Book Forum on Philanthropy in Democratic Societies / New Works in the Field / Philanthropy and Democracy

Reconciling Corporate Social Responsibility And Profitability: Guidelines for the Conscientious Manager

Editors’ Note: In our efforts to introduce readers to new works in the field, we have invited the authors of the recently-published volume Philanthropy in Democratic Societies to present synopses of their contributions. Paul Brest continues this forum by discussing his chapter on reconciling corporate social responsibility and profitability. 

How can a company’s managers safeguard the firm’s financial value for its shareholders while, at the same time, operate ethically and purposively in ways that benefits other stakeholders, including its employees and the communities in which the firm operates? Corporate social responsibility (CSR) is rooted in the idea that shareholder value is not the only measure of a firm’s value and, indeed, that the exclusive pursuit of profits may produce social harms.

But CSR sometimes requires the firm’s management to compromise the firm’s economic value to a greater or lesser extent. There are four possible rationales for doing so: (1) it is required by law, (2) it is implicitly required by environmental, social, and governance (ESG) criteria, (3) shareholders have signaled their willingness to sacrifice profits to benefit other stakeholders, and (4) moral principles require the firm’s management to take account of the interests of other stakeholders. The last of these is the most interesting.

It is worth emphasizing that moral obligations are different from altruism, which is, by definition, supererogatory. There are three sources of a firm’s moral obligations:

  • Shareholders’ moral obligations. Individuals have moral obligations as members of society, which they cannot avoid by delegating authority to an agent to act on their behalf.
  • Managers’ moral obligations. Just as delegation to corporate managers does not insulate shareholders from their moral obligations, managers are not relieved of their own obligations by virtue of accepting the delegation.
  • The firm’s moral obligations. Corporations and other institutions play major roles and wield enormous power over the lives of people—employees, consumers, community members—in our global society. A world in which they myopically served their core beneficiaries without any moral regard for others would be deplorable.

As the late U.S. Supreme Court Justice Potter Stewart once remarked, “Ethics is knowing the difference between what you have a right to do and what is right to do.” But what sources does a corporate manager have for determining what’s right to do?

Business and public social norms can provide valuable guidance for corporate managers considering tradeoffs among a firm’s stakeholders. A good analogy comes from the Supreme Court’s approach to adjudication under open-ended clauses of the U.S. Constitution—for example, the cruel and unusual punishment clause of the Eighth Amendment. The Court has looked to what it calls “evolving standards of decency that mark the progress of a maturing society.” The Court noted that this approach to adjudication is designed to incorporate social norms or conventional morality rather than “draw on our merely personal and private notions.”

Norms of business practice can also evolve over time. Although business norms are often vague and conflicting, sometimes they have developed to a point where they can provide reasonably good guidance. For example, voluntary codes in the apparel industry reflect an evolving consensus about acceptable standards for workplace safety and workers’ wages and hours in factories in developing countries. They provide a useful reference point for the managers of U.S. or multinational companies considering what requirements to impose on manufacturers in their supply chain.

Norms are a starting point, but exclusive reliance on existing attitudes and practices may give too much weight to the status quo and, indeed, inhibit the evolution of norms. There is no reason to assume, a priori, that adherence to norms exhausts the moral responsibilities of corporations and their managers. In any event, the evolution of norms often requires a first mover who takes a step beyond the comfort zone of existing practices.

Therefore, I propose that managers should accord shared norms a defeasible presumption of validity, but also give weight to their own moral values, deliberating and inviting the opinions of people with diverse views on the matter, including “devil’s advocates,” before coming to a decision.

For those concerned that corporate managers will follow their own idiosyncratic views at the expense of shareholder value, it should be noted that most managers tend to hold conventional moral views and have self-interested incentives not to stray too far from shareholders’ economic interests. If managers do stray, unhappy investors can countermand the decision through a shareholder resolution.

-Paul Brest

Paul Brest is Former Dean and Professor Emeritus (active), at Stanford Law School, a lecturer at the Stanford Graduate School of Business, a faculty co-director of the Stanford Center on Philanthropy and Civil Society, and co-director of the Stanford Law and Policy Lab. He was president of the William and Flora Hewlett Foundation from 2000-2012. He is co-author of Money Well Spent: A Strategic Guide to Smart Philanthropy (2008), Problem Solving, Decision Making, and Professional Judgment (2010),and articles on constitutional law, philanthropy, and impact investing. His current courses include Problem Solving for Public Policy and Social Change, and Advanced Topics in Philanthropy and Impact Investing. He also is the instructor in an online course, Essentials of Nonprofit Strategy, offered by Philanthropy University.

 

 

 

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