The Corporate Social Responsibility Distortion

by Dave Gernhard

Corporations, business, CEOs, these are terms that in the modern context conjure up images of greed and corruption.  Gone is the layman who risks everything to build an industrial empire for the benefit of the consumer.  Richard Sears, Henry Ford, and Thomas Edison have been replaced by Ken Lay of Enron and Dennis Kozlowski of Tyco.  Populism has defined business ethics as a contradiction in terms, with ignominy replacing ingenuity in today’s corporate image.  The Corporate Social Responsibility (CSR) movement is no different than yellow journalism.  CSR minimizes the role of corporate owners (stockholders) and lends authority to political and special interest organizations who seek to gain by destroying the competitive market.

CSR theory is based on the mantra “doing well by doing good.”[i] It is structured around the idea of the stakeholder.  The stakeholder is anyone who will be affected by the policy decisions of the copany.[ii]  Stakeholders are often divided into five categories: customers, employees, suppliers, shareholders, and communities.  The case is made by Edward Freeman of the University of Virginia that business policy can benefit both business and society when managers serve those who have a stake in the firm.[iii]  Emphasis is placed on the modern corporate social responsibility framework more than just the shareholders.  It is this aspect of CSR that makes it so dangerous for the modern firm.

    This conception of the proper role of business has wide popular appeal.  Tony Blair promised Great Britain a “Stakeholder Society”[iv] during his campaigns for political power.  Blair and other advocates of the stakeholder theory claim the moral superiority of elevating the employees, customers, suppliers, and communities to the level of the owners of the company for the determination of business policy.  This interpretation of ethical behavior misses the mark; it is the shadow cast by a perverse understanding of man’s inherent rights.

When corporations focus on the stakeholders they “legitimize the subordination of the shareholder interest.”[v]  Stakeholder theory holds that employees have the right to be employed, that suppliers have a right to sell, that customers have a right to a product and that communities have a right to the business created by the local corporation. This theory implies an obligation on behalf of the corporation to maintain employment and to maintain production because that is what is just. When deciding whether or not to close a factor, CSR would have the company move beyond cost/benefit analysis and consider everyone else that will be affected.[1]  CSR creates an obligation to the stakeholders where no natural obligation exists.

Stakeholder theory and CSR advocates overlook the basic principles of economics.  CSR assumes a great deal of power to corporations.  Namely that these corporations are in a position of power, able “to do good” by all the various stakeholders simply through choice.  It is not market constraints that keep corporations from acting with the stakeholder ethic, rather it is the whim of the executives and governing boards.  Corporations are not in such a position. CSR assures the people that corporations could keep the plant open in their town if they were willing to make the sacrifice for everyone’s benefit.  Unfortunately, reality contrasts sharply with this understanding. 

What CSR advocates neglect is the truth that corporations are not kings of the free market.  Corporations are “simply a reflection of consumer demands and priorities.”[vi]  Corporations exist because of consumer value.  The raison d’être of a factory is the consumer’s desire to possess the widget being produced in that factory.  The purpose of a factor isn’t to employ people are raise awareness for social issues.  The purpose of the factor is to satisfy the consumer whose value is imputed to the factor through the good produced.  Industry services the consumer and reflects consumer value.  CSR advocates seek social change through the alteration of corporate structure, but the only sustainable social change can occur when there is an alteration in consumer structure.  If the consumer valued more socially responsible production techniques then they would be willing to pay a higher premium for goods produced in that manner.  Businesses would then actively pursue the production method desired by the consumer.[vii]  Without a change in consumer preference, CSR is unsustainable.

 Consider the example of two firms provided by Andrew Coors and Wayne Winegarden in Regulation Magazine.  One firm focuses on all five groups representing the stakeholders while the other only concerns itself only with the shareholders.  If consumer value for both goods is equal, then the consumer is only willing to pay one price for either good. At this price the CSR firm makes less of a profit than the shareholder focused firm.  With its greater profits, the shareholder firm is able to lengthen its structure of production, creating an economy of scale, while at the same time attracting more investors with higher returns on equity.  Without profits for investment or new shareholders, the CSR firm would either have to borrow to remain competitive with the shareholder firm or it would be put out of business as the other firm’s capital investments lowered their costs of production even more.

Once this scenario has played out it is easy to see why CSR is flawed in its very assumptions.  At the end of this illustration the “socially responsible” business no longer exists.  What CSR doesn’t consider is that businesses are not the driving force of the economy.  Corporations don’t decide what gets produced and how much of it, consumers do.  It is the consumers who are king of a free market.  Consumer demand creates profits which act as signals to investors.  Capital is invested where profits are made.  If it is profitable to be socially responsible, then those businesses will thrive first on profits, then upon the investors profits bring.  The irresponsible businesses will fail.

Corporate Social Responsibility is a misleading and loaded term.  The movement that is needed is Consumer Social Responsibility.  That is the only way true reform can last.  It should not be considered the social responsibility of the corporations to concern themselves with stakeholders to any degree that reduces profits.  The socially responsible corporation seeks profits for the shareholders over the desires of the stakeholders. Without profits the business will fail, and people don’t invest in failing businesses.  Consumer Social Responsibility is the rational theory.

                Al Dunlap, nicknamed Chainsaw Al by the press for the mass lay-offs during the turnaround of Scott Paper, warned that “if you see an annual report with the term ‘stakeholder’ put it down and run, don’t walk, away from the company.  It means the corporation has it priorities upside down.”[viii]  This is true in many respects.  However, when the consumer wants to see stakeholders considered it becomes profitable to do so.  This is a consumer driven Corporate Social Responsibility that is much different than any “triple bottom line” system.   CSR, when treated with the cost/benefit analysis of any other advertising method can be effective.

                If the corporation engages in socially responsible activity voluntarily to advertise its behavior, and thereby differentiate its product, it does so to increase market share and boost profits.[ix]  When CSR is used in this manner it is no different than an advertisement. When CSR affects the consumer’s opinion of the company and increase its likelihood of attracting business the corporation will invest in “socially responsible” activities and projects.  If no additional revenue gained by CSR activities the company would not and should not bother with CSR because it isn’t what the consumer wants.  CSR by consumer is sustainable, unlike hardnosed stakeholder theory.

                Many corporations have adopted Corporate Social Responsibility plans and feature them prominently on their websites.[x]  The high profile nature of these CSR pledges indicates the perceived benefit of CSR to the consumer.  General Electric proudly proclaims a $2.1 million aid package to Darfur.  It also features links declaring GE’s dedication to protecting the environment.[xi]  The Ford Company alerts any would be investor or consumer on their website that they saved 8.8 billion gallons of water last year.[xii]  GE and Ford are conducting this stakeholder conscience policy with the belief that it will benefit the shareholder.  These companies are advertising themselves as firms dedicated to helping the world. Why? To increase its profits and to attract investors.  Here we see CSR falling within the realm of the profit loss framework.  In this instance it is ethical to engage in CSR because it increases corporate profits.   

        One of the problems with corporate adaptation of formal CSR plans is that they distract from the original purpose of the firm.  Coors and Winegarden ask: What should a company value in its pursuit of social responsibility? Should it attempt to minimize the negative impacts of its business activity, or maximize its positive impacts, or find some optimal combination of positive and negative impacts? And how much do various stakeholders’ preferences matter? Do the opinions of environmentalists count more than those of labor activists? Or shareholders? Or consumers? Those questions can become so overwhelming and convoluted that they quickly distract a company from its original purpose—to provide profits to shareholders while supplying consumers with goods and services that add tangible benefits to their lives.[xiii]

The danger always exists for companies to become overly concerned with stakeholders, beyond the profit earning potential.  Companies do not form to serve the stakeholders, they form to serve the consumers.  Profits for the shareholders show that the combined factors of production are serving their more valued ends to the consumer than some other capacity.        

        The Toyota Corporation is in danger of succumbing to this same error.  On their website they offer a commitment statement that includes three areas of dedication. "Toyota is dedicated to philanthropy, the environment, and diversity." claims their website.[xiv]  Who thought they were dedicated to making cars?  Toyota built its company by offering the consumers what they wanted: Cars built better, cheaper, faster.  Today the company is offering everybody everything.  Frank Easterbrook and Daniel Fischel comment on the problem of this in their 1991 book, The Economic Structure of Corporate Law: "A manager told to serve two masters (a little for the equity holders, a little for the community) has been freed of both and is answerable to neither. Faced with a demand from either group, the manager can appeal to the interests of the other."[xv]  Only the profit structure can hold mangers accountable to their decisions.

       How can the mangers of Toyota be held accountable if they can play one side off the other.  A plant can be built anywhere.  One location justified by profit, another justified by image.  Without the profit/loss structure economic calculation is impossible.  So long as Toyota is maximizing their profits they are conducting business in a responsible manner.  However they are clearly flirting with the line of CSR that moves beyond profit into the realm of stakeholders, where there is no tangible way to measure progress.    

        When individuals argue for stakeholders as the proper focus of business strategy they are destroying the free market system.  No longer does the consumer dictate through voluntary exchange when and where the goods are produced.  When profits/losses are ignored then the factors of production will be allocated not to their most valued ends, but to simply somewhat valued ends.  CSR as a policy provides the structure for mediocrity.  The profit seeking firm however is providing the most valued goods to the consumer for the least valued factors.  If CSR is worth more to the consumer than the additional cost, every corporation in the world would be institutions of social justice.  However consumers aren’t willing to spend the additional money on all forms of CSR.  If one wants to see business as a source of social progress, one must look to the purpose of business: the consumer.  The customer is king, and the customer is always right.

[1] CSR advocates also focus on the seen and rarely consider the unseen consequences of an action.  The focus solely on the closing plant or the laid off work and ignore the new plant or the higher wages of another.  The focus of most CSR advocates is similar to that of every other protectionist group, protecting themselves from the competition of a free market.

[i] Anonymous, “How good should your business be?” Economist 1/19/2008, Vol. 386, Issue 8563

[ii] Coors, Andrew C and Wayne Winegarden.  “Corporate Social Responsibility—Or Good

Advertizing?”  Regulation Spring 2005 pg 10-11

[iii] Marcoux, Alexei M. “Business Ethics Gone Wrong” Cato Policy Report June 2000 Vol. 22, No. 3


[iv] Marcoux, 2

[v] Marcoux, 2

[vi] Coors, 10

[vii] Coors,10

[viii] Scott, Jeff  “Stakes v. Stocks”  Ludwig von Mises Institute 8/3/1998


[ix] Coors, 11

[x] Markley, 2



[xiii] Coors, 11


[xv] Marcoux, 3

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One Response to “The Corporate Social Responsibility Distortion on “The Corporate Social Responsibility Distortion”

  • I liked you paper on CSR. I’m working on my MBA at WSU and researching this now. Good job.

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