Why corporations shouldn’t be socially responsible : A critical examination of CSR

Keynote address by Johan Norberg at the conference “Managing on the edge”, organised by the Dutch National Research Network on Corporate Social Responsibility, University of Nijmegen, The Netherlands, 25 September 2003
 
Thank you for this opportunity to be the Devil’s advocate at this conference. In this case, I am the advocate of socially irresponsible corporations. When a friend of mine saw on my web site that I was going to give a speech with the title “Why corporations shouldn’t be socially responsible” he was shocked. He thought that the whole point of my fight for globalisation and open markets was that corporations should benefit the world, instead of being crooks like Enron or like diamond traders in Africa. How could I claim that corporations should be irresponsible and destructive?
 
Well, that is not what I claim. I think that businesses, innovators and entrepreneur can benefit mankind on a tremendous scale, and they already have. And that is precisely why I am very cautious when I hear someone saying that corporations are irresponsible if they do not follow his specific code of morality. And I am bit sceptical when everybody takes some new concept for granted, and no one challenges it. I want us all to think again if it is really responsible to be “socially responsible” in the way that the CSR-theories claim.
 
I want to confess from the start that I am not an expert on CSR. I am not well read in the different theoretical interpretations and scholastic debates, and I won’t be able to do the different sides and scholars justice. I am focusing on and criticising the broad popular meaning that CSR has received in the public debate, among politicians and polemicists, businessmen and bureaucrats. Since there are so many different forms of the idea, and different ways of implementing them I apologise right away if someone feels that they are misrepresented when I make my case. Rest assured I was not thinking of you!
 
If we look through the various definitions of Corporate Social Responsibility that circulate in the CSR industry, the common denominator is the idea that an enterprise has more stakeholders than its shareholders - customers, employees, business partners, local communities, the environment and society at large, and that the enterprise has a duty to integrate the interest of the stakeholders in their everyday decisions. In other words, profits and financial success should no longer be the sole measure by which businesses should evaluate their activities. It should strive for financial – and social and environmental success. In other words, a company should also for example improve the quality of life of the work force and the local community and minimise its effect on the environment.
 
Sometimes advocates of CSR support their claims with the argument that the existence of corporations is sanctioned by the community in which it operates, and therefore, it should give something back to that community, to try and make the world a better place. Often they say that the power and influence of corporations have grown in recent years, and that this therefore requires that they behave in a new and decent manner.
 
I want to make one thing very clear, I am a free marketer in the classical liberal school, a bit simplified, you can say that I am pro choice – on everything. Therefore I believe in the freedom of corporations and consumers to make their own decisions. If owners of corporations of their own free will chose to adhere to CSR teachings, because they believe in it or because they believe this will increase their sales, that is their right. But I also want to make this clear, I think that corporations are already doing a fantastic job in making our world a better place, and I think that at least some interpretations of CSR is going to endanger those benevolent effects.
 
To explain my own point of view I want to discuss two points of departure that I think is important for CSR – the idea that something is lacking in corporations when they are only in it for profits, and the impression that their power has grown in recent years.
 
All we need is profit
 
Therefore, I would like to discuss what is going on in the world for a few moments. Because some people in the debate seem to take it for granted that problems, injustices and poverty is growing, and therefore we need a new concept of social responsibility. That is not the case. On the whole, official statistics from governments, the UN and the World Bank all point in the direction that mankind has never before seen such a dramatic improvement of the human condition as we’ve seen in the last decades.
 
As UNDP has noted, during the last 50 years, global poverty has been reduced more than it had been in the 500 years before. In the last 30 years, the average income in developing countries has been doubled. In only the last two decades, the proportion in absolute poverty – that is people with an income below $1/day – has been reduced from 31 to about 20 per cent. During that time, world population has grown by more than 1.5 billion people, but we have still seen a reduction in the numbers of absolute poor, with more than 200 million people. (Update: the latest figures say almost 400 million.) During the last 30 years chronic hunger in the developing countries and the extent of child labour has been cut in half. In 50 years, life expectancy has improved from 46 to 64 years and infant mortality has been reduced from 18 to 8 per cent.
 
Despite all our problems, we live in the golden era of human improvement. And this is all dependent on wealth creation, and the technological breakthroughs that are possible because of wealth creation. No country in world history has succeeded in reducing poverty without having long-term growth. Nor is there any case of the opposite, of a country having had long-term, sustainable growth that didn’t benefit the poor population. Economic growth means that production grows, and prosperity and opportunities grow with it. In the affluent world, growth may allow societies to save, to consume more, to invest in education and health care, or to enjoy more leisure time. In the developing countries, it can mean the difference between life and death, development and stagnation, for it is growth that makes wider access to healthy foods and pure drinking water possible.
 
If we have 3 per cent growth per annum, this means that the economy, our capital and our incomes double every 23 years. If growth is twice as fast, these things double about every 12 years. Growth is what happens when we put resources to better use than we used to do. When we produce something in a more efficient way, so that we can use some of our resources to produce something new, or more of the same.
 
This is where companies enter the scene. Companies exist to create a profit for their shareholders. But in a liberal market economy without government subsidies and the use of coercion, they can only lay their hands on other people’s money by giving them something they value more, something they pay for of their own free will. Both parties to a free exchange have to feel that they benefit from it; otherwise there won’t be any deal. Economics, then, is not a zero-sum game.
 
The bigger a person’s income in a market economy, the more that person has done to offer people what they want to pay for. Ted Turner and Madonna earn millions, but they don’t steal that money; they earn it by offering information, entertainment and music that a lot of people think are worth paying for. Profits in a market economy serve as a signaling system by which the entrepreneur, and the investor can navigate. Those who want to make a good profit have to seek out those parts of the economy where they can best cater to other people’s demands. In this sense, they are essentially our servants. We pay and they deliver. And since we have other options to choose from, they are in a constant process of finding ways to create something that is more valuable to us, at less cost to them. Otherwise someone else will find that, and they will get all the customers.
 
In other words, corporations fill the extremely important role of using society’s recourses as efficiently as possible. To produce more for less. It is exactly this process that has given us our historically unique wealth, which has made it possible for us to invest in food, health, sanitation, education. Therefore, I come to the conclusion that a corporation in its normal activities on the whole is something good, something fantastic, something worth encouraging. And this directly contradicts the starting point for many advocates of CSR – that a corporation is bad and irresponsible in itself, and they have to compensate for their existence by doing something else, something more than making a profit, they have to “give something back to the community”.
 
On the contrary, I say, when a corporation makes a profit, it is an indication that they have already given something to the community.
 
Better not bigger
 
The second point of departure, that I don’t find convincing is the idea that the power of corporations is growing in our era of globalisation and liberalisation. Often this is backed up by some simple and astonishing figure, like the one that 51 of the biggest 100 economies in the world are companies. But this is just plain wrong.
 
This figure originates from a comparison of the sales of corporations with the GDP of states, in David Korten’s book When corporations rule the world. But those are not comparable. GDP only counts the added value to a product, but sales include the value that others have added to the product. A corporation that sells a house hasn’t made it all by itself, it has bought services, material, and parts to construct it. To count the sales of the house without subtracting the expenses, leads to a lot of double counting. If we instead try to measure the added value to the goods and the returns, it is about 25 per cent of the sales. Then we realise that only 37 of the world’s 100 biggest economies are corporations, and they appear at the end of the list – among the world’s 50 biggest economies we find only 2 corporations. Almost all developed countries are bigger than all the corporations. The impression that the normal corporation is bigger than the average country fades when we realise that a small country such as Sweden is more than twice as big as the world’s largest corporation. France is more than 15 times bigger and United States is more than 100 times bigger. The GDP of the 50 largest corporations are only 4,5 per cent of the 50 largest countries’ GDP.
 
It is true that the normal corporation has increased its size in absolute numbers the last two decades, but so have the economy and other institutions. Governments grew faster during the last century, for example in the US: from 7.5 to 33 /GDP, compared to 16 to 37 for MNC, 1905-1998. So it is not a zero sum game, a trade-off between corporations and governments, as many claim. And during the last decades, the world economy as such grew faster than the MNCs. They have actually decreased compared to the North American and East Asian countries. This is interesting, because those are the regions that have opened their markets and welcomed investments from foreign corporations. By doing that, they have grown faster than the corporations. At the same time, more closed markets that have not received foreign investments, for example in Africa, have decreased in size compared to the corporations. Freedom for trade and investments is therefore not a way of making corporations bigger than states. Paradoxically, it is the lack of such globalisation that makes that possible.
 
Furthermore, it is not the size as such that is relevant here. If big corporations exist because they give us goods that we want at a cheap price, then it is not really a problem that they grow big, that is a way of exploiting the large-scale production for our benefit. The only problem would be if they got power, so that they needn’t be receptive to our demands, if they stayed big if they ever got big, if they had a market simply because they are big. This is the fear of many. The statistics do not seem to support that anxiety.
 
Ever since the 1930s, critics of the market have been speaking of the risk of dominion by big corporations. Meanwhile the market share of the 25 biggest American corporations has steadily declined. On the Fortune 500 list of the biggest companies, 10 per cent of the enterprises are changed every year. The average corporation is on the list for only ten years. In 1975 there was not a single East Asian company among the ten biggest, 20 years later there were six, today there are only two, and one of them is new since 1995.
 
Globalisation and deregulation is not a way to make corporations more powerful. Corporations have their biggest power in closed societies, with privileges and tariffs where other corporations can’t compete and consumers can’t chose. In such societies, such as Latin America after the Second World War, corporations can make bad and expensive products, and the working conditions can be terrible – the people are forced to buy from them and work for them anyway. The same goes for protected sectors in our countries today, it is in the protectionist sugar and cotton industries that producers have most powers over consumers and suppliers, not in the open sectors. The way to undermine the monopolies and powers is to open up for competition, to make it easy to start a business, to welcome foreign companies.
 
Globalisation is a way of giving corporations more freedom to trade and invest – so far the critics are correct – but it is exactly this freedom that gives them less power. On a free market, corporations are like waiters, they are free to offer you the menu, but if you are not interested you can go somewhere else. Free trade means that other waiters, even foreign ones, can offer competing menus!
 
To sum up, I find the world view that is supposed to show the need for CSR unconvincing. Our era of globalisation has not seen any expansion of the power or destructiveness of multinational corporations, which would warrant a new concept of social responsibility.
On the contrary, corporations are our means of guaranteeing an efficient use of society’s resources. That is a good for society, it is one of the most important institutions, not something bad and immoral that they have to compensate for by good deeds in any other way. Corporations have created all the wealth that politicians and bureaucrats distribute in their socially responsible ways, they are the Atlases that carry the planet on their backs. To suggest that corporations, acting as traditional profit-seeking corporations are irresponsible, is an insult.
 
Creative destruction
 
So what? You might answer. That is not the point. Perhaps corporations are doing a great job, and perhaps they become less powerful and more decent right now, but we live in a modern, civilised world with an educated and engaged public. We should demand more. The argument for CSR does not have to depend on any specific world view. Most things might become better, but why don’t we make it even better, at a quicker pace?
 
Here we come to the most important part of the problem. Because if you agree with me on the above, that profits are the reward that companies reap when they manage an efficient use of society’s resources, when they create value, then you will also agree with me that they will create less value, and use our resources less efficient, if they start to focus on something else than profits.
 
Here is one example of the problem. The process by which capitalism makes societies richer is often called creative destruction, after a phrase from the Austrian economist Schumpeter. More efficient production and new, improved technology means that we do things in new, improved ways, and that also means that we have to discontinue the old ones. This means that factories are closed and workers become unemployed in the short run. In the long term, however, this is a creative form of destruction. The money consumers save because of increased efficiency is then used to buy new goods, that we couldn’t afford before – luxury goods, better housing, education, health care. And the unemployed get employed in those sectors instead. With less work we can produce more, and therefore, with the same work we can get more of the goods and services we want. That is how living standards are increased.
 
In the 90’s alone more than 1 million American jobs moved abroad, and corporations in manufacturing downsize and reduce employment all the time when new technologies and more streamlined production is possible. But this is not a failure, this is a success. This has made it possible for labour and capital in America to go into the creation of new, higher-skill and higher-tech jobs. Without this process, the country would not have made way for the creative energy behind Silicon Valley or the massive growth in the health, service, leisure and entertainment industries for which there is an ever-increasing demand. The US may have lost 1,3 million jobs in the 90’s, but have during that decade, in total, on the net, gained more than 20 million new jobs.
 
A businessman guided by the profit motive knows what to do in times like this, he makes the organisation more efficient and he introduces the new labour saving machines, he moves factories to the best places for production, and he fires a lot of workers, because this is what makes his goods cheaper than the others, and therefore he produces more value for the consumers, and makes more money. And even though this is painful in the short run, this is how the economy grows, and we all get richer, and become able to reduce poverty, and satisfy human needs.
 
But what is the businessman guided by CSR supposed to do? I don’t know, and I’m not sure he does either. Because here we see a conflict between a lot of different stakeholders. Perhaps the consumers want the cheaper prices, but the workers do not want to get unemployed, and the local community would suffer from a factory closure. Is he supposed to slow the process down? What if he is a competitor, can he really drive other companies out of business just like that?
 
As I understand it, CSR does not give any firm answers. It just says that the company should integrate these consequences in their decisions. But what does that mean? Without a specific goal, and yardstick, you have no way of deciding how to do important trade offs and make decisions. Companies maximise profit by moving resources from a value that consumers find lower to one they value more. If they instead are supposed to use their resources in ways to make a specific pressure group or NGO happy, this does not happen. If they chose to be what is called responsible, rather than just increasing efficiency, the corporations become less productive, growth won’t increase, and society as a whole will have less resources to meet our needs.
 
I definitely understand if a business leader wants to make the world a better place, apart from the way he improves it by just producing, don’t we all? But in that case, the economically rational way is not to do things that are less profitable, and therefore less valuable to people. No the solution should be to make a lot of money, by giving people what they want, and then you use the profits for important charity work, like Bill Gates for example.
 
Developing countries
 
I want to mention another example, where CSR, interpreted in a specific way, might lead to incredible harm. Most people today believe that responsibility means that you do not buy goods made in sweatshops, or produced with the help of child labour. Is this the responsible thing to do?
 
Well, a couple of months ago, I travelled to Vietnam to examine the effects of the so called sweatshops the multinationals create. And of course, the work does look tough, and repetitive, if we compare Vietnamese factories with what we have back home. But that’s not the comparison these workers make. They compare the work with the way they lived before, or the way their parents or neighbours still work. And the facts are revealing. The conditions at the multinational were superior and the average pay was three times more than the alternative in the state-owned enterprises. The most persistent demand from the workers was for an expansion of the factories, so that their relatives could get a job there as well.
 
It is not altruism that is at work here; it is corporate globalisation. With their investments in poor countries, multinationals bring new machinery, better technology, new management skills and production ideas, a larger market and the education of their workers. That is exactly what raises productivity. And if you increase productivity – the amount a worker can produce – you can also increase his wage. On average, multinationals in the least developed countries pay twice as much as domestic companies in the same line of business. And that is the line of business with the highest wages. If you get to work for an American multinational in a low-income country, you get eight times the average income.
 
But some Western anti-sweatshop activists and CSR-advocates aren’t content. These are still bad jobs compared to our jobs. Some want to boycott them – which would lead to unemployment and deeper poverty. Others want to force companies to improve the conditions and wages dramatically. But then they don’t realise that the problem there is low productivity, because of low education, lack of technology and infrastructure and so on, low wages is merely a symptom of that. If it costs more to hire a worker than he is able to produce for, of course no one would hire him. And he would have to find other, worse alternatives. Is that a way of being responsible?
 
Another example:  In 1992 it was revealed that Wal-Mart in the US was buying garments that had been manufactured by child workers in Bangladesh. Congress therefore threatened to prohibit imports from countries with child labour. As a result of that threat, many thousands of children were fired by the Bangladeshi textile industry. Congress thought this was a way of putting an end to irresponsible business. But a follow-up by international organizations showed that many of the children had moved to more dangerous, less well-paid jobs, and in several cases had become prostitutes. Was that the responsible thing to do?
 
Processes like this might arise voluntarily, consumers might be influenced to demand conditions which harm workers in developing countries, and corporations might be convinced that they should not strive for efficiency above all. And in that case, I will merely feel sad and argue that they have made the wrong decisions. But I am also afraid that this won’t stop at voluntary codes, I think it will lead to enforced legislation in the next step. When big companies invest a lot of resources in something that is not productive, they are soon going to lobby for mandatory standards, so that small and medium sized business are not allowed to compete with other standards. For example, Nike has done a lot to improve working conditions in poor countries, and already Nike say that they encourage enforced standards. That would drive smaller companies out of business, and destroy the competition that is needed to force corporations to behave.
 
CSR 1.2
 
So is there no room for Corporate Social Responsibility? Should the title of this speech be taken literally? Should businesses be like Mr Scrooge or Gordon Gekko, not caring about anything except their own bank accounts?
 
No. There are rules that a free market presupposes, a morality which we all must follow, corporations as well. The basic rules are freedom and voluntary relations. Under no circumstances can corporations use violence or coercion. The forced relocations and disappearance of union activists we see in some developing countries is a horror, which governments and the business and its’ staff has a duty to put an end to immediately. If they don’t do that we all have a responsibility to push them to do it when we are active in the media or as consumers.
 
There are also more subtle ways of coercing others, fraud, protectionism, polluting without compensating, destroy the groundwater, churning out unsafe goods, etc. In the best of worlds we should be able to rely on governments to enforce those rules, not on the benevolence of corporations. But the government is not always what it should be. This is a problem above all in countries with dictatorships and corrupt leaders, but pretty often in open democracies as well, and in that case executives, corporations and employees have a duty to think for themselves, and assume responsibility for their decisions. But as former OECD chief economist David Henderson notes in his important critical book on CSR, Misguided Virtue, this is nothing new. Those considerations and that responsibility have always been important. And they never turned into a criticism of the corporation as such. We don’t need a new concept of social responsibility for these considerations.
 
And what is worse is that this new concept of CSR blurs the line between human rights, which should never be negotiable, and general ideas on what might be good for a community. Well, it actually blurs the line between one of the worst crimes, the organisation of slave labour, and one of the best things you can do, employing poor people in so called sweatshops.
 
I would propose something else. My concept of responsibility would be that in the process of doing good – doing business – there are bad forms of behaviour that you must avoid. This as an alternative to the CSR concept, which is that in the process of doing something immoral or at least amoral, doing business, you should compensate for this by doing a lot of vaguely positive things for a lot of people.
 
Actually, my preferred concept already exists. It is the oath many physicians take when they enter medical practice: ”First do no harm”.
 
It is popularly called the Hippocratic Oath.
 
If someone cared to update and adjust it to the corporate world perhaps we could call it CSR 1.2.
 
“Managing on the edge”, University of Nijmegen, The Netherlands, 25 September 2003