Wall Street Journal: Companies want profits, not social responsibility

Last week Aneel Karnani, Professor of Strategy at the University of Michigan, wrote an essay “The Case Against Corporate Social Responsibility” in the liberal Wall Street Journal. The article “has caused minor shockwaves in the academic community and perhaps in the business community as well” (see letters to the ed).

Karnani’s basic claim is that “the idea that companies have a responsibility to act in the public interest and will profit from doing so is fundamentally flawed”. In most parts of the article he argues like Milton Friedman in 1970, basically writing that the only thing managers are (and should be – sic!) interested in is profits – and this is why companies e.g. refrain from paying workers higher wages: “Companies could pay their workers more and charge less for their products, but their profits would suffer”. He regards most CSR as not upright, but as greenwashing. He basically argues that companies would ignore the real problems, because they are only intersted in financial issues.

• “In circumstances in which profits and social welfare are in direct opposition, an appeal to corporate social responsibility will almost always be ineffective, because executives are unlikely to act voluntarily in the public interest and against shareholder interests.”
• “Energy conservation didn’t become so important to many companies until energy became more costly. These companies are benefiting society while acting in their own interests; social activists urging them to change their ways had little impact. It is the relentless maximization of profits, not a commitment to social responsibility, that has proved to be a boon to the public in these cases.”

Like Friedman, he regards government regulation as the most effective regulator; the only sure way to change corporate decision making is “to impose an unacceptable cost — regulatory mandates, taxes, punitive fines, public embarrassment — on socially unacceptable behavior. Pleas for corporate social responsibility will be truly embraced only by those executives who are smart enough to see that doing the right thing is a byproduct of their pursuit of profit”. While he acknowleges that there can be and are problems with government regulation, particularly in developing countries, he mentions that civil society as a part of the solutions, but rather a small one: “Civil society also plays a role in constraining corporate behavior that reduces social welfare, acting as a watchdog and advocate. … Overall, though, it can’t be relied on as the primary mechanism for imposing constraints on corporate behavior”. Similarly, he regards self regulation as relevant, but not as only solution: “Companies are unlikely to voluntarily act in the public interest at the expense of shareholder interests. … The challenge is to design self-regulation in a manner that emphasizes transparency and accountability, consistent with what the public expects from government regulation.”

Karnani’s argument very much resembles the answers I now get from the BSCI members about why they do not want to pay living wages and why the governments should. However, Karnani ignores the possibility of transnational regulation.

Mike Valente yesterday published a reply to the WSJ article, which the two business ethics Professors Andrew Crane and Dirk Matten recommend. His reply is worth while a read. In one of his arguments, Mike praises that Karnani acknowledges the complexity of solutions, i.e. co-work of governments, business. Crane & Matten comment his post:

“Mike you’ve hit the nail on the head. Karnani’s views are outdated and too simplistic given the complex roles and responsibilities of business, government and civil society. Why I disagree: You’ve been too nice. Even on the first point where you claim to agree with the article, you probably don’t really. CSR isn’t irrelevant if managers have to creatively find those intersections between responsibility and profitablity (as you say later on) and choose these rather than other “non-responsible” but profitable options. There is always a choice and responsibility is always relevant. So forget about agreeing and stick to disagreeing!”

I agree that companies have a responsibility and that CSR is not irrelevant. However, his articles very much shows why much greenwashing is still going on and why CSR has its limitations. But to me the article also shows that it is necessary to stress more the role of governments & civil society.