entitle a business to approach its social relations differently from any other element of society. The social responsibility of business is the same as that of everyone else. So what standard of behaviour does society expect? Moral philosophy yields a wealth of responses. In this diverse world, however, there is something attractive about the discourse approach to ethics – the idea that two parties, given certain safeguards, can negotiate between themselves how they will behave towards each another. By all means draw from the multitude of standards and norms as a way of informing the dialogue, but businesses and stakeholder groups are turning to negotiation in order to arrive at a tangible social contract – what Lord Browne termed “a bargain of mutuality” in his speech at the World Economic Forum in Davos – underpinning their relationship. If not by virtue of markets, however, and if not necessarily with the intervention of government, what will drive corporations to conduct themselves as society expects?

Are you feeling lucky?
Following the failure of communism and the shifts in political power wrought by globalisation, one could be forgiven for thinking that politics – questions of social governance - had simply become subsumed within economics. Clearly economics is not up to that task, and society has a way of self-regulating in order to deal with such failure. This is civil society – the organically evolving, collective consciousness that things are going wrong, that lends itself to the “regulation” of relationships between members of society and the institutions of economic power within their midst. The pressure for change builds within civil society, and finds vent in unpredictable ways. It could be legal action, a media campaign, NGO activism or the cry of the whistleblower, or substantial acts of civil disobedience. It may prompt government to change law or regulation. It may affect one company, a sector or business in general. Consequences can be retrospective and severe.The dynamics of this pressure are not of the market - even when they use market mechanisms such as boycotts to effect their aims – but political, and they cannot generally be accounted for by the market until after the fact. Shareholders should be concerned, but that does not mean that pressure can be weighed up in a business case analysis.The only strategy by which managers can ward off the unpredictable consequences of feeding this pressure is by addressing the cause consistently. That means embedding a culture that questions the firm’s impacts on other members of society, striving to gain empathy with those stakeholder concerns through dialogue, then agreeing any necessary trade-offs between stakeholder interests, including those of shareholders. It may also be necessary, contrary to The Economist’s position, to enter into sectoral agreements on standards of conduct, provided they are arrived at through broad multi-stakeholder processes.Given legal constructs of the company that deny the reality of business’ place in society, such actions might be considered a form of civil disobedience to the injustice of a law-embedded ethic that considers important only the interests of one party to a social relation.Strength to their elbow. If capitalism and ethics are in conflict, it is not its ethics that society will change.

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