jim.shamlin.com

A Mission-Based View of Corporate Responsibility

Given that the factors toward which governance is presently oriented are not only unproductive, but unlikely ever to be productive, the author suggests there is a need for reconsideration - specifically, in the return to a mission-based method of determining and implementing the governance of a given firm.

How Some Companies Think About Corporate Responsibility

In the wake of a debacle, there tends to be contemplation. When the technology bubble burst, doubts surfaced about the exclusive focus on short-term profit, and the sense was that firms focused on financial performance neglected their reputation with customers, employees, and the general public. Some companies started to rethink their goals and social role, but for many it was too late.

In situations where small firms expand rapidly, they generally begin with a strong sense of their social impact, and dedication to customer service and have aspirations to provide innovative high-quality products. Few firms manage to preserve these in periods of rapid growth or increasing competition, and do not recognize their missteps until they have travelled far in the wrong direction. Others, however, manage to maintain their values and see them as a cause of success rather than a distraction or impediment.

The author gives the example of Henkel, a German firm that grew rapidly in the past few decades, but remained committed to the values of its founders. (EN: The next few paragraphs are laudatory and mention a number of recognitions as an admired and ethical firm, but doesn't provide much in the way of detail.)

One of the problems of firms that speak of their social responsibility is that it often seems to be a distraction from serious intrinsic weaknesses - the firm spends money of philanthropic measures and social causes to appeal to emotion. This dodge has been so often used that any firm that brags of its social conscience is viewed with some suspicion.

A firm's true commitment to creating a positive impact on society is not in conspicuous acts of charity, but in the way it behaves in regard to its customers, employees, shareholders, and suppliers. A little philanthropy can be good for public image, but it is entirely superficial and unsubstantial.

Corporate Social Responsibility As a Reaction to Corporate Crisis

The present financial crisis has prompted a demand for additional government regulation, but compliance to external regulation is not sufficient to restore corporate reputation. A firm is not respected for obeying the letter of the law, but for its mission, purpose, and role in society.

The philanthropic activities undertaken in recent years as a means of public atonement are obvious subterfuge and are considered likely to be short-lived. However, it will likely be a boon to the nonprofit sector, which seems to abruptly change from exposing misconduct to doling out praise when the donations come in.

The perspective that maintains a firm's commitment to society is demonstrated by philanthropy is misguided. A firm can fail to fulfill its mission and purpose in society while maintaining a generous budget for charitable donations. Such "good works" mean little when the donated funds are earned by short-changing employees and over-charging customers, which is contrary to its purpose and true social function.

The author meanders a bit into the evaluation of the charitable organizations themselves - there's good money to be made in helping corporate sponsors pretend to care. A nonprofit that "stands for" a cause and yet does nothing to address the social problem is at best pointless, and at worse a front.

A company delivers social value merely by serving its purpose and mission: providing a quality product to those who need it, providing a livelihood and opportunity for personal growth to those who serve as employees, providing income to its investors and its community. To suggest that such a firm is unethical simply because it does not donate heavily to charity is dismissive and unwarranted, and encourages its capital to flow to superficial activities that are ultimately less valuable to society.

The Rise of Corporate Social Responsibility

The author considers some of the theories concerning corporate social responsibility.

In 1970, economist Milton Friedman took the extreme stance that the only responsibility a company has is to its shareholders, and its duty to them is in maximizing its profit. This was not the first theory of corporate responsibility, but it exemplifies and extreme position that was highly influential.

A few decades later, Edward Freeman proposed "stakeholder theory," which identified a number of parties that are affected by firms - primarily investors, employees, suppliers, and customers - but also broader parties who were indirectly affected: political groups, trade associations, communities, and competitors. He may have gone a bit too far, suggesting that a company's greatest obligation should be to those who are most dependent upon it, rather than those upon whom the company depended. The obvious flaw in this approach, that a firm's service to those parties would inevitably lead to its extinction, made it a straw-man in comparison to the financial model.

Later, Archie Carroll proposed a notion of corporate citizenship that considered four dimensions: economic, legal, ethical, and philanthropic. The obvious problem, besides its simplicity, is that none of these dimensions has anything to do with the purpose for which a firm was founded or any direct relationship to the interests of those on whose participation it depends for its survival and success as a firm. The schism between efficiency and ethics in this context is "enormous."

More recently, the idea of corporate citizenship has returned to the notion of responsible behavior in the company's activities and interactions. While this approach follows the ethical principle of doing no harm, it neglects to consider the greater matter of deciding what to do, if anything at all. As such, it provides excellent guidance for the means by which a company interacts with others, but no guidance as to the purpose toward which a firm should strive.

The diversity and disparity of ideas about corporate social responsibility demonstrates and underlying confusion about the fundamental purpose of a company, and the theories are wrought with inconsistencies, impossibilities, and self-contradictions. It is doubtful a convoluted concept holds true, more doubtful that it can provide unambiguous guidance for action.

When considering corporate ethics, the very nature of the corporation must be addressed. It cannot be limited to the actions a firm undertakes that are entirely unrelated to its actual purpose, nor can ethics be limited to merely guiding or constraining the means, nor can it consider a benefit that is a consequence that is inconsequential to intent. It must speak to the essence of the firm, its reason for existence.

It must also be to some degree comprehensive: it cannot consider one set of actions undertaken by the firm and ignore others, or merely take an accounting of a firm's character as if its actions were isolated credits and debits in an accounting ledger. It must derive from and pertain to the objectives, strategy, and tactics of a firm and the consequences of every action it undertakes.

The author considers Garriga and Mele (2004), who categorized the ideas about corporate social responsibility into four categories:

1. Instrumental Theories. Friedman, and the like, focus entirely on creating economic value for shareholders, and any action undertaken must contribute to its profitability. Where a company benefits any other party, it increases revenue, decreases cost, or otherwise supports profitability - product quality is important because it enables premium pricing, employee health plans reduce absenteeism, a donation to a social cause improves brand image and increases sales.
2. Political Theories. Davis and others propose that a company is a "social power" in society, and with that power comes responsibility, in the manner of noblesse oblige, to use its power for the benefit of others: those that depend on a company have a right to its support, and the company is obliged to support them. At best, such theories correctly identify the impact a firm may have, but fails to properly justify how such an obligation arises and why the firm is to be held responsible for fulfilling these obligations.
3. Stakeholder Theories. These theories reckon that companies that exist in a society owe their existence to society, and must therefore serve whatever demands society may make of it at any given time. Such theories suffer from generalization and inconsistency - the service a firm owes a society is not limited by its purpose or function, or by anything except the brief and inconsistent impulses of any who would present a demand of it, nor is there a method for prioritizing among conflicting demands.
4. Common-Good Theories. The last category considers ethics in mathematical terms: whatever course of action does the most good for the most people is the most ethical. The author mentions the United Nations "Global Compact" aimed specifically at global companies that provides nine principles that a company must pledge to uphold to be regarded as respectful of human rights and environmental protection. This is a rather simplistic code that provides specific do and don't recommendations that is not comprehensive, subject to change, and does not provide much useful guidance. (EN: I looked into this, and it really is a sloppy document. It's grown to ten principles, each vaguely worded - "businesses should make sure they are not complicit in human rights abuses" - which are good ideas in terms of avoiding action that does harm, but useless in terms of framing day-to-day decisions toward a purpose.)

There are likely other categories, and many theoretical frameworks are based on a hodgepodge of ideas, some inconsistent with others and many inconsistent or insufficient in and of themselves.

Initiatives in the area of corporate social responsibility and those pertaining to corporate governance are often considered to be separate and distinct - but in fact, the two should be considered together because they are closely related. Responsibility defines the objectives, governance controls the means, and separating the two is obviously counterproductive.

In 2001, the European Commission published the Green Paper on Corporate Social Responsibility, which the author considers to be "a useful starting point for examining the practical aspects" of the topic. It promotes three principles:

1. A company is not accountable only for economic results, but should also consider the social and environmental impact of its activities
2. Relations with stakeholders are not secondary, but should be part of the firm's core activities.
3. A corporation's responsibility is not limited to compliance with law: it involves a voluntary commitment to focus on issues such as building the skills and competency of employees and demonstrating commitment to their communities.

Another body of theory (attributed to "Snider et. al" in 2003) further attempts to classify the actions through which companies strive to demonstrate a commitment to socially responsible behavior: they asked open-ended questions a diverse group of stakeholders. Given that the credibility of respondents and the context in which the questions are considered can lead to errors, the outcome still merits some attention:

• The degree to which firms adhere to the declaration of principles, directly or indirectly communicated through documents such as their mission statements, statements of principles, etc., is indicative of their ethics.
• Environmentalism is very much in fashion: in the present age, being "green" is equivocated to being good, and at least some part of the assessment of a firm's ethics pertains to its initiatives in this regard.
• Commitment to customers is also a common topic: it is held that companies must strive to deliver product and service quality, innovative solutions, cost reduction, and constantly seek to improve customer satisfaction through their product or service quality.
• Commitment to employees is another topic to which companies have been paying homage for a few decades. There is the notion that a company consists of its people, and that employees are the heart and soul of a company, and that they should be well compensated, professionally developed, and otherwise taken care of by their employers.
• Diversity is another common element, being inclusive of peoples of various demographic qualities such as race, gender, religion, sexual orientation, marital status, and the like. Initiatives range from non-discrimination to accommodation.
• Generating economic value for owners and shareholders is also regarded as a company's commitment to society. It is often understated in word and overstated in deed, but it is a valid claim that the owners of a firm, as members of society, are not to be excluded from the moral imperatives of a firm. Moreover, investors in the current day often demand more than just a yield, but insist that the companies in which they hold stock behave in certain ways, generally covered by the preceding categories.
• Finally, companies may wish to express their commitment to certain social causes that are beyond the scope of their operation. Such companies donate to charity and promote volunteerism by their stakeholders as an expression of their commitment to the welfare of the communities in which they operate.

The degree to which corporations espouse and support social causes has expanded greatly in recent years. It is clear that companies believe that they must commit to causes in order to demonstrate shared interests with certain groups, but given that there seems to be no correlation between a firm's business activities ad the causes they adopt, it's questionable whether firms are actually in support of causes, or merely using charity as a distraction from the problems that they are refusing to address.

This is not to say that all corporate charity is necessarily subterfuge, but that much of it seems so in its lack of relation to the purpose and values of the organization. If charitable acts are to be regarded as meaningful, they must be selected in a meaningful way - such that there is a clear relationship between the act of giving charity and the greater social purpose of the firm.

Toward Responsible Companies

On a fundamental level, a company is an organization of people who work cooperatively to provide goods and services for customers in an efficient way. If it were otherwise, it would not be a company by definition. This is the company's primary mission, from which its main responsibilities are derived. The firms other responsibilities are all secondary to this: the need to retain skilled employees, provide an economic return for investors, and maintain positive relations with the community and other companies are all important to its main purpose, but are subordinate to its service to its customers.

The author refers to Argandona, whose three dimensions of corporate responsibility are:

1. Economics: Efficient production, which enables the firm to offer products at a fair price to customers, provide fair compensation to employees, and provide a fair return to investors.
2. Social: Maintaining both internal and external relationships beyond strict economic efficiency to ensure the long-term success and sustenance of the enterprise.
3. Ethical: In the course of pursuing its goals, a firm seeks to create benefits and refrain from doing harm to others whom its activities impact.

There may be additional dimensions, but even these three give us the ability to focus debate on the issue more clearly.

Every company exists and operates in the greater context of a society, hence its responsibilities are seen as social in nature. Employees, customers, suppliers, financial institutions and local organizations are archetypes do not necessarily describe different people, but merely categorize interactions.

A single individual may be an employee, customer, and investor in a firm and the degree to which he has been served or harmed must consider all of his interactions with the firm: a firm cannot claim to have fulfilled its obligations if it provides him a better profit as an investor, but has cheated him as an employee and a customer.

As such, companies must consider their choices not in regards to a distinct group of people, serving some at the detriment of others, but in regards to all who are impacted so that each is benefitted (or at least not harmed) - only by doing so can a firm have a valid claim to have been completely responsible to all of society.

As such, the company's mission "hints at" the social commitment of the organization: the provide quality goods and services, generate economic value, contribute to the development of all who interact with it, and respect the laws and cultures of communities.

There's a bit about "economic freedom" that speaks to the right of individuals to pursue the goals of their choice - to act or refrain from acting at will - and in any action that involves or impact others, freedom requires responsibility for considering the consequences of any action undertaken. The right of one individual must not impede the rights of others: a firm will inevitably be held to this standard, by internal or external forces.

It's also noted that individuals and communities are also acting in pursuit of their own goals, and the success of a firm depends on its support of those goals. A firm succeeds in selling products if its products help customers achieve their goals. It succeeds in attracting and retaining employees if it helps them to achieve theirs. It succeeds in obtaining financing if it helps its creditors achieve theirs.

Return to the question of charity: to what extent should a firm "get involved" in projects and causes beyond the realm of serving those with whom it has a direct relationship? It is difficult, though not impossible, to identify opportunities for philanthropy that may have a benefit to the firm (contributing to education improves the quality of the labor pool from which the firm draws its employees); but it is less difficult to identify acts of philanthropy that harm the firm (contributing to a nonprofit organization that has filed a lawsuit against the firm). So in that regard, philanthropy must be restricted from any undertaking that prevents or hinders it from fulfilling its mission.

(EN: It seems to me there's some danger in this, as contributing to a cause for the sake of not being hindered - giving money to a charity so it does not file a suit or launch a PR campaign that is critical of a firm - crosses into the realm of bribery or extortion depending on how the donation was initiated.)

In addition to considering the impact a cause or organization has on the fulfillment of the firm's purpose, there is the consideration of degree: where giving money to a charity decreases the return to investors or the compensation to employees without accomplishing anything in the long run, it is harmful to do so. In effect, this is stealing from one party to gift to another.

Aside of the financial considerations, there is the question of efficacy: where funds are given to another organization to accomplish a social good, it is presumed that the third party can be more effective and efficient at doing so than were the resources to have been applied by the firm itself.

Said another way, a company should select opportunities for philanthropy that are coherent with their mission and that are supportive of the interests of its stakeholders. Employee development is specifically mentioned: if a firm encourages volunteerism, it is giving its employees the opportunity to develop skills and competencies by their participating in philanthropic activities, even if the outcome of those activities is unrelated to its mission.

In regard to employee development, this is a manner in which a firm contributes "to humanity" by virtue of its operations. In the course of performing activities related to providing a good or service, employees learn and grow and enjoy personal fulfillment. It is a natural and positive side effect of serving the core purpose of the organization. In the same way, providing a return to investors results from performing the operations necessary to the core purpose of the organization efficiently. Such side effects may be unintentional, but if addressed with intent, the degree of benefit can be increased without compromising the firm's mission.

By its very operations, a company makes a contribution to society that no other organization can make, or at least does so in a way that uses resources more efficiently and creates higher quality. For example, a commercial builder would accomplish more good for more people and less money by building and giving away houses than by donating to a nonprofit that built lower-quality homes at a higher cost.

In all, it might be preferable to consider the concept of a responsible company rather than corporate social responsibility - the latter concept considers responsibility to be an action rather than part of a firm's nature, such that an irresponsible firm may still act in a socially responsible way without understanding or accepting the significance of the act. It becomes something that can be done or feigned for PR, not out of a genuine desire to be responsible.

Turning to another theorist (Mele 1998), the author suggests that a firm can consider different types of responsibilities in evaluating or choosing among alternatives:

• The top priority is given to activities as defined by a firm's purpose and objectives: providing a useful product to its customers, to foster the development of workers, to earn enough profit to sustain itself, to honor legitimate contracts and promises, to provide a fair return to its investors.
• The second tier fosters positive relationships with the social groups with which it interacts in a larger context: core croups (committed shareholders, permanent employees, frequent customers); peripheral groups (passive shareholders, temporary employees, suppliers, occasional customers); and external groups (competitors and local communities)
• The lowest tier is actions the firm may undertake that are not directly related to its mission or its stakeholders, but are general actions that it performs "as a good citizen" such as sponsorship of charities that provide social benefits unrelated to its operations.

In effect, this hierarchy suggests that those acts whose consequences have the most direct impact on the success and sustenance of a firm are to be of the greatest priority; those with lesser effect should be of lesser priority; and those with no effect should be the lowest priority.

Friedman (rightly) criticizes executives for dipping into the corporate treasury to donate to charity, buying public glorification for being generous and philanthropic with money gathered by overcharging customers, underpaying employees, and cheating investors. His argument is that the returns should be paid out to shareholders and that, if shareholders wish to be charitable, they can voluntarily earmark some portion of their returns to donate to the social causes of their own choosing. Where donations are made to charities that have nothing to do with the purpose of the firm, Friedman's argument seems all the more legitimate. Where a donation ultimately serves the interests of the firm, there is an argument to the contrary.

A final note: social responsibility is not a substitute for ethics. A company must execute upon its mission with meticulous respect for legal and ethical imperatives. Charitable actions do not atone for ethical misconduct, though some may be temporarily distracted into so believing.

Some Final Thoughts

This chapter has presented a sampling of theories pertaining to corporate responsibilities, and has suggested that the notion should be derived from the firm's mission and purpose. People have become aware of the practice of random philanthropy for ulterior motives, and it is no longer an effective tactic for firms to seek to curry favor while refusing to change their behavior in more significant and meaningful ways.

Simply stated, generosity to causes is not a substitute for ethics, as the latter must be considered and practiced in its everyday interactions, including those that are not done in full view of the public.

The author also returns to the importance of documenting a company's mission, purpose, and values. These concepts, clearly defined, provide guidance for action - without them, a firm lacks foundation and acts at the whim of the moment. To become a respected company, it is necessary to understand why the company deserves to be respected, and act accordingly.

Restated: that ethics is not merely a list of prohibited activities or topics to which sensitivity should be shown. It may specifically proscribe certain things, but it should clearly be prescriptive in its nature - and prescribe goals and values that are supportive of its core mission.

Finally, consider that a company is an organization of people, each of whom has free will. The firm can, and should, encourage ethical behavior of its employees and, in doing so, provide guidance that enables them to recognize an practice ethics. Educating people about ethics and responsibility may be seen as beneficial to employees personal growth and development, and it is certainly one of the most significant drivers of corporate reputation.