Thursday, August 26, 2010

The Business of Business

In Monday's WSJ, Aneel Karani made The Case Against Corporate Social Responsibility:

Executives are hired to maximize profits; that is their responsibility to their company's shareholders. Even if executives wanted to forgo some profit to benefit society, they could expect to lose their jobs if they tried--and be replaced by managers who would restore profit as the top priority. The movement for corporate social responsibility is in direct opposition, in such cases, to the movement for better corporate governance, which demands that managers fulfill their fiduciary duty to act in the shareholders' interest or be relieved of their responsibilities. That's one reason so many companies talk a great deal about social responsibility but do nothing—a tactic known as greenwashing.

Managers who sacrifice profit for the common good also are in effect imposing a tax on their shareholders and arbitrarily deciding how that money should be spent. In that sense they are usurping the role of elected government officials, if only on a small scale.

Privately owned companies are a different story. If an owner-operated business chooses to accept diminished profit in order to enhance social welfare, that decision isn't being imposed on shareholders. And, of course, it is admirable and desirable for the leaders of successful public companies to use some of their personal fortune for charitable purposes, as many have throughout history and many do now. But those leaders shouldn't presume to pursue their philanthropic goals with shareholder money. Indeed, many shareholders themselves use significant amounts of the money they make from their investments to help fund charities or otherwise improve social welfare.

This is not to say, of course, that companies should be left free to pursue the greatest possible profits without regard for the social consequences. But, appeals to corporate social responsibility are not an effective way to strike a balance between profits and the public good.

Managers of corporations who engage in "social responsibility" (and often brag about their efforts) do so in order to look good. Whether they're actually doing good or whether it's really even rightly their place to have their companies do so is almost entirely irrelevant.