This is “The Responsible Office: Corporations and Social Responsibility”, chapter 13 from the book Business Ethics (v. 1.0).
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Chapter 13 "The Responsible Office: Corporations and Social Responsibility" defines different legal structures for businesses and explores ways that individual companies may be understood not only as pursuing economic goals but also as possessing broad ethical responsibilities in society.
Movies from Paramount Pictures begin with an image of a mountain flashed onto the screen. That mountain, reputedly, was quick-sketched on a notepad by the company’s founder W. W. Hodkinson. Hodkinson got started in the movie business in the early 1900s when he opened a theater in Ogden, Utah. He shuffled films faster than his competitors (the town’s two other movie houses), and so came to dominate the local market. Soon he expanded to the big city of Salt Lake, then Los Angeles, and onward.
Looking to keep his enterprise growing, Hodkinson founded a company called Paramount to provide up-front money to cash-strapped movie producers. In exchange, he got exclusive rights to screen their work in theaters. Grateful for the help, for the trust, and above all for the cash, struggling moviemakers including Adolph Zukor, Samuel Goldfish (later Goldwyn), and Cecil B. DeMille signed on to the project in five-year deals. By 1915, they were all wealthier.
Now that they no longer needed his up-front money, Zukor and the rest started trying to squirm out of their deal. Having initially taken the risk to launch their careers, Hodkinson refused to let them go. So Zukor and friends hatched a plan. Pretending to have been faced down by Hodkinson, they not only embraced the deal they’d already inked, but they also extended it for twenty-five more years in exchange for a lump sum. They took that money, opened a line of credit, and began secretly buying Paramount stock. When they accumulated enough, they took it over, and in what would be a good premise for a revenge movie, they kicked Hodkinson out of his own company.
One lesson of Hodkinson’s story is that the way a business is organized is critically important. He left Paramount open to a financial sneak attack by not keeping the whole company in his name as a sole proprietorship. When he let shares go out—when he allowed others to buy part ownership in his enterprise—he was setting himself up for what happened. Of course it’s also true that he probably wouldn’t have had the money needed to get the enterprise going in the first place had he not gotten a capital injection from selling off pieces of ownership.
Every form of business organization comes with advantages and disadvantages, and the specific kinds of organization that may be formed are numerous and change from state to state. There are, however, a number of basic types:
A sole proprietorshipA business owned by a single individual. is the easiest kind of business to start. All you need to do is go down to the county courthouse and fill out a DBA, which is a form officially registering that you’re opening a business with the name you choose. DBA means doing business as, so Jan Jones can go register her company as JJ’s Midnight Movie House, and she doesn’t need to do anything more: her tax ID number for the business is just her Social Security number, and when she’s filling out her IRS forms, she counts her profits as income, just like a paycheck. Benefits of a sole proprietorship include the speed and ease of getting it going. Further, sole proprietors can take advantage of tax accounting fitted to business reality. If you’re Jan Jones and you sign contracts to pay $2,500 to rent a vacant warehouse along with the rights to show Paramount’s Mommie Dearest, and you receive $3,000 from ticket buyers, you don’t pay income tax on the whole $3,000, only on the $500 profit. Finally, sole proprietorships have the advantage of belonging to their owner: she can do whatever she wants with her company without fear of being taken over by someone else.
The main disadvantage of a sole proprietorship is that the company really is an extension of you, and you’re on the hook for whatever it does. So if you screen your movie and no one shows up, you can’t just call the whole thing a bad idea, declare bankruptcy, and walk away. Your lenders can sue you personally for the $2,500 you agreed to pay as JJ’s Midnight Movie House. Worse, if people do show up, but someone smokes in the theater, which starts a fire and causes injuries, those injured people can sue you personally, and maybe take everything you own. The fact that Jan Jones has to take full responsibility for what her company does is called unlimited liabilityThe owner’s or owners’ legal responsibility in the face of all claims made against a company.. That liability, finally, is legal, but it’s also clear that there’s an ethical dimension to the responsibility. While few assert that it’s morally wrong to fail in business, there is a reasonable objection to be made when those who fail try to avoid paying the cost.
A partnershipA business owned by more than one person. resembles a sole proprietorship. The main difference, obviously, is that there’s more than one owner: maybe there are two partners with 50 percent each, or one with 50 percent and then a group of smaller shareholders each owning 10 percent of the enterprise. The bookkeeping is pretty straightforward since profits are allotted in accordance with how great a share each partner owns. All partnerships must have, finally, at least one general partner who faces unlimited liability for the company’s actions. On the ethical front, responsibility starts getting murky as you move to multiple owners. If the theater burns down, and one individual partner had been assigned (and failed) the task of making sure there were a few fire extinguishers around, does that one partner bear the entire ethical burden of the injuries? Is it doled out in accordance with the percentage owned? What if one of the owners just kicked some money in as a favor to a friend, and wasn’t involved in the actual operation, does she bear any responsibility for what happened?
Limited liability companies (LLC) and S corporationsCompanies usually owned by a limited number of individuals that provide some legal protections to owners for claims made against the company. are very similar. They’re both hybrids of partnerships and corporations. From the partnership side they take the tax structure. Called pass-through taxationA tax regime where the profits (or losses) of a company are passed through to the owners who are responsible for declaring and paying taxes—the company itself pays no taxes., profits are divided among the partners or shareholders. Then those individuals pay taxes on the money like it’s income, a normal paycheck. What these two take from the corporate side—and the main reason people form an LLC or an S corporation—is that the enterprise’s legal status provides some protection against liability lawsuits. If you, Jan Jones, and a few others form an LLC and the theater burns and people get injured, you may get out without losing all you have. Creditors and lawyers for the injured will be able to sue the company and probably take any money left in the till, but they’ll have a harder time trying to take your personal car or the house you live in. Specific rules, it’s important to note, vary depending on the business and the location, but both options are typically limited to a certain number of participants.
On the responsibility front, this is the pressing ethical question: If the theater burns down for an LLC, the owners will likely enjoy some legal protection. Does that protection, however, extend to the ethics? Is there any difference in terms of moral responsibility between a partnership operating a burning theater and an LLC?
Nonprofit corporationsCorporations formed to serve a charitable or civic cause that are exempt from taxes and channel income back into the cause they’re formed to serve. exist in a class by themselves. Usually formed to serve a charitable or civic cause, they don’t have to pay taxes since they don’t make profits: they spend all their income promoting the cause they’re set up to serve. The operators of nonprofits often enjoy complete protection from liability claims. What about the ethics? If a nonprofit screens Mommie Dearest to raise money for the cause of orphans, and the theater burns, does the fact that the entire endeavor was arranged for the public good provide moral protection from guilt when people get hurt?
Technically, what most of us mean when we use the term corporationA legally independent business that protects its owners from all liability claims made against the company. is a C corporation (as opposed to an S corporation). One financial difference between the two is that a C corporation is taxed twice. First, the government takes a chunk of the corporation’s profits before they’re distributed to the company’s owners, who are all those individuals holding shares. Then when the shareholders get their part, each must pay taxes on it again. Another difference is that C corporations are not limited in terms of number of shareholders. Finally, most of the corporations that people are familiar with are publicA corporation with shares available for purchase by the general public., meaning that the company’s shares are available for purchase by anyone with the money to spend. There are, it should be noted, private corporationsA corporation with share allocation limited to a group or single person. (and the similar “closely held” corporations) where share allocation is limited to a group or single person, but again, most of the commonly referenced incorporated companies are listed for public sale in places including the New York Stock Exchange, and you or I may become partial owners. In fact, and as the story of W. W. Hodkinson teaches, if we get enough money, we can buy the shares to take over the business.
Corporations step away from easier-to-form partnerships by providing protection to owners against liability claims. In the case of C corporations, that protection is significant. In many cases, the protection is total: completely insulated from liability, shareholders can lose their investment if the company does something it shouldn’t and gets sued, but their personal possessions are completely safe. This is the case, for example, with the mega movie chain Regal Cinemas. The price of one share of that company today was $13.77. If you buy that, then no matter what the company does tomorrow, the most you could possibly lose is a little under $15. No one likes to lose $15, but still, there’s a very large freedom from responsibility here. If Regal tries to save some money (and therefore boost its share price and your profit) by intentionally not charging their fire extinguishers, and on the day a blockbuster gets released ten theaters in various states burn with accompanying human suffering and a major number of deaths, the company may go bankrupt under a flood of lawsuits and justifiable public outrage. But you, one of the owners, would be out three $5 bills.
Corporations play a very large role in business ethics for two reasons. First, their independence from their specific owners opens questions about who—if anyone—should take moral responsibility for what the corporation does. Second, because corporations today have grown so large and powerful, because they touch all our lives in so many ways so often, the ethical questions they raise become hard to avoid. Both these dimensions of the modern corporation, the ethical ambiguity and the potentially huge size, relate to the history of the institution.
Exxon Mobil’s market value is around $450 billion. Just to compare, the GDP of Portugal—the total value of all goods and services produced in the country each year—is about $250 billion (when converted to US dollars). Walmart’s revenues are climbing above $375 billion, which is a full third of the total revenues (in the form of taxes) collected by the US federal government from individuals. If Walmart were a sovereign nation, it would be China’s fourth largest export market. Less abstractly, the size and penetration of the Ford Motor Company can be felt just by going out on the street and watching their products pass by. And if you go to a movie from Paramount, or laugh for a while with the Comedy Channel, or check out music videos on MTV, you’re patronizing the behemoth called Viacom.
All these businesses, along with the rest of the corporations on the Fortune 500 list and then the many that didn’t make the top tier, change our lives most every day. If you outfitted your dorm room or apartment at Walmart, it was a decision made by an executive buyer that determined the choices you’d have. If you’re thinking about voting this year, Jon Stewart at Comedy Central is doing all he can to guide the way you decide which lever to pull. If you go to see a concert next weekend, an MTV executive may have been the one who originally pulled that group out of obscurity. Publicly held corporations, all this means, aren’t just places where we go to work, or manufacturers that supply our necessities: they set the parameters and directions of our lives.
The first corporations extended directly from governments. In 1600, the English monarchy designated the British East India Company to manage international trade between the homeland and the Indian subcontinent. Shareholders did extremely well. By the 1800s, private enterprise was breaking away from tight governmental association; the corporation as we know it today began taking shape when individuals started claiming a right to freely associate for their economic benefit without direct governmental oversight and license.
Modern corporations are formed by a group of people who fill out the papers and register the name. Once it’s created, however, the business exists as a legally distinct entity. In the eyes of the law, it is
In 1819, the US Supreme Court defined a corporation as “an artificial being, invisible, intangible and existing only in the contemplation of the law.”Trustees of Dartmouth College v. Woodward, 17 U.S. (4 Wheat.) 518 (1819). This legal independence clears the way for owners (shareholders) to escape liability claims made against the corporation. Because the business stands on its own, because it is a “being,” all claims must be made against it, not the shareholders standing behind.
Corporations are structured in diverse ways, but the basic governing form starts with the shareholders electing a board of directorsIndividuals elected by shareholders who oversee a business and select the enterprise’s operating, day-to-day managers.. Walmart, for example, is governed by a fifteen-member board, which is elected each year. The board holds two main responsibilities. One is oversight; it keeps track of what’s going on and reports back to shareholders. The other responsibility is operational. The board selects individuals who’ll run the company on a day-to-day basis. Frequently, a chief executive officer (CEO)Selected by the board of directors, the CEO is responsible for managing a company’s daily operations. leads this team and is ultimately responsible for making sure Walmart is buying from suppliers at the lowest possible price, getting goods into the stores before stock runs out, and convincing customers to return and do more buying.
If the CEO and management team is good, there’s a decent chance the company will be successful and grow. Good leadership, however, can’t alone explain the megadimensions of today’s larger corporations. One critical element of the corporate structure that contributes to the size is the owner-as-shareholder model. The model allows businesses to collect large amounts of cash quickly. Simply by printing up and selling more shares, a corporation raises potentially huge sums. That capital can be reinvested in the business—maybe to build new Walmart stores in growing suburbs—and the corporation’s value goes up. It’s true that the original shareholders now own less of the company on a percentage basis (because there are more owners), but their shares are worth more because the company is worth more, so they’re unlikely to complain. As long as that virtuous cycle continues, well-run corporations can grow very quickly.
While all that growth is going on, the actual owners—shareholders—can be at home sitting in front of the TV. Many shareholders, actually, have almost no idea of what’s happening inside the company they partially own. With respect to business ethics, this adds another level of complexity to the question about who, if anyone, should be held morally responsible for what the corporation does. If you just go out in the street and ask a passerby, “Who do you think bears moral responsibility for what a company does?” the answer you’ll probably get is the owners. But in the case of corporations, they’re protected legally by a liability firewall, and now they’re also protected structurally by the fact that they—along with the multitude of other owners scattered all over the country and even the globe—aren’t necessarily involved in making the company’s operational decisions. These two factors combined have thrust this question to the forefront of questions about ethics in the economic world: can these artificial beings called corporations themselves have moral responsibilities to go along with their legal responsibility to operate within the law?
A Civil Action was originally a novel, but more people have seen the movie, which was distributed by W. W. Hodkinson’s old company, Paramount. One of the memorable scenes is John Travolta playing a hotshot lawyer speeding up a rural highway to Woburn, Massachusetts. He gets pulled over and ticketed. Then he continues on his way to investigate whether there’s any money to be made launching a lawsuit against a company that allowed toxic industrial waste to escape into the town’s aquifer. The polluted water, Travolta suspects, eventually surfaced as birth defects. After checking things out, he races his Porsche back to Boston at the same speed. Same result.A Civil Action, directed by Steven Zaillian (New York: Scott Rudin, 1998), film.
One of the movie’s messages is that many corporations are like greedy lawyers—they have little sense of right and wrong, and their behavior can only be modified by money. The lesson is that you can’t make Travolta slow down and drive safely by appealing to the right of others to use the road without being threatened by speeding Porsches, or by pleading with him to respect general social well-being that is served when everyone travels at about the same speed. If you want him to slow down, there’s only one effective strategy: raise the traffic ticket fine. Make the money hurt. Analogously for companies, if you want them to stop polluting, hit them with harder penalties when they’re caught.
What if that’s not the only way for corporations to exist in the world, though? What if people who directed businesses began understanding their enterprise not only in financial terms (as profits and losses) but also in ethical ones? What if companies became, in a certain moral sense, like people, members of society bound by the same kinds of duties and responsibilities that you and I wrestle with every day? When companies are seen that way, a conception of corporate social responsibility comes forward.
According to the traditional view of the corporation, it exists primarily to make profits. From this money-centered perspective, insofar as business ethics are important, they apply to moral dilemmas arising as the struggle for profit proceeds. These dilemmas include: “What obligations do organizations have to ensure that individuals seeking employment or promotion are treated fairly?” “How should conflicts of interest be handled?” and “What kind of advertising strategy should be pursued?” Most of this textbook has been dedicated to these and similar questions.
While these dilemmas continue to be important throughout the economic world, when businesses are conceived as holding a wide range of economic and civic responsibilities as part of their daily operation, the field of business ethics expands correspondingly. Now there are large sets of issues that need to be confronted and managed outside of, and independent of the struggle for money. Broadly, there are three theoretical approaches to these new responsibilities:
The title corporate social responsibilityIn general, the conviction that corporations are not only legal entities with responsibilities but also moral entities, and they hold ethical obligations comparable to those of citizens in a society. has two meanings. First, it’s a general name for any theory of the corporation that emphasizes both the reponsibility to make money and the responsibility to interact ethically with the surrounding community. Second, corporate social responsibility is also a specific conception of that responsibility to profit while playing a role in broader questions of community welfare.
As a specific theory of the way corporations interact with the surrounding community and larger world, corporate social responsibility (CSR)As a specific theory of business ethics, a package of four obligations the corporation holds as an independent ethical actor in society; the responsibilities are economic, legal, ethical, and philanthropic. is composed of four obligations:
Taken in order from top to bottom, these four obligations are decreasingly pressing within the theory of corporate social responsibility. After satisfying the top responsibility, attention turns to the second and so on. At the extremes, the logic behind this ranking works easily. A law firm on the verge of going broke probably doesn’t have the responsibility to open up for school visits, at least not if the tours interfere with the accumulation of billable hours and revenue. Obviously, if the firm does go broke and out of business, there won’t be any school visits in any case, so faced with financial hardship, lawyers are clearly obligated to fulfill their economic obligations before philanthropic ones.
More difficult questions arise when the economic responsibility conflicts with the legal one. For example, to remain profitable, an industrial plant may need to dispose of waste and toxins in barrels that barely meet legally required strengths. Assuming those legal limits are insufficiently strict to guarantee the barrels’ seal, the spirit of the law may seem violated. The positive economic aspect of the decision to cut corners is the ability to stay in business. That means local workers won’t lose their jobs, the familial stresses of unemployment will be avoided, suppliers will maintain their contracts, and consumers will still be served. The negative, however, is the possibility—and the reality at Woburn—that those toxins will escape their containers and leave a generation of workers’ children poisoned.
Knowing what we do now about those Woburn children, there’s no real conflict; anything would have been better than letting the toxins escape. If necessary, the company should have accepted bankruptcy before causing the social damage it did. At the time of the decision, however, there may have been less certainty about exactly what the risks and benefits were. Even among individuals promoting a strong sense of corporate responsibility for the surrounding community, there may have been no clear answer to the question about the proper course of action. Regardless, corporate social responsibility means every business holds four kinds of obligations and should respond to them in order: first the economic, then the legal, next the ethical, and finally the philanthropic.
The triple bottom lineA form of corporate social responsibility dictating that corporate leaders tabulate results not only in economic terms but also in terms of company effects in the social realm and with respect to the environment. is a form of corporate social responsibility dictating that corporate leaders tabulate bottom-line results not only in economic terms (costs versus revenue) but also in terms of company effects in the social realm, and with respect to the environment. There are two keys to this idea. First, the three columns of reponsibility must be kept separate, with results reported independently for each. Second, in all three of these areas, the company should obtain sustainable results.
The notion of sustainability is very specific. At the intersection of ethics and economics, sustainability means the long-term maintenance of balance. As elaborated by theorists including John Elkington, here’s how the balance is defined and achieved economically, socially, and environmentally:
Economic sustainability values long-term financial solidity over more volatile, short-term profits, no matter how high. According to the triple-bottom-line model, large corporations have a responsibility to create business plans allowing stable and prolonged action. That bias in favor of duration should make companies hesitant about investing in things like dot-coms. While it’s true that speculative ventures may lead to windfalls, they may also lead to collapse. Silicon Valley, California, for example, is full of small, start-up companies. A few will convert into the next Google, Apple, and Microsoft. What gets left out, however, of the newspaper reports hailing the accomplishments of a Steve Jobs or a Bill Gates are all those other people who never made it—all those who invested family savings in a project that ended up bankrupt. Sustainability as a virtue means valuing business plans that may not lead to quick riches but that also avoid calamitous losses.
Moving this reasoning over to the case of W. R. Grace dumping toxins into the ground soil, there’s a possible economic-sustainability argument against that kind of action. Corporations trying to get away with polluting the environment or other kinds of objectionable actions may, it’s true, increase their bottom line in the short term. Money is saved on disposal costs. Looking further out, however, there’s a risk that a later discovery of the action could lead to catastrophic economic consequences (like personal injury lawyers filing huge lawsuits). This possibility leads immediately to the conclusion that concern for corporate sustainability in financial terms argues against the dumping.
Social sustainability values balance in people’s lives and the way we live. A world in which a few Fortune 500 executives are hauling down millions a year, while millions of people elsewhere in the world are living on pennies a day can’t go on forever. As the imbalances grow, as the rich get richer and the poor get both poorer and more numerous, the chances that society itself will collapse in anger and revolution increase. The threat of governmental overthrow from below sounds remote—almost absurd—to Americans who are accustomed to a solid middle class and minimal resentment of the wealthy. In world history, however, such revolutions are quite common. That doesn’t mean revolution is coming to our time’s developed nations. It may indicate, however, that for a business to be stable over the long term, opportunities and subsequently wealth need to be spread out to cover as many people as possible.
The fair trade movementProponents ask businesses—especially large producers in the wealthiest countries—to guarantee that suppliers in impoverished nations receive reasonable payment for their goods and services even when the raw economic laws of supply and demand don’t require it. fits this ethical imperative to shared opportunity and wealth. Developed and refined as an idea in Europe in the 1960s, organizations promoting fair trade ask businesses—especially large producers in the richest countries—to guarantee that suppliers in impoverished nations receive reasonable payment for their goods and services even when the raw economic laws of supply and demand don’t require it. An array of ethical arguments may be arranged to support fair trade, but on the front of sustainability, the lead argument is that peace and order in the world depend on the world’s resources being divided up in ways that limit envy, resentment, and anger.
Social sustainability doesn’t end with dollars; it also requires human respect. All work, the logic of stability dictates, contains dignity, and no workers deserve to be treated like machines or as expendable tools on a production line. In today’s capitalism, many see—and the perception is especially strong in Europe—a world in which dignity has been stripped away from a large number of trades and professions. They see minimum wage workers who’ll be fired as soon as the next economic downturn arrives. They see bosses hiring from temporary agencies, turning them over fast, not even bothering to learn their names. It’s certainly possible that these kinds of attitudes, this contempt visible in so many workplaces where the McJob reigns, can’t continue. Just as people won’t stand for pennies in wages while their bosses get millions, so too they ultimately will refuse to accept being treated as less dignified than the boss.
Finally, social sustainability requires that corporations as citizens in a specific community of people maintain a healthy relationship with those people. Fitting this obligation into the case of W. R. Grace in Woburn, it’s immediately clear that any corporation spilling toxins that later appear as birth defects in area children isn’t going to be able to sustain anything with those living nearby. Any hope for cooperation in the name of mutual benefit will be drowned by justified hatred.
Environmental sustainability begins from the affirmation that natural resources—especially the oil fueling our engines, the clean air we breathe, and the water we drink—are limited. If those things deteriorate significantly, our children won’t be able to enjoy the same quality of life most of us experience. Conservation of resources, therefore, becomes tremendously important, as does the development of new sources of energy that may substitute those we’re currently using.
Further, the case of an industrial chemical company pouring toxins into the ground that erupt years later with horrific consequences evidences this: not only are resources finite, but our earth is limited in its ability to naturally regenerate clean air and water from the smokestacks and runoff of our industries. There are, clearly, good faith debates that thoughtful people can have about where those limits are. For example, have we released greenhouse gases into the air so heavily that the earth’s temperature is rising? No one knows for sure, but it’s certain that somewhere there’s a limit; at some point carbon-burning pollution will do to the planet what toxic runoff did in Woburn: make the place unlivable. Sustainability, finally, on this environmental front means actions must be taken to facilitate our natural world’s renewal. Recycling or cleaning up contamination that already exists is important here, as is limiting the pollution emitted from factories, cars, and consumer products in the first place. All these are actions that corporations must support, not because they’re legally required to do so, but because the preservation of a livable planet is a direct obligation within the triple-bottom-line model of business responsibility.
Together, these three notions of sustainability—economic, social, and environmental—guide businesses toward actions fitted to the conception of the corporation as a participating citizen in the community and not just as a money machine.
One deep difference between corporate social responsibility and the triple bottom line is cultural. The first is more American, the second European. Americans, accustomed to economic progress, tend to be more comfortable with, and optimistic about, change. Collectively, Americans want business to transform the world, and ethical thinking is there (hopefully) to help the transformations maximize improvement across society. Europeans, accustomed to general economic decline with respect to the United States, view change much less favorably. Their inclination is to slow development down, and to keep things the same as far as possible. This outlook is naturally suited to sustainability as a guiding value.
It’s important to note that while sustainability as a business goal puts the breaks on the economic world, and is very conservative in the (nonpolitical) sense that it favors the current situation over a changed one, that doesn’t mean recommending a pure freeze. Sustainability isn’t the same as LudditismResistance to all technological development., which is a flat resistance to all technological change.
The Luddites were a band of textile workers in Britain in the 1800s who saw (correctly) that mechanized looms would soon rob them not only of their livelihood but also of their way of life. To stop the change, they invaded a few factories and broke everything in sight. Their brute strategy succeeded very briefly and then failed totally. Today, Ludditism is the general opposition to new technologies in any industry on the grounds that they tear the existing social fabric: they force people to change in the workplace and then everyplace, whether they like it or not. There’s an element of (perhaps justifiable) fear of the future in both Ludditism and the business ethics of sustainability, but there are differences between the two also. For example, sustainability concerns don’t always stand against technological advances. Actually, innovation is favored as long as advances are made in the name of maintaining the status quo. For example, advances in wind power generation may allow our society to continue using energy as we do, even as oil reserves dwindle, and with the further benefit of limiting air pollution.
Stakeholder theory, which has been described by Edward Freeman and others, is the mirror image of corporate social responsibility. Instead of starting with a business and looking out into the world to see what ethical obligations are there, stakeholder theory starts in the world. It lists and describes those individuals and groups who will be affected by (or affect) the company’s actions and asks, “What are their legitimate claims on the business?” “What rights do they have with respect to the company’s actions?” and “What kind of responsibilities and obligations can they justifiably impose on a particular business?” In a single sentence, stakeholder theory affirms that those whose lives are touched by a corporation hold a right and obligation to participate in directing it.
As a simple example, when a factory produces industrial waste, a CSR perspective attaches a responsibility directly to factory owners to dispose of the waste safely. By contrast, a stakeholder theorist begins with those living in the surrounding community who may find their environment poisoned, and begins to talk about business ethics by insisting that they have a right to clean air and water. Therefore, they’re stakeholders in the company and their voices must contribute to corporate decisions. It’s true that they may own no stock, but they have a moral claim to participate in the decision-making process. This is a very important point. At least in theoretical form, those affected by a company’s actions actually become something like shareholders and owners. Because they’re touched by a company’s actions, they have a right to participate in managing it.
Who are the stakeholders surrounding companies? The answer depends on the particular business, but the list can be quite extensive. If the enterprise produces chemicals for industrial use and is located in a small Massachusetts town, the stakeholders include:
The first five on the list—shareholders, workers, customers, suppliers, and community—may be cited as the five cardinal stakeholders.
The outer limits of stakeholding are blurry. In an abstract sense, it’s probably true that everyone in the world counts as a stakeholder of any serious factory insofar as we all breathe the same air and because the global economy is so tightly linked that decisions taken in a boardroom in a small town on the East Coast can end up costing someone in India her job and the effects keep rippling out from there.
In practical terms, however, a strict stakeholder theory—one insistently bestowing the power to make ethical claims on anyone affected by a company’s action—would be inoperable. There’d be no end to simply figuring out whose rights needed to be accounted for. Realistically, the stakeholders surrounding a business should be defined as those tangibly affected by the company’s action. There ought to be an unbroken line that you can follow from a corporate decision to an individual’s life.
Once a discrete set of stakeholders surrounding an enterprise has been located, stakeholder ethicsStakeholders are individuals and groups who are affected by a company’s actions; the theory holds that a corporation’s stakeholders have a right and obligation to participate in directing the business. may begin. The purpose of the firm, underneath this theory, is to maximize profit on a collective bottom line, with profit defined not as money but as human welfare. The collective bottom lineWithin stakeholder ethics, the summed effect of a company’s actions on all stakeholders. is the summed effect of a company’s actions on all stakeholders. Company managers, that means, are primarily charged not with representing the interests of shareholders (the owners of the company) but with the more social task of coordinating the interests of all stakeholders, balancing them in the case of conflict and maximizing the sum of benefits over the medium and long term. Corporate directors, in other words, spend part of the day just as directors always have: explaining to board members and shareholders how it is that the current plans will boost profits. They spend other parts of the day, however, talking with other stakeholders about their interests: they ask for input from local environmentalists about how pollution could be limited, they seek advice from consumers about how product safety could be improved and so on. At every turn, stakeholders are treated (to some extent) like shareholders, as people whose interests need to be served and whose voices carry real force.
In many cases transparency is an important value for those promoting stakeholder ethics. The reasoning is simple: if you’re going to let every stakeholder actively participate in a corporation’s decision making, then those stakeholders need to have a good idea about what’s going on. In the case of W. R. Grace, for example, it’s important to see that a stakeholder theory would not necessarily and immediately have acted to prohibit the dumping of toxins into the soil. Instead, the theory demands that all those who may be affected know what’s being dumped, what the risks are to people and the environment, and what the costs are of taking the steps necessary to dispose of the chemical runoff more permanently and safely.
As already noted, we know now what W. R. Grace should have done under most every ethical theory. At the time, however, stakeholders fully informed of the situation may have been less sure because it wasn’t so clear that the runoff would cause so many problems (or any problems at all). Given that, owners may have favored dumping because that increases profits. Next, what about workers in town? It’s important to keep in mind that the safe removal of the waste may have lowered company profits and potentially caused some layoffs or delayed wage hikes. As stakeholders, they may have been willing to agree to the dumping too. The same goes for community politicians who perhaps would see increased tax revenue as a positive effect of high corporate profits.
What’s certain is that stakeholder theory obligates corporate directors to appeal to all sides and balance everyone’s interests and welfare in the name of maximizing benefits across the spectrum of those whose lives are touched by the business.
Traditionally, the directors of companies have had an extremely difficult but very narrowly defined responsibility: guide the enterprise toward money. The best companies have been those generating the highest sales, gaining the most customers, and clearing the largest profits. As for ethical questions, they’ve been arranged around the basic obligation to represent the owners’ central interest, which presumably is to profit from their investment. Consequently, the field of business ethics has mainly concerned conflicts and dilemmas erupting inside the company as people try to work together to win in the very competitive economic world. The idea of corporate social responsibility—along with the related ideas of the triple bottom line and stakeholder theory—opens a different kind of business ethics. Morality in the economic world is now about corporate directors sensing and responding to a broad range of obligations, ones extending through the town where the business is located and then out into surrounding communities and through society generally.
In Woburn, Massachusetts, in the early 1980s, this conflict between two ways of running a business played out in the Hollywood depiction of the lawyer played by John Travolta. At the movie’s beginning, right and wrong for a business got decided in dollars and without broader sensibility. Travolta’s law firm existed to make money and operated by accepting only cases that promised big payouts. That’s what brought Travolta to Woburn, the chance to sue deep-pocketed W. R. Grace for poisoning the land with toxic runoff and for destroying the lives of families living near the pools of contamination. Over the course of the movie, however, Travolta becomes attached to Woburn’s cause and the social good of fighting for a clean environment. By the end, he’s risking his firm’s high profits—and, according to his law-firm partners, all common sense—to make sure that harmed people living in town get their good lives back, and to ensure that a Woburn-like toxic disaster won’t happen again.
In terms of business ethics, it’s not difficult to interpret Travolta’s transformation from a businessman taking care of the bottom line, to one engaged by a broader vision of social responsibility. Each of the three discussed theories—corporate social responsibility, the triple bottom line, stakeholder theory—can be fit into the movie A Civil Action.
In terms of corporate social responsibility, Travolta came to believe that his job as the law firm’s leader obligated him to satisfy his economic responsibility to make money for the firm by suing for financial damages while also acting legally. Further, his firm needed to satisfy the ethical responsibility to help others in Woburn get their good lives back. Here, there is a basic duty to help others in need when you have the capability. Finally, there was an element of philanthropy in Travolta’s endeavor because his law firm pursued a case that served the greater good even though more profitable work opportunities were available.
In terms of the triple bottom line of economics, society, and the environment, Travolta came to believe that his job as the law firm’s leader obligated him to take account of and do well in all three areas. It was no longer enough to win money; his business had a moral responsibility to win for society and to win for the environment also. The long-term goal was to ensure the economic sustainability of his firm, the sustainability of healthy family life in Woburn, and the sustainability of clean earth and air in that part of Massachusetts.
In terms of stakeholder ethics, Travolta came to believe that his job as the law firm’s leader obligated him not only to work for the firm’s owners (including himself) but also to take direction from those who would be affected by the firm’s actions. That meant considering—trying to balance and to add up—the interests of his partners and all those who lived in Woburn.
Finally, because Travolta’s story was also a Hollywood story, his transformation on the big screen was presented as the change from an aloof bad guy to a caring good guy. It’s not clear, however, in the real world whether a corporate ethics based on social responsibility, the triple bottom line, or all stakeholders is actually recommendable. The debate between the two ways of thinking about business—the traditional, profit-centered view and the broader, socially responsible view—is hard-fought and intensified by good arguments on both sides.
Broadly, there are three kinds of arguments in favor of placing corporations, at least large and fully developed ones, within an ethical context of expansive social and environmental responsibilities:
The moral requirement that business goals go beyond the bottom line to include the people and world we all share is built on the following arguments:
Conclusion. Taken together, these arguments justify the vision of any particular enterprise as much more than an economic wellspring of money. Businesses become partners in a wide world of interconnected problems and shared obligations to deal with them.
The second type of argument favoring corporate social responsibility revolves around externalities. These attach corporations to social responsibilities not morally but operationally. An externalityIn the economic world, a cost of a good or service that isn’t accounted for in the price. in the economic world is a cost of a good or service that isn’t accounted for in the price (when that price is established through basic laws of supply and demand). For example, if a corporation’s factory emits significant air pollution, and that results in a high incidence of upper respiratory infections in the nearby town, then a disproportionately high number of teachers and police officers (among others) are going to call into work sick throughout the year. Substitute teachers and replacment officers will need to be hired, and that cost will be borne by everyone in town when they receive a higher tax bill. The corporation owning the pollution-belching factory, that means, gets the full amount of money from the sale of its products but doesn’t pay the full cost of producing them since the broader public is shouldering part of the pollution bill. This strikes many as unfair.
Another example might be a company underfunding its pension accounts. The business may eventually shut its doors, deliver final profits to shareholders, and leave retired workers without the monthly checks they’d been counting on. Then the government may have to step in with food stamps, welfare payments, and similar to make up for the shortfall, and in the final tabulation, the general public ends up paying labor costs that should have been borne by shareholders.
Externalities, it should be noted, aren’t always negative. For example, the iPhone does a pretty good job of displaying traffic congestion in real time on its map. That ability costs money to develop, which Apple invested, and then they get cash back when an iPhone sells. Apple doesn’t receive, however, anything from those drivers who don’t purchase an iPhone but still benefit from it: those who get to where they’re going a bit faster because everyone who does have an iPhone is navigating an alternate route. More, everyone benefits from cleaner air when traffic jams are diminished, but again, that part of the benefit, which should channel back to Apple to offset its research and production costs, ends up uncompensated.
Whether an externality is negative or positive—whether a company’s bottom line rises or falls with it—a strong argument remains for broad corporate responsibility wherever an externality exists. Because these parts of corporate interaction with the world aren’t accounted for in dollars and cents, a broad ethical discussion must be introduced to determine what, if any, obligations or benefits arise.
The third kind of argument in favor of corporations as seats of social responsibility grows from the notion of enlightened self-interest. Enlightened self-interestIn the business world, taking on broad responsibilities for the social welfare because, on careful analysis, that public generosity also benefits the company’s bottom line. means businesses take on broad responsibilities because, on careful analysis, that public generosity also benefits the company. The benefits run along a number of lines:
Enlightened self-interest starts with the belief that there are many opportunities for corporations to do well (make money) in the world by doing good (being ethically responsible). From there, it’s reasonable to assert that because those opportunities exist, corporations have no excuse for not seeking them out, and then profiting from them, while helping everyone else along the way.
One basic question about enlightened self-interest is, “Are corporations making money because they’re doing good deeds, or are they doing good deeds because it makes them money?” In terms of pure consequences, this distinction may not be significant. However, if the reality is that social good is being done only because it makes money, then some will object that corporate social responsibility is twisting into a clever trick employed to maximize profits by deceiving consumers about a business’s intention. CSR becomes an example of cause egoismGiving the false appearance of being concerned with the welfare of others in order to advance one’s own interests.—that is, giving the false appearance of being concerned with the welfare of others in order to advance one’s own interests.
In 1970, just as the idea of corporate social responsibility was gaining traction and influential advocates in the United States, the economist Milton Friedman published a short essay titled “The Social Responsibility of Business is to Increase its Profits.” Possibly the most provocative single contribution to the history of business ethics, Friedman set out to show that large, publicly owned corporations ought to be about making money, and the ethical obligations imposed by advocates of CSR should be dismissed. His arguments convinced some and not others, but the eloquent and accessible way he made them, combined with the fact that his ideas were published in a mainstream publication—the New York Times Magazine—ensured their impact.Milton Friedman, “The Social Responsibility of Business Is to Increase Its Profits,” New York Times Magazine, September 13, 1970, accessed June 7, 2011, http://www.colorado.edu/studentgroups/libertarians/issues/friedman-soc-resp-business.html.
Businesses, as discussed at the chapter’s beginning, come in all shapes and sizes. When the topic is social responsibility, however, attention frequently fixes on very large corporations because they’re so big (and therefore able to do the most good) and powerful (the philosophies driving them tend to set the tone for business life in general). Friedman’s essay concerns these large, publicly held corporations. Here are his arguments.
A business can’t have moral responsibilities any more than a wrench can. Only humans have moral responsibilities because only we have consciousness and intentions: we’re the only things in the world that can control our actions, that can distinguish between what we want to do and what’s right to do. Therefore, only we can have responsibilities in the ethical sense. What, then, is a business? Nothing more than a tool, something we make to further our ends. It may work well or poorly, but no matter what, it doesn’t do what it wishes, so we can’t blame or credit the business, only those individuals who use it for one purpose or another.
In Woburn, Massachusetts, according to this argument, it makes no sense to say that W. R. Grace has some kind of corporate responsibility to keep the environment clean. A company doesn’t have any responsibilities. It’s like a wrench, a thing out in the world that people use, and that’s all. Would you accuse a wrench of being irresponsible if someone uses it to loosen the bolts on some truckers’ tires and so causes an accident and disastrous spill of toxins? You’d probably accuse the person who used the wrench of acting irresponsibly, but blaming the wrench for something would be madness.
Corporate executives are employees of the owners of the enterprise. They’re contracted and obligated to conduct the business as the owners desire, not in accord with the wishes of some other people out in the world advocating broad social concerns. Executives in this sense are no different from McDonald’s burger flippers: they’re hired and agree to do a certain thing a certain way. If they don’t like it, they’re free to quit, but what they can’t do is take the job and then flip the hamburgers into the trash because their friends are all texting them about how unhealthy McDonald’s food is.
What do corporate owners desire? According to Friedman, the typical answer is the highest return possible on their investment. When you buy shares of the industrial chemical maker W. R. Grace, you check once in a while what the stock price is because price (and the hope that it’s going up) is the reason you bought in the first place. It follows, therefore, that executives—who in the end work for you, the owner—are duty bound to help you get that higher share price, and the quickest route to the goal is large profits.
What about the executive who decides to dedicate time and a corporation’s resources to social welfare projects (to things like reducing runoff pollution even further than the law requires or hiring released felons as a way of easing their passage back into society)? Friedman is particularly cutting on this point. It’s despicable selfishness. There’s nothing easier than generosity with other people’s money. And that’s what, Friedman hints, CSR is really about. It’s about corporate executives who like the idea of receiving accolades for their generous contributions to society, and they like it even more because the cash doesn’t come out of their paycheck; it’s subtracted from shareholder returns. There’s the seed of an argument here, finally, that not only is corporate social responsibility not recommendable, it’s reproachable: in ethical terms, corporate leaders are duty bound to refuse to participate in social responsibility initiatives.
One serious practical problem with the vision of corporate executives resolving social problems is it’s hard to be sure that their solutions will do good. Presumably, corporate executives got to be executives by managing businesses profitably. That’s certainly a difficult skill, but the fact that it has been mastered doesn’t automatically imply other talents. More, given the fact that corporate executives frequently have no special training in social and environmental issues, it’s perfectly reasonable to worry that they’ll do as much harm as good.
One example of the reversed result comes from Newsweek. Executives at the magazine probably thought they were serving the public interest when they dedicated space in their April 28, 1975, issue to the threatening and impending environmental disaster posed by global…cooling. Not a very enticing subject, they probably could’ve done more for their circulation numbers by running a story (with lots of pictures) about the coming summer’s bathing suit styles, but they did the science to stoke broad discussion of our environmental well-being. As for the stoking, they certainly succeeded. Today, many scientists believe that global warming is the real threat and requires corporations to join governments in reducing carbon emissions. They have a hard time getting their message out cleanly, though, when there’s someone around bringing up that old Newsweek article to discredit the whole discussion.
Social problems shouldn’t be resolved by corporations because we already have a large institution set up for that: government. If members of a society really are worried about carbon emissions or the disposal of toxic waste at chemical plants, then they should express those concerns to elected representatives who will, in turn, perform their function, which is to elaborate laws and regulations guiding the way all of us—inside and outside of business—live together. Government, the point is, should do its job, which is to regulate effectively, and those in the business world should do their job, which is to comply with regulations while operating profitably.
Underneath this division of labor, there’s a crucial distinction. Friedman believes that human freedom is based to some significant degree in economic life. Our fundamental rights to our property and to pursue our happiness are inviolable and are expressed in our working activities. The situation is complicated, however, because it’s also true that for us to live together in a society, some restrictions must be placed on individual action. No community can flourish if everyone is just doing what they want. There’s room for quite a bit of discussion here, but in general, Friedman asserts that while government (and other outside institutions) have to be involved in regulation and the imposing of limits, they shouldn’t start trying to mold and dictate basic values in the economic realm, which must be understood in principle as a bastion of individual liberty and free choices.
At this juncture, Friedman’s essay reaches its sharpest point. The notion of corporate social responsibility, Friedman asserts, is not only misguided; it’s dangerous because it threatens to violate individual liberty. Stronger, the violation may ultimately lead to socialismIn the economic world, the subordination of individual liberty to the general welfare., the end of free market allocation of resources because rampant political forces take control in the boardroom.
The movement to socialism that Friedman fears comes in two steps:
It’s difficult to miss the fact that Friedman’s worries were colored by the Cold War, by a historical moment that now feels remote in which the world really did hang in the balance between two views of working life: the American view setting individual freedom as the highest value and the Soviet view raising collectivism and the general welfare above all personal economic concerns and liberties.
Still, and even though today’s historical reality is quite different from the 1970s, the essence of Friedman’s objection to CSR hasn’t changed. It’s that you and I get to be who we are by going out into the world and making something of ourselves. When our ability to do that gets smothered beneath social responsibility requirements, we may help others (or possibly not), but no matter what, we sacrifice ourselves because we’ve lost the freedom to go and do what we choose. This loss isn’t just an inconvenience or a frustration: it’s the hollowing out of our dignity; it’s the collapse of our ability to make ourselves and therefore the end of the opportunity to be someone instead of just anyone.
The final major argument against corporate social responsibility in its various forms is that the best way for most corporations to be socially responsible is to contribute to the community by doing what they do best: excelling in economic terms. When corporations are making profits, the money isn’t just disappearing or piling up in the pockets of the greedy super rich (though some does go there); most of it gets sent back into the economy and everyone benefits. Jobs are created, and those that already exist get some added security. With employment options opening, workers find more chances to change and move up: more successful corporations mean more freedom for workers.
Further, corporations don’t get to be successful through luck, but by delivering goods and services to consumers at attractive prices. Corporate success, that means, should indicate that consumers are doing well. Their quality of life improves as their consumer products improve, and those products improve best and fastest when corporations are competing against each other as freely as possible.
What about the public welfare in the most general sense, the construction of parks, schools, and similar? Here, too, corporations do the best for everyone by concentrating on their own bottom line. More hiring, sales, and profits all also mean more tax revenue flowing to the government. And since elected governmental entities are those organizations best equipped to do public good, the most a corporation can hope for with respect to general social welfare is to succeed, and thereby generate revenues for experts (or, at least democratically elected officials) to divide up wisely.
The term marketplace responsibilityThe twin views that the notion of corporate social responsibility is misguided and dangerous, and the corporate purpose of profit maximization serves the social welfare while cohering with the value of human freedom that should be paramount in business ethics., finally, names the economic and social (and political) view emerging from Friedman’s arguments. The title doesn’t mean ethical responsibility in the marketplace so much as it does the specific conception of ethical responsibility that the open marketplace produces. It has two aspects: first, the notion of corporate social responsibility is misguided and dangerous, and second, the corporate purpose of profit maximization serves the social welfare while cohering with the value of human freedom that should be paramount in business ethics.
Advocates of corporate social responsibility believe corporations are obligated to share the burden of resolving society’s problems. They maintain that the responsibility stands on pure moral grounds. More, there are operational reasons for the responsibilities: if businesses are going to contaminate the environment or cause distress in people’s lives, they should also be actively working to resolve the problems. Finally, there’s the strong argument that even if the corporate purpose should be to make profits, social responsibility is an excellent way to achieve the goal.
Advocates of marketplace responsibility—and adversaries of the corporate social responsibility model—argue that by definition corporations can’t have moral responsibilities. Further, to the extent ethical obligations control corporate directors, the obligations are to shareholders. More, corporate directors aren’t experts at solving social problems, and we already have an institution that presumably does have expertise: government. Finally, there’s a strong argument that even if the corporate purpose should include broad social responsibilities, free individuals and corporations in the world making profits is an excellent way to achieve the goal.
Source: Photo courtesy of emdot, http://www.flickr.com/photos/emdot/22751767.
Earl Grinols and David Mustard are economists and, like a lot of people, intrigued by both casinos and crime. In their case, they were especially curious about whether the first causes the second. It does, according to their study. Eight percent of crime occurring in counties that have casinos results from the legalized gambling. In strictly financial terms—which are the ones they’re comfortable with as economists—the cost of casino-caused crime is about $65 per adult per year in those counties.Earl Grinols and David Mustard, “Measuring Industry Externalities: The Curious Case of Casinos and Crime,” accessed June 7, 2011, http://casinofacts.org/casinodocs/Grinols-Mustard-Casinos_And_Crime.pdf.
When casinos come to town, the following specific crimes increase:
The crimes also increased to some extent in neighboring counties.
Situation: A casino regular runs out of money after a string of bad cards. She coasts out to the street and drops her purse in front of an out-of-towner. When the chivalrous guy bends over to pick it up for her, she picks his back pocket. With the $100 stolen from the wallet, she heads back into the casino, spends $40 on hard liquor, loses the rest at the roulette table, and goes home. She wakes up alone, though some underwear she finds on her floor makes her think she probably didn’t start the night that way. She can’t remember.
Large, public corporation
Pigouvian taxes (named after economist Arthur Pigou, a pioneer in the theory of externalities) attempts to correct externalities—and so formalize a corporate social responsibility—by levying a tax equal to the costs of the externality to society. The casino, in other words, that causes crime and other problems costing society, say, $1 million should pay a $1 million tax.
Source: Photo courtesy of Andre Chinn, http://www.flickr.com/photos/andrec/2608065730.
The W. R. Grace Company was founded by, yes, a man named W. R. Grace. He was Irish and it was a shipping enterprise he brought to New York in 1865. Energetic and ambitious, while his company grew on one side, he was getting civically involved on the other. Fifteen years after arriving, he was elected Mayor of New York City. Five years after that, he personally accepted a gift from a delegation representing the people of France. It was the Statue of Liberty.
Grace was a legendary philanthropist. He provided massive food donations to his native Ireland to relieve famine. At home, his attention focused on his nonprofit Grace Institute, a tuition-free school for poor immigrant women. The classes offered there taught basic skills—stenography, typewriting, bookkeeping—that helped students enter the workforce. More than one hundred thousand young women have passed through the school, which survives to this day.
In 1945, grandson J. Peter Grace took control of the now worldwide shipping company. A decade later, it became a publicly traded corporation on the New York Stock Exchange. The business began shifting from shipping to chemical production.
By the 1980s, W. R. Grace had become a chemical and materials company, and it had come to light that one of its plants had been pouring toxins into the soil and water underneath the small town of Woburn, Massachusetts. The poisons worked their way into the town’s water supply and then into the townspeople. It caused leukemia in newborns. Lawsuits in civil court, and later investigations by the Environmental Protection Agency, cost the corporation millions.
J. Peter Grace retired as CEO in 1992. After forty-eight years on the job, he’d become the longest-reigning CEO in the history of public companies. During that time, he also served as president of the Grace Institute.
The nonfiction novel A Civil Action came out in 1996. The best-selling, award-winning chronicle of the Woburn disaster soon became a Hollywood movie. The movie, starring John Travolta, continues to appear on television with some regularity.
To honor the Grace Institute, October 28 was designated “Grace Day” by New York City in 2009. On that day, the institute defined its mission this way: “In the tradition of its founding family, Grace Institute is dedicated to the development of the personal and business skills necessary for self-sufficiency, employability, and an improved quality of life.”“Our Mission,” Grace Institute, accessed June 1, 2011, http://www.graceinstitute.org/mission.asp.
The specific theory of corporate social responsibility encompasses four kinds of obligations: economic, legal, ethical, and philanthropic.
The triple-bottom-line theory of corporate responsibility promotes three kinds of sustainability: economic, social, and environmental.
Stakeholder theory affirms that for companies to perform ethically, management decisions must take account of and respond to stakeholder concerns.
There are a number of arguments supporting the proposal that corporations are autonomous entities (apart from owners and directors and employees) with ethical obligations in the world. The moral requirement argument contains four elements:
How can each of these general arguments be specified in the case of W. R. Grace?
Source: Photo courtesy of the Italian Voice, http://www.flickr.com/photos/desiitaly/2254327579.
The Body Shop is a cosmetics firm out of England, founded by Anita Roddick. “If business,” she writes on the company’s web page, “comes with no moral sympathy or honorable code of behaviors, then God help us all.”“Our Values,” The Body Shop, accessed June 7, 2011, http://www.thebodyshop.com/_en/_ww/services/aboutus_values.aspx.
Moral sympathy and an honorable code of behaviors has certainly helped The Body Shop. Constantly promoted as an essential aspect of the company and a reason to buy its products, the concept of corporate social responsibility has been a significant factor in the conversion of a single small store in England to a multinational conglomerate.
Maybe it has been too significant a factor. That’s certainly the suspicion of many corporate watchers. The suspicion isn’t that the actual social responsibility has been too significant but that the actions of corporate responsibility have been much less energetic than their promotion. The social responsibility has been, more than anything else, a marketing strategy. Called greenwashing, the accusation is that only minimally responsible actions have been taken by The Body Shop, just enough to get some good video and mount a loud advertising campaign touting the efforts. Here’s the accusation from a website called thegoodhuman.com:
The Body Shop buys the palm oil for their products from an organization that pushed for the eviction of peasant families to develop a new plantation. So much for their concern about creating “sustainable trading relationships with disadvantaged communities around the world.”“Greenwash of the Week: The Body Shop Business Ethics,” The Good Human, September 30, 2009, accessed June 7, 2011, http://www.thegoodhuman.com/2009/09/30/greenwash-of-the-week-the-body-shop-business-ethics.
Source: Photo courtesy of the Annie Mole, http://www.flickr.com/photos/anniemole/2750611025.
It’s probably the most repeated business ethics line in recent history. Michael Douglas—playing Wall Street corporate raider Gordon Gekko—stands in front of a group of shareholders at Teldar Paper and announces, “Greed is good.”
Teldar has been losing money, but the company, Douglas believes, is fundamentally strong. The problem’s the management; it’s the CEO and chief operations officer and all their various vice presidents. Because they don’t actually own the company, they only run it, they’re tempted to use the giant corporation to make their lives comfortable instead of winning profits for the actual owners, the shareholders. As one of those shareholders, Douglas is proposing a revolt: get rid of the lazy executives and put in some new directors (like Douglas’s friends) who actually want to make money. Here’s the pitch. Douglas points at the CEO and the rest of the management team up at their table:
All together, these men sitting up here own less than 3 percent of the company. And where does the CEO put his million-dollar salary? Not in Teldar stock; he owns less than 1 percent.
Dramatic pause. Douglas earnestly faces his fellow shareholders.
You own the company. That’s right—you, the stockholder. And you’re all being royally screwed over by these bureaucrats with their steak lunches, their hunting and fishing trips, their corporate jets and golden parachutes. Teldar Paper has 33 different vice presidents, each earning over 200 thousand dollars a year. Now, I have spent the last two months analyzing what all these guys do, and I still can’t figure it out. One thing I do know is that our paper company lost 110 million dollars last year. The new law of evolution in corporate America seems to be survival of the unfittest. Well, in my book you either do it right or you get eliminated.
In the last seven deals that I’ve been involved with, there were 2.5 million stockholders who have made a pretax profit of 12 billion dollars.Wall Street, directed by Oliver Stone (Los Angeles: Twentieth Century Fox, 1987), film.
Douglas says, “In my book you either do it right or you get eliminated.”
In the real world, the paper company Weyerhaeuser promotes itself as socially and environmentally responsible. On their web page, they note that they log the wood for their paper from certified forests at a percentage well above that required by law.“Forest Certification,” Weyerhaeuser, accessed June 7, 2011, http://www.weyerhaeuser.com/Sustainability/Footprint/Certification. Carefully defining a “certified forest” would require pages, but basically the publicly held corporation is saying that they don’t just buy land, clear-cut everything, and then move on. Instead, and at a cost to themselves, they leave some trees uncut and plant others to ensure that the forest they’re cutting retains its character.
According to the Weyerhaeuser web page, the US government sets certain rules for sustainability with respect to forests. Weyerhaeuser complies and then goes well beyond those requirements. According to Milton Friedman and the ideals of marketplace responsibility, broad questions about social and environmental corporate responsibilities should be answered by democratically elected governments because that’s the institution we’ve developed to manage our ethical life. Governments should try to succeed in the ethical realm by making good laws; companies should try to succeed in the economic realm by making good profits.
The first part of Douglas’s speech concerned problems with the corporate organization’s structure, and with out-of-control managers: people employed to run a company who promptly forget who their bosses are. The speech’s second part is about what drives life in the business world:
The point is, ladies and gentleman, that greed—for lack of a better word—is good.
Greed is right.
Greed clarifies, cuts through, and captures the essence of the evolutionary spirit.
Greed, in all of its forms—greed for life, for money, for love, knowledge—has marked the upward surge of mankind.
Greed, Douglas says, is an imperfect word for what he’s describing. What words might have been better? What words might advocates of marketplace ethics propose?