Corporate Social Responsibility-Or Good Advertising?

By Coors, Andrew C.; Winegarden, Wayne | Regulation, Spring 2005 | Go to article overview

Corporate Social Responsibility-Or Good Advertising?


Coors, Andrew C., Winegarden, Wayne, Regulation


IN THE UNITED STATES, CORPORATE MANAGERS are fiduciary agents for a firm's owners--the shareholders. Those managers should act in the interest of the shareholders by maximizing the returns of the company. Despite that responsibility to the owners, some people argue that a company should be responsible to a much more broadly defined group: stakeholders--those people who are affected by a firm's behavior. The problem with this, the corporate social responsibility (CSR) perspective, is that a company focused solely on pleasing all stakeholders will go out of business.

Ultimately, the corporation is only a reflection of consumers' demands and priorities; true social change necessarily involves changes in consumers' demands. Voluntary CSR is really nothing more than corporate advertising that makes consumers aware of new products with features for which they are willing to pay. Although CSR advocates portray a profit-centric corporation as socially irresponsible, the opposite is true. A profit-centric firm provides the optimal amount of socially responsible behavior.

WHAT IS CSR? The ethic of corporate social responsibility has been described as "the alignment of business operations with social values. CSR consists of integrating the interest of stakeholders--all of those affected by a company's conduct--into the company's business policies and actions." Fundamentally, socially responsible behavior internalizes all external consequences of an action, both its costs and benefits.

But there is a problem with this definition. What should a company value in its pursuit of social responsibility? Should it attempt to minimize the negative impacts of its business activity, or maximize its positive impacts, or find some optimal combination of positive and negative impacts? And how much do various stakeholders' preferences matter? Do the opinions of environmentalists count more than those of labor activists? Or shareholders? Or consumers?

Those questions can become so overwhelming and convoluted that they quickly distract a company from its original purpose to provide profits to shareholders while supplying consumers with goods and services that add tangible benefits to their lives. Companies provide consumers with goods and services that they prefer enough to forgo other consumption. If consumers are willing to pay a premium for more socially responsible production, however that is defined, then businesses would be actively pursuing those methods of production without any new organizational framework besides simple creative profit maximization.

The fact that the market gives us precisely what we ask of it is difficult for many CSR advocates to believe. A business's methods of production and the products it provides are mirrors that reflect individuals' preferences and economic tradeoffs given a budget constraint. For example, gasoline stations would begin selling biomass fuel tomorrow if consumers were willing to pay the premium necessary to make that venture profitable; but, in general, consumers are not yet willing to make that monetary sacrifice. Sure, there is discontent with the pollution that stems from our combustion-based economy, but consumers do not seem to be eager to pay more than current gasoline prices to relieve their discontent.

The economic dance of supply and demand works to maximize social welfare, but externalities such as pollution are sometimes produced in the supply process. To combat those externalities, government sometimes (arguably too frequently) intervenes in the private market, implementing incentives and disincentives in attempts to change consumer or supplier behavior. The government can tax a product, thereby manipulating the market to address the externalities produced. In those cases, the government attempts to force firms to act in a socially responsible manner by changing the equilibrium conditions of the market. The government has the ability to pass the cost of an externality onto consumers through "Pigouvian taxes. …

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