Listener 15 March, 1997

keywords Business Economics & Finance; History of Ideas, Methodology & Philosophy

This column agrees with Roger Kerr, the executive director of the Business Roundtable, that “we should not confuse corporate social responsibility with gestures such as saving endangered species or sponsoring Christmas concerts in the park. If they are honest, most businesses that make these efforts admit they do to add value to their firm or brand.”

Some argue that businesses should appear socially responsible, but their argument reduces to one of pragmatism. Not being dishonest for the pragmatic reason one may get caught and be subject to a social penalty, is very different from ethical rejection of dishonesty. Businesses may pursue social objectives to enhance their long run profits, but they are not being ethical, just practical. They will want you think they are being ethical, because that will enhance their profits even more. (Notice how the term “profit” is transmuted into “value” which, despite its appearance, has nothing to do with virtue.)

As Milton Friedman said, and Kerr favourably quotes, “the social responsibility of business is to increase its profits.” Kerr goes on that businesses should comply with the law. To do otherwise may result in a loss of profit (or incarceration). But this being a democracy, business is entitled to argue for a change of the law (as the Roundtable did over insider trading), no doubt in order to increase their profits, so law is hardly a permanent standard.

More puzzling, Kerr also says that business should comply with “society’s ethical standards.” But consider the wine box enquiry. Undoubtedly, Commissioner Davison will provide a judgment which is consistent with the narrow terms of the enquiry, the law, and the facts. But many people will be disappointed that some behaviour they believe to be below society’s ethical standards, if legal, will not be punished. Among those likely to be so publicly judged, are members of the Roundtable itself. One wonders how they will respond.

If an organization is driven to maximize profit, it will try (usually) to stay within the law. But there is no mechanism – other than for pragmatic reasons – to ensure it will adopt “society’s ethical standards”, even could we agree what they are. Given that the standards are ambiguous, the opportunities for flouting them are as large as the incentives to do so. Some business people will not do so for personal ethical reasons, but they risk their company being out-manoeuvred by less scrupulous competitors, or they being personally replaced by personnel who are more directed to maximizing profits without scruple.

Business differs from individuals because its sole objective is profit maximization, whereas most of us are also concerned with ethical issues. (We do not steal, even when we know we will not get caught.) Moreover, monopolies possibly excepted, businesses which do not seek profits will fail, whereas individuals with their more diverse objectives may succeed even though they may never be rich. Even if the rich have no greater difficulties than others getting through the eye of a needle into heaven, there is no reason to believe they are more ethical or virtuous on any other standards.

Kerr’s argument has a further logical consequence. If spending on social responsibility by businesses is a matter of pragmatic pursuit of profitability, then that includes money outlayed on the Business Roundtable by its members. Thus the Roundtable is not fundamentally socially responsible, according to the Kerr’s logic, even if it would like us to believe it to be so. Rather it is a political lobby group, seeking to further its members’ objectives of maximizing their profits. Of course the Roundtable will tell us that it is socially responsible for business to maximize profits, but in Mandy Rice-Davies immortal words, they would, wouldn’t they?

Is it in the social interest for business to pursue profits? As Adam Smith said “by pursuing his own interest [a businessman] frequently promotes that of a society more effectually than when he really intends to promote it.” Smith’s “frequently” is usually omitted (including by Kerr in his article). “Frequent” is not the same as “always”. Just as there are instances where profit seeking and the social interest agree, there are many instances where profit maximization does not promote society’s interest. I have just written a book The Commercialisation of New Zealand which makes this point for broadcasting, conservation, culture, education, health, public administration, and research so I wont detail the argument here. If you are unsure, switch on your television set, and look at the consequences on programming of increased pressures for profitability.

Should we take any notice of the statements and reports of the Roundtable, given that it is not seeking the public interest, but the narrow element of its members interests? I suspect Kerr would draw attention to that play Major Barbara by the fabian socialist Bernard Shaw, which argues that it may be ethical to work for an organization which is not entirely ethical. Similarly we should judge the output of the Roundtable on its merits. Just has I have done with Kerr’s argument that business has no commitment to widespread social responsibility – only to profit.