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MONTHLY FEATURE

May 2001

Alternative View of Corporate Social Responsibility: A Dialogue with the Financial Times

On May 16th,2001,Martin Wolf of the Financial Times wrote a provocative article criticising CSR since he argued, based on a pamphlet by David Henderson former Chief Economist of the OECD, that social responsibility distorts the market by deflecting business from its primary role of profit generation (see Martin Wolf in www.ft.com). What follows is a summary of a dialogue between Wolf and Hopkins that followed publication of Wolf's article "Sleepwalking with the enemy: Corporate social responsibility distorts the market by deflecting business from its primary role of profit generation". Needless to say, as the dialogue shows, MHCi disagrees.

Wolfís main argument was that CSR is conducted by activist groups, who are "with few exceptions . . . hostile to, or highly critical of, multinational enterprises, capitalism, freedom of cross-border trade and capital flows and the idea of a market economy. One might expect, and indeed hope, that the business community would effectively contest such anti-business views. But . . .the emphasis is on concessions and accommodation." Wolf believes that powerful objections can be made to such a radical redefinition of corporate objectives: it accepts a false critique of the market economy; it endorses an equally mistaken view of the powers of multinational businesses; it risks spreading costly regulations worldwide; it is more likely to slow the reduction of global poverty than to accelerate it; it requires companies to make highly debatable political judgments; and it threatens a form of global neo-corporatism, in which unaccountable power is shared between companies, activist groups, some international organisations and a few governments. Wolfís article concludes with the statement that "the role of well run companies is to make profits, not save the planet. Let them not make the error of confusing the two.

Comment By Hopkins

Dear Sir

I find the article by Martin Wolf deeply disturbing. Given FT's very influential position and reputation for objective analysis and reporting the article will very likely injure serious efforts to explore CSR in greater detail. For instance, statements such as 'the idea is not merely undesirable but potentially quite dangerous' might do well as a slogan for right wing marketeers in the White House or elsewhere but are merely scurrilous when poorly justified.

Let me elucidate further. First, Wolf does not start with a definition of CSR. One definition is 'Corporate Social Responsibility is concerned with treating the stakeholders of the firm ethically or in a socially responsible manner. Stakeholders exist both within a firm and outside.' Wolf apparently believes that this will lead to the distortion of the market and reduce profits. This is the heart of the matter. Does Wolf imply profits at any cost? Does not Wolf realise that treating stakeholders well will actually lead to improved profits? For instance, those companies that treat one stakeholder well, its employees, tend to perform better than those who do not - see Collins and Porras in 'Built to Last'. (Century, 1994, USA). Yet other stakeholders are a companies shareholders and management. At Henderson's old workplace, the OECD, major efforts are underway to define and propagate principles of corporate governance for these stakeholders.

Wolf's straw man of CSR, which he doesn't define, is turned into a diatribe of those who are against markets and profits i.e. he equates those who see merit in CSR as anti-market. He says 'hostility to markets is sour old wine' and cites Henderson who says many activist groups 'with few exceptions ..are hostile to...the idea of a market economy'. I should be interested in Henderson's comments against the so-called anti-market corporate governance activists at the OECD?

But Wolf is correct in saying that the 'aim is not to eliminate private business but to transform the way it behaves'. He qualifies his previous statements by arguing that profits should be pursued within ' the constraints of law and the principles of honest dealing'. This is exactly what the more serious proponents of CSR are examining..i.e. what aspects of law need to be improved and what is meant by honest dealing i.e. ethical treatment of stakeholders.

He continues in the vein that CSR is against the market when he equates CSR to a notion of the 'triple bottom line...economic, social and environmental' and then says that this ' ..accepts a false critique of the market economy..'. In fact there are many instance where economic aspects alone produce profits but to the detriment of the environment and social welfare. There is an increasing body of evidence that positive environmental action by firms leads to increased profits and longer-term sustainability. The evidence linking social aspects (which to my mind include environmental and economic aspects..but that is another story) to increased profits is still the subject of research but preliminary results are positive and companies such as the Co-operative Bank are ecstatic with their results based on improved levels of CSR. To this Wolf says '..some suspect that these notions are mush'. May I retort, 'The Wolf Conditions are dangerous and mush' but I will not have the FT to propagate my statement.

Will CSR increase costs to businesses? The short answer is probably yes. But to say that this will be imposed on companies by Greenpeace is laughable. Unless Greenpeace makes a solid case they will be ignored - to whit their confusion over the Brent Spar. But the balance is on both sides of the equation - costs will increase but so will profits and longevity (see articles on our website to this effect - 'Economics of CSR' in the monthly feature section of www.mhcinternational.com).

I wonder what are the 'proper' differences that operate in favour of less economically advanced countries? Wolf says that a company that follows CSR policies will harm the development of poorer countries. Just tell that to the Bhopal villagers who suffered the effects of Wolf-conditions in Union Carbide. There is no doubt that those countries who have labour costs that outrun labour productivity will suffer in terms of international competitiveness. It is true that CSR proponents have hardly dealt with that issue and that the international organizations who could debate the issue have largely ducked it - notably the WTO and the ILO. But enterprises in developing nations need to move toward acceptable CSR practices since 'beggar-thy-neighbour' actions where companies compete to pay the worst wages in appalling conditions will lead to reduced effective demand and lower levels of world trade. Thus the 'Wolf-conditions' MUST be avoided.

Reply to Hopkins by Wolf

Dear Professor Hopkins,

I am afraid I find your reply quite as incoherent as you say my article is. I think you are saying that properly defined corporate social responsibility is profit maximising. If so, I have no problem with it. But that is not a statement of morals, but of how to make the most money. It's also an empirical question, of course.

Your last sentence is complete economic illiteracy. The cost of labour will not be reduced below its opportunity cost. But why should it be far above it? As to effective demand, do you think that recipients of profits or of cheaper goods and services put their gains under the mattress? Talk about the pot calling the kettle black!

Yours,

Martin Wolf

Reply of Hopkins to Wolf

Subject:Touché

Dear Mr Wolf,

Thank you for the courtesy of sending me Mr Henderson's draft. There is much in what he says with which I very much agree, which may both surprise you and he. There is a lot of hubris in the CSR/Sustainability/Citizenship debate and it is welcome that someone takes a hard look at it all. As to your own comments on my comment. I wish, in your article, you had cited Henderson's view of radical and less-radical CSR since I very much agree with your statement: "that properly defined corporate social responsibility is profit maximising. If so, I have no problem with it. But that is not a statement of morals, but of how to make the most money. It's also an empirical question, of course."

Regarding the question of global standards, I agree with Henderson when he says: "The effects of enforced stringency and uniformity are especially damaging in labour markets. Regulations made in the name of 'social justice' or 'positive' human rights, whether by governments or businesses, can undermine freedom of contract and thus deprive people of opportunities. Those who suffer most from such actions are often the worst off." I am very much in favour of labour flexibility in labour markets and, like, Henderson regard Jospin's 35 hour week and his new contribution of doubling indemnities to fired workers from large companies (M&S was the starting point) as insane.

Turning to your point about my economic illiteracy which, in general, could well be true but I am trying....You say: "the cost of labour will not be reduced below its opportunity cost. But why should it be far above it?" In fact the cost of labour often becomes above its market price through market imperfections or, through Government intervention to put in place, for example, minimum wages. In the Philippines, for instance, minimum wages are above the market wage which has both positive and negative impacts. CSR proponents have not discussed this issue, although the issue has been widely discussed outside of that arena. I agree with Henderson, and you implicitly, that CSR companies cannot dish out wages above market wages for all the negative effects that that implies. However, over time it is key to push up labour productivity in developing countries so as to pay higher wages and thereby increase effective demand. Keynes was also aware of the problems of inflation but, like myself, would not have had economic policy totally dominated by interest rate and inflation considerations. I note, in passing, that 'the market' does not set interest rates unless Greenspan is a market? But that is another story.

Turning to your point "As to effective demand, do you think that recipients of profits or of cheaper goods and services put their gains under the mattress?" I would simply prefer the effective demand to be placed in the poorer countries for welfare and income distribution considerations. Now whether this will lead to impoverishment of these poorer nations in the future compared with placing the profits in the hands of richer people is a point that could be discussed further.

Yours sincerely,

Michael Hopkins

Wolf to Hopkins

Dear Professor Hopkins,

I apologise for the waspish nature of my earlier reaction. Yours are all very fair points. You must understand that in my short column (1100) words my aim was to provoke reaction and comment and have certainly succeeded). I would not necessarily say that everything I said was incontrovertibly true. But I felt the CSR consensus needed to be challenged and have no regrets about doing so.

On the economics, I think there is room for much debate. But these are matters I have dealt with in other contexts.

Yours,
Martin Wolf


Hopkins to Henderson

Dear Dr. Henderson,

Martin Wolf passed me a copy of your draft "False Notions of Corporate Social Responsibility". I enjoyed reading it since it brought an acute sense of the market and profit generation to a critique of what some believe passes for CSR. I agree that many who promote CSR are anti-profit and anti-capitalism. But there also many who believe, as I do, that the private sector (including MNEs) is being given greater and greater prominence than in the last century and that, therefore, as Governments cut back budgets, there is a need for a new social responsibility of enterprises (a process not necessarily a unique event associated with what you term 'dawnism'). But I also believe, and am trying to establish this empirically, that CSR is also good for business and profits in particular. But I agree with you that additional costs will be imposed but it is still an empirical question whether these costs will be balanced by increased profits. Your essay brought Milton Friedman's aphorism of 'social responsibility or profits' up to date although I hold the view that the more appropriate aphorism is 'social responsibility and profits'.

I also agree with your analysis of 'sustainable development' that I have always found difficult to understand outside of the environmental lobby. Did you ever come across 'sustainable human development' which has been the slogan of UNDP for a dozen years since its former Administrator, James Speth was faced with two groups one doing human development (for the Human Development Report you so dislike) and the other sustainable development. To appease them he put the words together leading to an enormous number of publications trying to find out what SHD was all about! Like you, I also admired the work of Julian Simon and I wonder what he would have made of SHD?

On a personal note, you assume from a statement, in my book, that 'Raising the living standards of workers round the world through socially responsible policies of enterprises' that I believe that the key to economic progress in developing countries, and indeed to ending world poverty, is easily found: big international companies should pay people well. I do not say that nor imply it. What I say is that 'raising the living standards of workers around the world through socially responsible policies of enterprises will help to stimulate Keynesian effective demand'. The emphasis is on 'will help' not that this is the only way. I discuss some provisos on this statement and I am quite aware that unrestrained rises in effective demand can be inflationary, and this is mentioned in the book. But I do not say that 'the world stands in need of global effective demand'. Thus your statement that "Hopkins adds to this a second layer of nonsense, by arguing that if companies act in this way it will provide a 'Keynesian stimulus' to global effective demand which the world stands in need of" requires more discussion than a simple throw away line.

You cite the contribution of Bill Gates' Microsoft but later note that privatisation has done away with old-style state monopolies - which themselves were businesses, large-scale and shielded from competitors. Yes, but new monopolies arise as is the case of Microsoft as pursued by the Clinton Administration.

Finally, what you are against in CSR and what elements you support are clouded in your presentation. Sometimes I get the impression that anything remotely linked to CSR will be bad for business and social welfare; at other times you say some bits may work and the market will sort it out? It would be useful to clarify your 'straw men' a little more.

Yours sincerely

Michael Hopkins

Reply from David Henderson

Dear Professor Hopkins,

First, many thanks for your letter. It raises a lot of issues that I hope we shall have the chance to discuss before long, now that I am based in London. Second, I am concerned that I may have misinterpreted you in my essay, which was not at all my intention. What you wrote in your letter does not convince me that I have erred, but this is a matter that should be high on our agenda when we meet (see below). With luck, we shall be able to agree on what we are disagreeing about, and how this might be reflected in later versions of my essay (initial publication, by the New Zealand Business Roundtable, is imminent).

Yours sincerely,

David Henderson

Hopkins: In conclusion CSR, if properly defined, is profit making. What is meant by 'properly defined' and how this links to profits will be the subject of a future MHCi "Monthly Feature".