Friday, 5 November 2004

What's the Role of Business in the Modern World?

In his new book, “The Role of Business in the Modern World” (…), published by the Institute of Economic Affairs, David Henderson challenges the notion of “corporate social responsibility” (CSR), which many people believe to be the next logical and desirable step of corporate transformation.  A former chief economist of the OECD, Henderson takes issue with this view. He believes that CSR represents a threat to capitalism, because it requires a redefinition of the role of business, in such a way that it would be, once again, subject to control by political rather than economic forces.

The doctrine of CSR is seen by its many adherents as a creative response by business enterprises to problems and challenges that have been thrown up by recent changes on the world scene. According to the doctrine, businesses should now consciously endorse the notion of “corporate citizenship”. In giving effect to it, they should run their affairs in close conjunction with an array of interested “stakeholders” and practise “multiple stakeholder engagement”.

“Sustainable Development”

Corporate citizenship chiefly involves pursuing the goal of “sustainable development”. This goal is taken to have three dimensions — economic, environmental and social. Hence companies are enjoined to set objectives, measure their performance, and have that performance independently audited and reported on, in relation to all three: they should aim to meet the so-called “triple bottom line”. By following this course, they will both promote the general welfare and be seen to do so.

Only through such actions (it is said) can businesses respond to what are now “society’s expectations”, and thus earn and keep their informal “licence to operate”. In so responding lies the key to long-run commercial success, since profits depend to a large extent on reputation, which itself now depends on being seen to have done the right thing by promoting sustainable development in all its aspects.

In today’s world, therefore, virtuous corporate conduct will bring its own reward: in taking the path of CSR, businesses will improve their long-run profitability. They will likewise improve the working of the market economy which — left to itself and with companies typically concerned only with short-term financial gains — would give too little weight to the environmental and social considerations which now enter into society’s expectations. The general adoption of CSR, by businesses around the world, will “give capitalism a human face”.

Given the broad interpretation of sustainable development which has taken hold, the conception of the general welfare that is relevant to business is held to cover human rights; social justice; the plight of poor countries; discrimination and equal opportunities; the treatment of local communities and indigenous peoples; and stakeholder engagement, as well as “radical environmental improvement”.

What’s the Primary Role?

But, as Henderson argues, what is the primary role of business? Past history, especially of the past half-century or so, offers clear evidence of rapid, sustained and increasingly widespread improvements in material welfare, and there is good reason to think that profit oriented, capitalist business enterprises — operating within the framework of competitive market economies — have played, and are continuing to play, a large part in making such achievements possible. From an economy-wide perspective this is the primary role of business.

Henderson would have expected that businesses and business organisations themselves — in their own defence against the many hostile critics who accuse them of wielding overweening and unaccountable power — would have stressed this obvious point; but in all too many cases they have acquiesced in, or even endorsed, the mistaken belief that globalization has conferred on them both large unmerited gains and substantial new powers, by virtue of which they now have to assume new social obligations. In this as in some other ways, they have tolerated, or even lent support to, arguments, criticisms and forms of social pressure which they could and should have held out against. Events in recent years have in fact demonstrated how weak and vulnerable even the largest business enterprises are today. Many of them now appear as convinced appeasers of their critics and opponents — some with resignation, others with equanimity or even relish. Henderson wonders whether this is responsible conduct.

According tot the adherents of CSR, one needs “new approaches to governance”, which would involve “balancing the roles, responsibilities, accountabilities and capabilities of different levels of governments and different actors or sectors in society”. But Henderson argues that the whole notion of an equal global partnership between governments and non-governmental organisations is inadmissible, and holds out dangers for the democratic process. No non-governmental organisation, and no grouping of such organisations, has a valid claim to represent, and to speak for, the people of a country when that country has a democratically elected and responsible government. Neither NGOs nor businesses — nor trade unions for that matter — have valid claims in their own right to play an active role in international negotiations and decision-making.

Henderson believes that there is another reason for questioning the idea of a tripartite or quadripartite global partnership, namely the characteristic views both of the NGOs and the international agencies chiefly concerned. The great majority of those NGOs that aspire to a larger role in global governance are opposed to freedom of cross-border trade and capital flows, suspicious of further moves in that direction (except possibly for unilateral trade concessions by rich to poor countries), and preoccupied with what they see as the damaging effects of globalization. These attitudes typically go with a generalised hostility to capitalism, multinational enterprises and the idea of a market economy. Much the same view of the world is to be found in UN agencies.

Finally, Henderson queries the notion of “global partnership” because that action taken under this heading may lead to overregulation of the world. Should such a trend take hold, the most
serious effects would be felt in poor countries. The overregulation in question would take the form of laying down, and enforcing, common or uniform international norms, standards, rules and codes. The pressure for this may come from governments, as in the case of the European Union, where the European Commission has recently endorsed the dubious notion of “global social governance”. It may also come from international agencies, with the acquiescence or support of their member governments.

But similar results may follow from actions taken by multinational enterprises (MNEs) on their own account. These businesses are now under strong social pressures, first, to adopt throughout their operations high, self-chosen environmental and social standards; and second, to ensure that these same standards are met by their partners, suppliers and contractors — and even, on some interpretations, by their business customers. Any such trend towards imposed uniformity, whether officially or unofficially promoted, is liable to do harm. Since circumsta
nces vary greatly across countries, the whole notion of common cross-border standards, or even of universal minima, is open to question. Insofar as pressures for greater uniformity become effective, they will restrict the potential for mutual gains through trade. In particular, such developments would worsen the prospects of people in developing countries, by depriving them of employment opportunities which they would be glad to take.

To adopt this way of giving capitalism a human face will reduce welfare, especially though not only in the poorest countries where terms and conditions of employment that are fully acceptable to the workers concerned can be represented as being exploitative and immoral. Regulation, whether formal or informal, as well as prudent reluctance by MNEs to involve themselves in deals or arrangements within poor countries that may make them subject to fierce, sustained and damaging attacks by anti-business activists, will tend to close off a range of what would be mutually beneficial market-based transactions. The enforcement of, or tacit acquiescence in, norms and standards which are unrelated to local market conditions will in fact have the opposite effect to that claimed for it. Denial of opportunities for poor people is a predictable result of the forms of global governance that they and the firms they speak for have endorsed.

Economic Opportunities Exploited

In defense of the traditional role of business, Henderson points out that hundreds of millions of people in poor countries have made significant or even dramatic advances, without benefit of global strategies, partnerships and programmes offering “empowerment” and deliverance from above, largely because individuals and enterprises in those countries were able to create and exploit economic opportunities. In the many poor countries where little or no progress has been made, the main reasons can be seen to lie in deep-seated internal problems, or corrupt and repressive regimes, which have prevented the establishment of adequately functioning market economies. The collapse of communism has discredited centralised economic planning, and provided further evidence that it is only within the framework of a market economy that economic progress can be relied on. These events have belied the salvationist vision.

Giving effect to CSR, in the name of sustainable development, is liable to affect both enterprise profitability and the general welfare: the two aspects need to be kept distinct. Under both headings, there may be negative and positive effects to be taken into account. Where the balance lies will depend to a large extent on how far the CSR approach is taken up by businesses everywhere, as its advocates would wish, rather than just by vanguard firms.

It is clear that, within enterprises themselves, a genuine commitment to CSR carries with it obvious dangers of raising costs and impairing efficient operation, and hence, other things being equal, reducing prospective profitability: to adopt the role of vanguard firm is not a riskless decision. If this were not so, if there were no question of trade-offs and hard choices, the whole notion of CSR would be unimportant if not trivial. Three main sources of enterprise risk can be identified. All of them are ignored or played down in typical statements of the case for CSR.

The Costs

The first source of risk relates to the agenda and performance of management. Taking the path of CSR brings with it an extension of managerial tasks and responsibilities to take greater account of a range of environmental and social concerns. Alongside directors and managers are called on to involve themselves, as part of multiple stakeholder engagement, in time-consuming consultations, negotiations and review processes with an array of outside groups.

Secondly, CSR involves developing new systems for recording, monitoring, reporting on and evaluating the firm’s performance in relation to a range of environmental and social goals. To design and operate such systems adds directly to costs, as well as taking up managerial time and effort.

Thirdly, the adoption of more exacting self-chosen environmental and social norms and standards to govern the conduct of business operations is itself liable to add to costs, possibly substantially. The effect is magnified if, as the doctrine of CSR requires, firms insist on the observance of these same standards by their partners, suppliers and contractors — and even, as some would argue, their customers. These various negative impacts on the performance of enterprises are directly and unavoidably passed on to their shareholders and customers. In so far as CSR makes managers less effective in performing their basic tasks, and gives rise to higher operating costs, the effect is to make people in general poorer.

It is tempting to succumb to the fashionable and politically correct siren songs of global salvation by CSR. But Henderson‘s new book presents a fresh and forceful rebuttal of its claims. He rightly advocates the reinvigoration of the traditional role of business: to serve the consumer, with profits being the yardstick of its success in achieving that goal. He also reminds us of the vital link between prosperity and freedom in the face of collectivists and interventionist tendencies within our societies. In short, his rigorous analysis has convincingly revealed the ugly face of CSR. No doubt that CSR has been inspired by lots of goods intentions. But that is the same stuff which has been used for the pavement of the road to hell.

By Hans Labohm

This article first appeared on http://www.techcentralstati…