CSR: the dangers of ‘doing the right thing’

In this first part of an exclusive two-part essay for spiked, Phil Mullan examines how the decline of profitability and investment has caused corporations to lose faith in their social role, leading them to embrace the idea of corporate social responsibility – at the expense of democratic accountability.

Five years after the low point of the Western financial crisis, we still see almost daily attacks on bankers’ bonuses and CEO pay levels. This idea that big payouts to business people are a key factor behind our economic troubles has become something of a ‘modern truth’; unfortunately it is one that obscures and stymies the much-needed deeper analysis and discussion of what’s really gone wrong with the Western economies.

While there are lots of reasons why this narrow focus on executive salaries and bonuses has been so enduring, one significant driver is the way big business has opened itself to this sort of challenge by its own adoption of the dictums of corporate social responsibility (CSR). Under the auspices of CSR, businesses are expected to look beyond their day-to-day business objectives and challenges and consider how they can ‘do good’ for society.

The assumption behind the need to adopt CSR practices is that otherwise businesses are failing society in some way, that they are doing the ‘wrong’ thing. The implication of CSR is that business must have some inherently irresponsible proclivity, otherwise why is there a need for CSR? Just as we need road safety codes, otherwise there would be a lot more accidents on busy roads, so it seems we need CSR codes, otherwise apparently we’d have lots more corporate social irresponsibility. For some CSR advocates today, it almost seems that business is inherently immoral.

The cumulative effect is that it is now commonplace to assume that business has something to answer for to society. In practice, CSR is a polite form of business bashing. Condemnations of senior pay levels follow easily in such a climate. The fact that large parts of business accept the need for CSR actions validates this more refined version of business criticism, and thereby opens the way for all those attacks on business leaders, their pay and incentives, and their supposedly greedy, dangerous behaviours.

This highlights the key issue with CSR: it is no longer, if it ever really was, a criticism of business from outside – from lobbyists or from non-governmental organisations (NGOs). Now, CSR is a framework endorsed by business itself. Most business leaders genuinely accept that there is some deficiency in the mores of business which requires an alternative CSR-style, morally and ethically guided approach. Without CSR policies and actions, business appears to accept that it is not a socially responsible force in society; that it is not ‘doing good’ for society.

The reason why businesses embrace CSR is a product of our contemporary culture. It is rooted in the defensiveness of business leaders: over the past 30 to 40 years, they have increasingly lost faith in themselves and in their contribution as business people. They no longer feel able to argue for the essence of capitalism as represented by their profit-driven organisations.

What is business for?

Business corporations, as a distinct organisational form, are set up to produce things – goods or services – for sale to customers in a market-based economy. That is their primary social purpose. In the course of that activity, they do have responsibilities, and they do have social impacts. The blurring of these three categories – purpose, responsibilities and impacts – expresses the confusions and uncertainties in relation to what business is about, and what it should not be about.

Businesses do not have ‘responsibilities to society’, in the sense of duties that they have to carry out directly for society. Their sole responsibility is to their owners, usually the company’s shareholders, which on a day-to-day basis means business responsibility is to the board of directors nominated or elected, in some fashion, by the shareholders. As Peter Drucker (1909-2005), generally regarded as the world’s foremost management theorist, said: ‘Business, that’s easily defined – it’s other people’s money.’ These ‘other people’ are the owners and investors.

Given that the shareholders have invested their money in the business to make more money, this is the source of the idea popularised by Milton Friedman in his famous 1970 article in the New York Times titled ‘The social responsibility of business is to increase profits’. While this provocative phrase more than justified itself in the impact this article had on all subsequent discussions of corporate responsibility, it would be more accurate – though a little more long-winded – to say that sustained profitability is a necessary condition for a business to fulfil and continue its purpose to produce things and thereby both satisfy the owners to whom it is accountable and responsible, and to bring about the consequences from which society benefits. The drive for profit underpins the dynamic of capitalist businesses.

Business has both direct and indirect social impacts and effects. Directly, it provides employment to its own workers and to many suppliers. The business organisation is the main form of wealth creation in a market economy, and this wealth provides the extra resources for investment in the future and for taxation to pay for social requirements today. Business is therefore the prime source of the wealth that society can choose to utilise in order to address our common social or environmental challenges.

Indirectly, businesses can also contribute to social progress. When pursuing opportunities for their own profit, businesses bring about technological transformation, improving productivity at a society-wide level and therefore contributing to social, as well as to economic, development and progress. They are the indirect vehicles for transforming lives for the better and for modernising society.

Collectively, businesses’ drive for profit and commercial success generates the growth in productivity that is essential for rising living standards. Business did this pretty consistently and extensively in the late-eighteenth and nineteenth centuries across Europe and large parts of America, and again for much of the twentieth century, though more unevenly, and with the huge disruptive interruptions of the 1930s slump and World Wars along the way. The private business sector is not the sole source of innovation and productivity growth – the state has contributed to innovation, too; think only of atomic energy or space travel or the internet – but the private market economy is nevertheless a significant driver of human progress over the past quarter of a millennium.

The rise of CSR

Banker bashing may have risen to fever pitch in the wake of the 2007-8 financial crisis, but we should remember that business-bashing more widely has been increasingly prevalent and widely echoed for much longer, since at least the early 1990s. The same Peter Drucker may have denounced the ‘business ethics’ movement as ‘ethical chic’ as long ago as 1981, but as respected as his views were then, they are now seen as wildly anachronistic.

It was probably the Brent Spar affair that propelled business behaviour and CSR to centre stage in the business world, and brought this new anti-business mood fully into the open. In 1995, environmentalists campaigned against Shell over its decision to sink a redundant oil platform, Brent Spar, in deep ocean waters. Despite multiple studies recommending deep-sea disposal for the old platform as the safest and most environmentally responsible course of action, and after requesting and receiving UK government approval for its plans, a campaign orchestrated by the NGO Greenpeace forced Shell to reverse its decision and dismantle the platform on land instead.

Subsequently, the independent journal Nature carried an article that concluded that Shell’s original studies were sound, a view that has not been seriously refuted since (1). Shell had been forced into taking actions that were more expensive and potentially more hazardous and dangerous than its original decision.

Nevertheless the heralded ‘success’ of this crusade against business gave great encouragement to the CSR lobby (more recently sometimes re-branded as ‘ESG’: environmental, social and corporate governance). Over the past two decades, the CSR/ESG movement has seen many other companies adopting a defensive stance, and accepting the underlying assumption that much of what companies do, even if unintentionally, is harmful for society and destructive for the environment. Instead, it has been assumed both outside and inside the corporate world that businesses need to mend their ways and address their moral and ethical responsibilities while they pursue their day-to-day activities, or ‘give something back’ to society to offset any harm unavoidably inflicted.

The economic backdrop to the openness to CSR ideas within the business world is the return of economic unevenness since the 1970s, following the end of the postwar boom. Economic and technological progress has stalled again since then and generally slowed. Weak business investment underlies this faltering of innovation and productivity growth and the resulting relative lack of growth in average living standards in many Western economies (2).

Business leaders are products of a social environment where the elite has become increasingly uncertain about the future. The wider elite’s loss of confidence in taking society forward has sapped business leaders’ own sense of legitimacy in themselves and in business organisations as a respectable and valued institution.

As David Henderson, a CSR critic and former head of the Economics and Statistics Department of the Organisation for Economic Cooperation and Development (OECD), described: ‘CSR is in large part an expression, a reflection, of the prevailing climate of opinion, which affects people within companies as well as outside: these are not two separate worlds. Positive and negative ways of thinking reinforce one another. On the one hand, there is general approval for the appealing notion of sustainable development… Almost equally widespread, at the same time, is distrust of the profit motive together with a disparaging view of the standards of conduct that currently prevail in private business.’

While the Western elite’s hesitancies about the meaning and purpose of Western society go back much further, to the early parts of the last century, this malfunctioning of capitalism since the 1970s has served to exacerbate business leaders’ discomfiture in the mission of their own organisations. Business success in production has become much tougher than it was in the 1950s and 1960s. The slowdown in the economic dynamic has aggravated their own uneasiness, and engendered an openness to frameworks other than explicit profit maximisation.

Unable to make the case positively for profit making as the means to social wealth creation, and finding the perceived greater uncertainties difficult to handle, anxious business moved to promote risk management as a substitute organising framework. This went alongside the ‘reputation-protecting’ phase of CSR. Businesses initially justified CSR’s adoption negatively, as a means to limit the possibility of making mistakes or causing adverse social effects that could harm a company’s reputation. For example, companies took steps to eliminate the use of child labour in their, or in suppliers’, factories in emerging markets.

Subsequently, much of business has moved on to the fuller, positive endorsement of the assumptions of CSR, expressed in the widespread business acceptance of ‘sustainable development’. Business leaders became susceptible to the notion that they have to earn some sort of social ‘licence to operate’ through their better behaviour; that they have to prove their value morally and ethically, not just by being good at their line of business.

Being ‘good at business’ was no longer seen as the prime goal. In fact, commercial success even seemed to become something of a liability if profits were large enough to be denounced as ‘excessive’. Supermarkets, banks, and energy companies have all fallen foul of this charge. Instead, it is more important that you have to be seen to ‘do good’ than be good at your business. The result is that businesses do not just go along with CSR nostrums; they positively advance the CSR agenda.

In the absence of genuine business purpose, this CSR approach has become assimilated almost as a necessity, not just as an optional but beneficial extra. For example, without businesses being able to espouse their own institutional meaning, people working for them have become less ‘engaged’, to use the language of the human-resources world. Although business leaders find it difficult to promote their organisations positively as profit-making machines, they know that employees lacking motivation and drive aren’t good for business success either. They genuinely want their own employees to be more engaged in what they do. This is one driver for the embrace of CSR and its fellow traveller, philanthropy, which are often justified by seeking to boost employee morale, engagement and the sense of ‘feeling good’. As Brian Moynihan, chief executive of Bank of America said recently: ‘These projects are very popular with our own staff’.

Hence, too, the fashion for making up fatuous mission statements. Previously, business expressed their mission through what they did – producing particular goods and services profitably for their customers – and didn’t feel the need to resort to creeds on bits of paper or posters on the canteen wall.

In this two-part essay, I will argue that this wide-scale endorsement from within business, and from outside, of the necessity for CSR policies is unjustified. On the contrary, CSR, or the Doing the Right Thing perspective, however well intentioned, is bad for democracy, bad for business and bad for society.

CSR is bad for democracy

Given the existing disenchantment with politics, the anti-democratic bent of the CSR brigade is probably the most important danger today, and the one with potentially the most enduring impact. Paradoxically, it’s also the one least often discussed, even in the critical literature about CSR, which too often focuses simply on that Friedmanite counter-position of profit maximisation to the social-responsibility crusade.

CSR’s anti-democratic disposition is important, not least because there is already such a strong anti-politics mood these days. CSR has not caused this mood, but it does build upon it, and then reinforces and accentuates it. It is commonplace today, in assessments of trust levels informed by a CSR-sympathetic outlook, to highlight the extent to which business lacks credibility. For example, according to the 2013 Edelman Trust Barometer, fewer than one in two people in the UK have trust in big business. Meanwhile, a business think-tank, Tomorrow’s Company, introduced its recent report on business ownership, Tomorrow’s Business Forms, with the words: ‘A prevalent public view is that business is not trustworthy and focuses too much on short term profit instead of taking a longer term view.’ (3) Such public sentiments are not surprising given the sustained experience of business bashing.

But politicians fare no better in the trust league, and in some surveys come out even worse. The same Edelman Trust Barometer reported that ‘Government leaders are less trusted than business leaders across the board on a variety of criteria: their ability to solve social or societal issues (15 per cent versus 19 per cent); correct issues within industries (15 per cent versus 26 per cent); and make ethical and moral decisions (14 per cent versus 20 per cent).’ Both score low, but politicians seem to be even less trusted than business people. Anti-business and anti-politics sentiments go together these days, and are reflected in sentiments about almost all traditional institutions. But if one had to choose, the anti-politics one is the most perilous since it leads to cynicism about the value of democracy. Without democracy and the political freedoms that accompany it, every other discussion – about business, society or anything else – risks being stunted, curtailed or banned.

How does CSR make anti-democratic tendencies worse? Because the ubiquitous phrase aimed directly at companies to ‘do the right thing’ raises the fundamental question of who decides what is right and wrong. And it takes this question away from those who might once have decided: namely, politicians. Still, when people talk of business ‘doing the right thing’, the question should become the right thing by whom? Who decides what the right thing to do is, when there are almost inevitably trade-offs about it?

Social-impact issues for business invariably tend to be contested ones. There are no self-evident unequivocally ‘right’ answers. Responses to issues are also unlikely to be eternal or universal; they change over time and can be different in disparate parts of the world.

Consider questions such as:

Should businesses invest in pollution control? Sounds straightforward – of course they should. But what are the right levels of anti-pollution investment to qualify as ‘doing good’? Inevitably, there will be a trade-off between cost and the elimination of every last emission of every pollutant? Does the answer change at different levels of economic development? In the early stages of development (nineteenth-century Britain, or sub-Saharan Africa today), isn’t combating poverty through creating jobs more important than pricing a start-up business out of potential markets by investing heavily in anti-pollution measures? Who decides?

Is it right for a company to produce sugary drinks? Is sugar good for nutrition and energy, or bad for teeth and obesity? Thirty years ago, soft drinks were marketed as good for health. Today, some campaigners claim sugar is the ‘new tobacco’. Who decides?

What about a business like AirBnB? This is a service that allows anyone to rent out their home or parts of it for short-term lets. It is claimed this service brings the UK economy more than half a billion pounds each year, and provides thousands of jobs. But, at the same time, there are concerns that AirBnB’s members don’t have to meet the same safety standards as their rivals who run hotels and hostels. So is it fair that the service it promotes undercuts other local businesses? Is that the right thing? Who decides?

Is it right for a food producer to use organic methods? Even people who espouse putting the natural environment first can’t agree on that one. Producing foodstuffs without the aid of ‘artificial’ chemicals fulfils some people’s moral agenda and is therefore endorsed as the ‘right thing’ to do. However, other environmentalists claim that if it became ubiquitous, organic-food production would be hugely damaging to the biodiversity of natural forestland since organic methods need about double the amount of cleared land to feed people compared to the use of chemical pesticides and fertilisers. So is there an unequivocal right way for the food producer to act in this situation? Who decides?

Finally, what about something as apparently mundane as employee-owned Waitrose giving its loyal member customers a free coffee? Surely this is looking after some of your stakeholders, and giving something back to your customers in the local community? However, consider the potential impact on the artisan coffee shop round the corner when a big local supermarket starts giving away your main product for free. Is that the right thing for Waitrose to do? Who decides?

Corporate activity pretty much always has some sort of social impact – on employment, on the local community where it operates, on the local environment – and there is no fixed, objective, eternal answer about the right way of operating. It’s very rare to be faced with a clear black-and-white choice where there is an unequivocal right course of action.

Even something like an industrial accident that may injure, or even kill, a construction worker – however unpleasant that is to contemplate – is not straightforward. Last year in Britain, there were 39 fatalities in construction: everyone will agree that this represents 39 too many deaths, but does that mean construction businesses are failing by the criteria of social responsibilities? In fact, 39 is half the fatality rate of 20 years ago, but accidents are ‘accidents’ and will still happen. Even as safety levels improve further across the board, construction will probably remain five-times more dangerous than the average workplace. The only certain way to stop such deaths in British construction is to stop all construction work, but that’s absurd and would result in a worsening housing shortage and infrastructure inadequacy, with all the social problems these entail.

So the $64,000 question is: who decides what is the right thing? What corporate actions are in line with CSR maxims? We can all as individuals follow our own moral compass on what is ‘right’ or not, and business leaders are no different; they can exercise individual moral judgments for their businesses on issues that go above and beyond their legal or regulatory obligations. In which case they should be accountable for their actions, but solely to their shareholders or whatever other corporate structure they have, not to some vague concept of ‘society’. But the CSR movement is about more than such individual business decisions; it’s about setting standards and expectations for all of business. So who decides for society the ‘right’ form of company behaviour?

Is it campaigning NGOs? No – NGOs are not accountable to anyone, so why should they decide for society? Is it ‘moral’ figures like religious leaders? They are not accountable either (at least not to a mortal constituency). Is it the companies themselves? Surely not – they do what they do for their owners, so whatever ethical decisions they may make for themselves, they are not appropriate judges on behalf of society of what is ethically ‘right’ either. They are not accountable to society. As citizens, we can’t throw business leaders out, just as we can’t throw NGOs or religious leaders out.

Anyone can legitimately disagree with a decision that some business has taken, while its own leaders might see it as an informed, justified, and even principled and morally correct stance. Such disagreement is fine. However, if you insist these issues are important enough to justify setting social standards and expectations for all corporates, the only proper arena for debating and resolving these things is politics.

It’s only through political debate that questions on such contentious issues of whether there should be common standards set for business – and I’d argue it should be a very high bar before that’s answered in the affirmative – and, if so, what they should be, can be properly discussed. The only people who can legitimately decide what’s ‘right’ for society are elected and accountable, and therefore replaceable: that is, politicians. If we don’t like what the existing politicians are doing regarding the way businesses act or don’t act, we can argue a different viewpoint, and hopefully seek to throw those politicians out at the next election and replace them with others. That’s the way representative democracy is supposed to work.

Social and moral questions that are being pushed on to companies to address are being taken away, in whole or in part, from the place where they should be discussed and debated: the political arena. Whatever the intentions of people promoting it, the CSR agenda is part of today’s anti-democratic tendency – it encourages contentious issues to be at least partially taken away from democratic debate, and seeks technical solutions through the unaccountable actions of companies.

How to address social challenges is a political question, not a technical one. But increasingly they are being viewed apolitically today. Even seemingly technical tasks, such as cleaning up the local environment, confront us with essentially political decisions: who decides what to prioritise and how to handle any trade-offs? Ignoring this represents a huge threat to democracy. Responsibility for a better future is taken from elected, accountable politicians and given to unelected, unaccountable business leaders. Politicians have been losing status for their own reasons, but we should be very concerned about this tendency to move from a rejection of weak politicians into a deeper disdain for democratic politics per se.

Business leaders themselves can enter these political debates as much as anyone else in society; they can even stand for election as politicians. But what is unacceptable is that they should by-pass democracy and set themselves up as society’s leaders to impose certain standards of business behaviour for everyone else in that country, either because they personally think that is the ‘right’ way or because they feel pressured by some other unelected, unaccountable body into adopting that approach as the ‘right’ one.

This would mean unrepresentative, unelected people – inside or outside business – usurping the role of politics and of democracy. That is wrong for society. As a point of democratic principle, businesses should not be encouraged, or leant upon, to use their undoubted social and economic power for the ends of ‘social responsibility’. To do so will supplant and weaken democratic channels for social change and improvement. And it will therefore encourage the already strong anti-politics mood.

A long time ago, Adam Smith, a moral philosopher and the founder of classical political economy (the same man, not two different personae as is fashionable for CSR advocates to assert), argued that government and business don’t go well together. ‘No two characters’ he wrote, ‘seem more inconsistent than the trader and the sovereign’ (4). His point was not about natural behaviours or differences; it was that the goals of business and of government are very different. Smith even seemed to give an early warning about CSR: ‘I have not known much good done by those who affected to trade for the public good.’ (5)

Rather more recently, in the middle of the postwar economic boom, Theodore Levitt, a former professor at the Harvard Business School and former editor of the Harvard Business Review, warned of the dangerous allure of social responsibility to business: ‘Welfare and society are not the corporation’s business. Its business is making money, not sweet music… Government’s job is not business, and business’s job is not government’ (6).

Read part two here.

Phil Mullan is the author of The Imaginary Time Bomb: Why an Ageing Population Is Not a Social Problem, IB Tauris, 2000. (Buy this book from Amazon (UK) or Amazon (USA).).