The Irresponsibility of the Socially Responsible Corporation
|Sponsors:||Regulatory Transparency Project|
The fiduciary duties of corporate directors and officers require that they always act in a responsible manner to promote the best interests of their corporation and its shareholders, and never act to promote their personal interests, or the interests of third parties, that are inconsistent with the best interests of their corporation and its shareholders.
Traditionally, corporate law has supported the position that the best interests of a corporation and its shareholders are most effectively promoted when directors and officers focus their governance on the pursuit of long-term, sustainable shareholder wealth maximization rather than on efforts to promote the interests of third-party stakeholders or society at large.
In recent years, however, various progressives have argued with increasing frequency and intensity that the maximization of shareholder wealth is too narrow a focus for corporate governance in light of the significant threats they say are posed to the well-being of corporations and their shareholders, and to society at large, by global warming and other forms of social injustice.
These progressives argue that for directors and officers to promote the best interests of their corporations and shareholders in a responsible manner they must modify their business plans to incorporate meaningful efforts to advance the cause of social justice, including efforts that promote the interests and activities of third-party stakeholders working for social justice.
How should we define the fiduciary duties of corporate directors and officers? How should we measure their performance to determine the extent to which they have fulfilled their duties in a responsible manner? We do not have to look far for the answer.
This past Sunday, September 13, marked the fiftieth anniversary of Milton Friedman’s famous essay, The Social Responsibility of Business is to Increase Its Profits. Over the years, critics have frequently attacked the essay as a defense for a form of irresponsible capitalism that cares only about maximizing profits and cares nothing at all about the social and environmental damage that may result from the pursuit of profits. Nothing could be further from the truth! See for yourself. Friedman’s essay is a testament to responsible corporate behavior in every sense of the term. In his discussion of corporate behavior, he presupposes full corporate compliance with the ”basic rules of society, both those embodied in the law and those embodied in ethical custom.”
Presuming full compliance, Friedman is concerned about the obvious problems that arise when corporate leaders, acting to fulfill their supposed social responsibility, move their corporation into compliance with additional policy requirements not reflected in the basic rules of society. One example he gives is when corporate leaders decide to “make expenditures on reducing pollution beyond the amount that is…required by law in order to contribute to the social objective of improving the environment.”
When corporate leaders act in this way, they impose new restrictions or additional requirements on the operation of their corporation. They act, in effect, as regulators imposing new regulatory burdens. The added cost of the new regulatory burdens will result in some combination of reduced returns to shareholders, increased prices to customers, or reduced wages to employees. In all cases, the corporate leaders are spending someone else’s money to pursue a social policy objective. They are, “in effect imposing taxes, on the one hand, and deciding how the tax proceeds shall be spent, on the other.”
The imposition of regulatory requirements and taxes, and the expenditure of tax proceeds, to pursue social policy objectives are all government functions. Within our constitutional system of government, we have established elaborate institutions and procedures for the pursuit of social policy objectives. They are designed to ensure that the appropriate political and administrative officials all perform their respective roles in full accordance with the Constitution, relevant statutes, and applicable regulations.
When corporate leaders modify their business plans and usurp the regulatory, taxing, and spending functions of government to pursue social policy objectives, they forsake their traditional fiduciary duties, circumvent and undermine the established institutions and procedures of government, and engage in activities that they have neither the technical expertise nor the legal authority to perform legitimately. When corporate leaders do these things, they act in a manner that is highly irresponsible.
Even if “social responsibility” as a concept amounted to nothing more than a public relations slogan and “hypocritical window-dressing,” Friedman is concerned that “the nonsense spoken in its name by influential and prestigious businessmen does clearly harm the foundations of free society” by seeming to confirm socialist narratives about the evils of irresponsible capitalism, and by undermining the status and effectiveness of established institutions of constitutional government.
We enacted the Constitution to establish a political and legal system within which all the people can pursue their respective policy objectives in a lawful and orderly manner. Within this system, some people prevail in their pursuits, some fail, most are forced to compromise. All are secure in the knowledge that the constitutional system protects them by channeling, moderating, and resolving policy differences.
By forcing the policy making process outside of the institutionalized system established for that purpose, advocates of corporate social responsibility deprive us of these vitally important benefits. They extend the policy making process and “the scope of the political mechanism into every human activity. [The doctrine of social responsibility] does not differ in philosophy from the most explicitly collective doctrine…a fundamentally subversive doctrine in a free society.”
Friedman is clear. In a free society, “there is one and only one social responsibility of business—to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game” that have been set by the institutions of government established for that purpose.
Corporations, operating productively in full compliance with the “the rules of the game,” make a tremendous contribution to the well-being of society, enriching the lives and livelihoods of their shareholders, employees, suppliers, customers, and communities. Corporate leaders should be proud to play this vitally important role. And they should be ever mindful of their fundamental responsibility as individual and corporate citizens to respect the status and support the operation of the institutions of government that set “the rules of the game” for all of us in a free society.
That would be responsible corporate behavior!