Mirror of Justice

A blog dedicated to the development of Catholic legal theory.
Affiliated with the Program on Church, State & Society at Notre Dame Law School.

Thursday, November 30, 2006

Reinforcements for Manne

Mike Perry's colleague Bill Carney thought my critique of Henry Manne's position on Corporate Social Repsonsibility (CSR) was all wet. Here is his comment:

Sargent's quarrel with Manne's claim that CSR is pushed by enemies of

private enterprise is, apparently, that it's an attack on the messenger. He

has to ignore the public choice side of this phenomenon, which is often an

attempt by interest groups to capture benefits from corporations. I give

you organized labor's attack on Wal-Mart, which is only designed to raise

wages (the "living wage" campaign) and fringe benefit costs for Wal-Mart, to

make it easier for employers with higher cost union contracts to compete,

and raises the cost of goods for the poor (and everyone else). Others do

much the same thing. When Pacific Lumber was acquired by outsiders who were

expected to increase the harvest rate on old growth redwoods,

environmentalists attacked. Ultimately they achieved their goal not by

dissuading the new owners from cutting trees, but by getting the government

to buy the land from the new owners, who apparently didn't want to maintain

a scenic wilderness at private expense. It is, I think, in this sense that

Manne uses the word "socialist" -- to express the idea that forcing CSR on

corporations gives the "public" (more likely some interest group) a claim of

some kind of right to the corporation's property. I'm not sure we've

developed a term other than socialist to describe this.

The main attack on Manne's argument is that it's simplistic. Sargent then

goes on to concede that most CSR is done for profit-making motives, which

Manne has stated, I think. I'm not familiar with Catholic Social Thought on

the subject of the corporation, but to the extent that it goes beyond law

obedience and profit-maximizing, I'm on Manne's side. Any attempt to make

the corporation (read corporate management) accountable for something in

addition to profits dilutes the accountability of management, increases its

discretion, lowers profits, and increases the cost of capital for new and

existing enterprises. I wrote about this in the 1990 Cincinnati Law Review,

and I won't repeat the elaboration of those arguments here.

[Mark here] As you might expect, I'm not persuaded by this response. First, Carney does not address my criticism of Manne's tendentious assumption that anyone who buys into CSR despises capitalism and entrepreneurship in particular. Second, Carney points out that CSR arguments may be used by unions or other "interest groups" to capture benefits from corporations. Public choice analysis cuts both ways, however, as evidenced by the nonshareholder constituency statutes extracted from state legislatures by powerful local corporations to protect themselves from hostile takeovers. In other words, CSR can be used hypocritically by both sides. That does not mean, however, that the concept is nonsense; there is such a thing as the common good. Catholic social thought, of course, regards the ownership of private property as constrained by social obligations to an extent that Manne and Carney obviously would not accept. Third, my "concession" that much CSR activity represents an indirect way of maximizing profits does not mean that I buy into Manne's overall argument: a recognition that CSR is "good for business" opens up the possibility of dialogue between the private good and the common good that hardly seems to be countenanced by the Friedman/Manne hard line position. Third, Carney does not address my argument about how the minimalist law compliance approach actually may breed cynicism about law compliance and actually exacerbate illegal or antisocial behavior, and that this may be countered by a more positive approach to CSR. Finally, the Friedman/Manne/Carney view may not even be an accurate way of describing the way people running large corporations actually think about what they should be doing. Note the following observations in a new piece by Peter Haslam of Cambridge University:

doing business with purpose

With the death last week of the Nobel laureate Milton Friedman, business lost one of its brightest and most influential gurus. His saying ‘There’s no such thing as a free lunch’ has become part of popular English usage, but in business circles his name is associated with another dictum: ‘The social responsibility of business is to maximise profits.’

This idea, which has been dubbed ‘shareholder value’, has helped to provoke a vigorous reaction in the form of the ‘corporate social responsibility’ movement, which insists that business has responsibilities not only to shareholders but to stakeholders: customers, employees, suppliers, society at large and the environment.

Despite the obvious appeal of this argument, there are several reasons why Friedman’s point should not be too easily dismissed. After all, any good that business can do is dependent on it making a profit, and shareholder value obliges managers to put the interests of shareholders first rather than their own. Moreover, shareholder value is not so much the invention of business gurus as the product of our demands for the best return on our investments.

Nonetheless, there is a serious problem with shareholder value, though it’s not one we might expect: it conflicts with the way most business people think. According to recent research, the great majority of CEOs believe that corporations should balance their obligations to shareholders with those to wider society. Only one in six, in fact, agrees with Friedman on this score. None of the most admired companies regards shareholder value as its main purpose; and, paradoxically, companies that do focus on shareholder value perform less well than those whose first priority is to serve their customers.

What motivates most business people, evidently, is the sense that they’re providing something that people want or need. And will want or need again. And again. Business, it seems, is less about serving a remote share index than about creating and sustaining long-term relationships with people. Perhaps this reflects the nature of our universe: ultimately, true purpose and meaning are found not in the quantity of material returns but in the quality of relationships.

Business shoots itself in both feet, therefore, if it makes maximising profit its chief objective. Not only does it damage its reputation by convincing the public that it’s up to no good, it also reduces its shareholder value – two outcomes that Friedman would have been keen to avoid.

[Mark Again] I think these are very challenging arguments that "complexify" the question in a way that makes the lapidary Friedman/Manne position ultimately reductionist.



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