Thursday, July 22, 2010

Corporate Social Responsibility and Charity--An American Law/Policy Connection Worth Reconsidering

A recent opinion piece published by the Washington Post reminds us that, for some important political-legal cultures, the connection between corporate social responsibility and charity is quite strong. Chrystia Freeland, What's BP's Social Responsibility?, The Washington Post, July 18, 2010.
As crude poured into the Gulf of Mexico and the world economy struggled to recover from the financial crisis, corporate social responsibility might seem a perverse target. Surely we need more corporate responsibility, not less. But many of the business disasters of the past 24 months have been facilitated by the mini-industry of corporate social responsibility -- known as CSR by those in the trade -- a fetish encouraged by the philanthropies that feed off it and funded by the corporate executives who have found that it serves their bottom line. Id.
Ms.Freeland focuses on the character of the problem: "But the gulf oil spill and the financial crisis have taught us, rather brutally, that the heart of the relationship between business and society doesn't lie with the charitable deeds that companies do in their off-hours but whether they are doing their day jobs in ways that help -- or hurt -- the rest of us."  Id.  The character of the problem suggests the solution. 
The problem with CSR is that it muddies the waters. Goldman's purpose isn't to educate women; BP's isn't to lead the green revolution. The job of business is to make money -- in BP's case by producing energy, particularly fossil fuels; in Goldman's case through finance. Even the most cuddly, caring chief executive is ultimately charged with a selfish central mission: to generate profit for her shareholders.  Id.
Thus, within a shareholder (or entity) welfare maximization model of corporate organization, corporate social responsibility presents an incompatible intrusion.  Worse, corporate CSR might be understood as necessarily subverted by the welfare maximization model itself.  Because welfare maximization is the principal task of business, CSR "and the communitarian philosophy behind it, asks us to believe that the interests of an individual company and those of the wider community are fully aligned. They aren't -- a truth too many regulators forgot in recent years." Id. Corporations should embrace the business of profit maximization, and government ought to shoulder its burden of providing for the public welfare, including the regulation of business. 
Freeland's views were criticized for suggesting an incompatibility between welfare maximization and CSR, for ignoring differences between long term and short term business decision making, and for confusing marketing with strategy. Alice Korngold, Freeland's Washington Post Op-Ed Is Wrong: CSR Does Maximize Corporate Profitability, Fast Company, July 19, 2010.  Another suggested that "the failings of Goldman Sachs and BP underscore the need for firms to take their engagement with society more seriously, and to put being on the right side of social progress at the core of their long-term profit-making strategy." Matthew Bishop,  Is CSR Evil?, Philanthrocapitalism, July 20, 2010 (short term welfare maximization a cause of failure). 

Freeland's point is a venerable one within American political and legal culture. Professor Milton Friedman argued that corporate shareholder benefit maximization is the only possible position consistent with American notions of democracy. (Milton Friedman, Capitalism and Freedom 133–36 (1962). Shareholder benefit theory is the most efficient manner for maximizing corporate utility and general wealth maximization (free markets and the invisible hand theory applied). If corporations were to be granted social or public policy obligations, then corporations would be acting in the place of the state. But corporations are not legitimate state actors; their directors were not elected by or accountable to the people. Conversely, if corporations with social policy functions would be legitimate only if fully accountable and responsible to the political community, they would have to be chosen by the political community and serve them. Essentially, corporations would become governmental units. To avoid this, regulation ought to facilitate the operation of the market and limit market inefficiencies and fraud. This position has proven very influential since the 1960s. For a more recent defense of these arguments see, for example, Stephen M. Bainbridge, "In Defense of the Shareholder Wealth Maximization Norm: A Reply to Professor Green," Wash. & Lee L. Rev. 50:1423 (1993).  This view reflected a longer conceptual tradition within American business and legal culture:

Early on, however, the American bench and Bar seemed to reach an uneasy stalemate about the contours of the debate regarding corporate social responsibility. . . . The most important points of agreement, at least among members of the American bench and Bar, were these: Corporations were understood as enterprises engaged solely in an economic role and the ultimate object of corporate existence was maximizing shareholder wealth. Corporate boards were permitted some flexibility with respect to compliance with this latter requirement. This flexibility took three principle forms. First, corporations were permitted to distribute corporate property for charitable or other eleemosynary purposes within certain clearly defined limits. Second, corporate boards of directors were given some flexibility when they sought to serve other constituencies, to the extent that such service was consonant with their primary missions. After the merger manias of the 1970s and 1980s, such flexibility was sometimes memorialized in so-called “other constituency” statutes. [e.g., Ohio Rev. Code Ann. § 1701.59(E) (West 2005) (allowing directors the discretion to consider, in determining the best interests of the corporation, factors such as employee interest, the state economy, and community considerations).] Third, boards of directors were accorded some flexibility in determining the factors, including time frame, which might be considered in maximizing shareholder value.
Backer, Larry Catá, Multinational Corporations, Transnational Law: The United Nation's Norms on the Responsibilities of Transnational Corporations as Harbinger of Corporate Responsibility in International Law. Columbia Human Rights Law Review, 37:287-389 (2006).

Corporate statutes usually empower corporations to “make donations for the public welfare or for charitable, scientific or educational purposes, and in time of war or other national emergency in aid thereof.” Del. Gen. Corp. L. tit. 8 § 122(9) (2005). Courts have developed standards for determining the validity of such giving in individual cases. See Theodora Holding Corp. v. Henderson, 257 A.2d 398 (Del. Ch. 1969); see also A.P. Smith Mfg. Co. v. Barlow, 98 A.2d 581 (N.J. 1953), appeal dismissed 346 U.S. 861 (1953) (upholding corporate gift to Princeton University because the gift arguably advanced the long run business interest of the company even in the absence of a statute permitting such gifts). Corporate charity has been both praised and criticized because of its character as advancing the corporate donor’s economic interests. See Hayden W. Smith, If Not Corporate Charity, Then What?, 41 N.Y.L. Sch. L. Rev. 757 (1997). It has also been criticized or as a front for the satisfaction of the directors’ personal interests. See Faith Stevelman Kahn, Pandora’s Box: Managerial Discretion and the Problem of Corporate Philanthropy, 44 U.C.L.A. L. Rev. 579 (1997). See generally Victor Brudney & Allen Ferrell, Corporate Charitable Giving, 69 U. Chi. L. Rev. 1191 (2002) (discussing different rationales for corporate charity).

As such, the real issue for American law and policy makers is not so much the fundamental character of CSR, but the division that American law and culture makes between two kinds of corporate expenditures--one is called charity and is deemed exogenous to corporate activity, and the other is deemed endogenous.  Part of what CSR theorists have been attempting over the last decade or so is to make the case that, like expenses for labor,  materials, advertising and investor relations, expenditures for the relationships between corporate actors and the communities within which it operates and from which the value of its economic activities are maximized, are also endogenous.  More importantly, perhaps, the insistence of American policymakers to continue to embrace the traditional conceptual model has tended to force the issue of corporate CSR both out of the field of corporate law--and into that of administrative or international law--and directed attention to transnational corporations rather than to all enterprises operating in corporate form.  In addition, the focus on the profit maximization premise as the foundation of the "problem" tends to blind policymakers to the realities that all bodies corporate have human rights and social responsibilities to people they affect.   Like the profit/charity binary, the profit/nonprofit division ignores commonalities and provides room for strategic behavior among corporate actors.

As a consequence, the great movements of constructing governance systems affecting the responsibilities of corporations have moved from the national to the international law,  with a focus, for the moment on soft law frameworks.  At the same time, law has increasingly assumed a secondary role in the construction and implementaiton of such governance systems. Backer, Larry Catá, On the Evolution of the United Nations’ 'Protect-Respect-Remedy' Project: The State, the Corporation and Human Rights in a Global Governance Context (June 3, 2010). Santa Clara Journal of International Law, Vol. 9, No.1, 2010.What Ms. Freeland really appears to suggest is that the current insistence on embracing a profit-charity model for CSR will make American law and policy increasingly irrelevant to the development of global CSR standards.  This is a not an area of leadership that Americans lawyers, judges, policymakers and academics ought to cede lightly. 

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