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Feb 1, 2008 (Vol. 28, No. 3)

Firms Need to Focus on Profits

CEOs Are Often Distracted by Corporate Social Responsibility and Other Forms of Social Activism

  • President Calvin Coolidge was famous for saying that the business of America is business. He might have added that the business of business is to pursue profits, for lately some corporate leaders and others seem to have lost sight of that basic precept. Instead, they have embraced corporate social responsibility (CSR), the politically correct buzzword du jour of activists who seek to advance social goals that they have decided are virtuous and who covet the deep pockets of the world’s capitalists.

    Daniel Vasella, the chairman and CEO of Novartis, the world’s fifth largest pharmaceutical company, declared that multinational companies “have a duty to adhere to fundamental values and to support and promote them.” If he was referring to the corporate values of honesty, innovation, voluntary transactions, and the wisdom of the marketplace, he’d be right. What he meant was “collaborat[ing] constructively with the UN and civil society to define the best way to improve human rights.”

    The expansion and consolidation of human rights are worthy goals, to be sure, but Vasella’s saccharine altruism brings to mind economist Milton Friedman’s reproachful observation, “Businessmen believe that they are defending free enterprise when they declaim that business is not concerned merely with profit but also with promoting desirable social ends; that business has a social conscience and takes seriously its responsibilities for providing employment, eliminating discrimination, and whatever else may be the catchwords of the contemporary crop of reformers.”

    Vasella’s catchwords are human rights and corporate citizenship. We have recently seen other similar examples of businesses trying to do good (or perhaps just trying to look good) while deviating from their primary purpose.

  • Trying to Do Good

    Although the practice has enormous costs for shareholders and society at large, many business executives fear taking on the proponents of CSR. “This is especially true in large-scale retail businesses like Wal-Mart, Coca-Cola, or BP that are highly vulnerable to organized public criticism,” according to Henry G. Manne, dean emeritus of the George Mason University School of Law.

    Examples include McDonald’s decision to end its popular supersized portions in the name of discouraging obesity and various businesses that have adopted less efficient but supposedly environmentally sustainable practices.

    Some businessmen see CSR as a way to mollify activists or they naively think that it is an integral part of business management. Why else would one of the world’s largest biopharmaceutical companies spend a small fortune to bring National Public Radio’s “Prairie Home Companion” program to the San Francisco Bay Area? Is someone likely to choose a cancer drug based on such considerations?

    Other executives support the CSR movement because their companies can afford to, and they believe their competition either cannot or will not pay the price of admission to the CSR club. They never miss a chance to pontificate on issues like the Kyoto Treaty, sustainable development, protection of the rain forests, and the so-called living wage.

    Are these corporate chieftains purely altruistic? Hardly. Often, their motive is to use CSR as a tool to achieve a nonproductivity-based advantage over the competition. They are just old-fashioned opportunists.

    A good example is General Electric, the world’s second largest company in terms of capitalization, a $350 billion behemoth whose CEO, Jeff Immelt, thought there were branding and revenue opportunities in the company’s attempt to address climate change. The result was “Ecomagination”—a marketing campaign that promotes tomorrow’s solutions including hybrid locomotives, fuel cells, lower-emission aircraft engines, wind turbines, and clean coal-processing technologies.

    Not satisfied with competing in a free market, Immelt wants government regulation to guarantee the success of Ecomagination’s products. GE is part of the United States Climate Action Partnership—a coalition of corporations and environmental activist groups “that have come together to call on the federal government to quickly enact strong national legislation to require significant reductions of greenhouse gas emissions.”

    But Immelt’s master plan isn’t working. As Thomas J. Borelli of the National Center for Public Policy Research has written, “While global warming fears may aid one part of GE’s business, the macroeconomic impact of high-energy prices and the hysteria surrounding climate change is harming its other businesses. GE’s most recent earnings were hurt because the high cost of oil-based raw materials squeezed margins from its plastics business. Because of its drag on earnings, GE is looking to sell its plastics unit.”

    He continues, “GE’s clean coal technology for power plants is also in question. So far, utility companies are unwilling to gamble on the new technology because of its expense and questionable reliability.”

    It is always instructive to return to first principles. Businesses don’t have social responsibilities: only people do. And inasmuch as corporate leaders work for business owners, their legal and moral responsibility is to pursue the best interests of their employers (that is, shareholders)— interests that relate primarily to making as much money as possible while conforming to the laws, regulations, and ethical norms of society.

    By spending the company’s funds on activities that he arbritarily decides are socially responsible, a corporate executive, in effect, reduces returns to shareholders and is, therefore, spending someone else’s money.

    It is far easier to spend other people’s money on the causes in which you believe. If executives wish to support nonbusiness-related goals of their own choosing, they should offer philanthropy from their private fortunes.

    Billions of corporate dollars, however, are now being diverted from investors and redistributed elsewhere, often according to the whims of social activists who are accountable to no one but themselves and who pursue goals based, not on a desire for greater corporate efficiency or profits, but on their own vision of what is sustainable, equitable, and good for the rest of us.

    Neither free enterprise nor the human condition is likely to experience net benefit from companies pursuing CSR. Such actions do, however, raise the cost of doing business and lower corporate productivity. By diverting resources away from productive capital, businessmen will hurt many of the very people they claim to want to help.

    “The last capitalist we hang shall be the one who sold us the rope,” predicted Karl Marx. Little did he suspect that the noose would be corporate social responsibility.

    A response to this Point of View article has been posted on our blog by K. John Morrow, Jr., PhD., of Newport Biotech Consultants.

    Read his response and post your comments.



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