Are recent announcements nothing more than window-dressing?
This week, the Business Roundtable, an influential group of CEOs of large businesses, announced that they are changing the nature of their corporations. No longer would their only priority be the quest for higher returns for shareholders. Now, their firms would take the needs of other interested parties, or “stakeholders,” into consideration in their business decisions. Stakeholders include groups such as employees, communities, suppliers, customers, and other groups with an interest in the corporation but who do not own stock.
Would that it were so easy. The idea that stockholders own the corporation and that top managers work for the shareholders and nobody else is ingrained in American law.
Under agency law, a central concept in our legal system, when managers do anything other than paying attention to the needs of shareholders they are actually abusing their authority, violating their “duty of loyalty.”
It doesn’t have to be this way. In Germany, employees of large corporations must be given half the seats on the board of directors. As a result, German law makes it clear that the corporation owes a duty to its employees. In South Africa and India, corporations must donate a percentage of their profits to charitable causes. But this is not the law in America.
To be sure, being socially responsible is often good business. Research has shown that investments in corporate social responsibility can lead to higher financial performance for the corporation. It has also been shown to improve employee productivity, and one interesting study found that employees are willing to work for less at a socially responsible company than at an irresponsible one.
But research has also shown that the more excess resources a firm has available to it, known as “slack,” the more a firm invests in certain kinds of socially responsible projects. This finding is a contrast with other research that has found no link between the availability of slack resources and corporate political activity. The take-away? Social responsibility is seen as something nice to do when the resources are available. Political activity, however, is something that is necessary to the firm’s survival, and so must be invested in even when times are bad.
But even if we insist corporations must be socially responsible, just what does that mean? It is a truism that people have different ideas about ethics, but even the experts can’t agree. Indeed, one study found that when you compare the various indexes ranking companies based upon their level of social responsibility, the indexes don’t agree. Literally, if you ask ten people what it means to be socially responsible, you will get ten answers.
To be sure, there are some examples of bad corporate behavior that outrage pretty much everyone. There’s the overly risky behavior on the part of the banks leading up to the financial crisis. There’s the fraud perpetrated by Volkswagen regarding the environmental harm caused by its diesel engines. There’s the cover-up by tobacco and pharmaceutical companies of their own research showing the dangers associated with their products. Most of these examples are already illegal, however. The problem is that even when the firms had to pay fines, in general, the executives committing the bad acts walked away with, at most, a slap on the wrist. Oftentimes, they ended up richer than when they started.
Such lax enforcement is due to a number of causes. On the one hand, firms lobby to limit regulations that prioritize the public interest too strongly. On the other hand, their lobbying efforts create such close relationships between the firms and their regulators that the regulators care more about the firms’ interests than their duty to the public. That close relationship is called “regulatory capture.”
In truth, the biggest problem we have regarding corporate ethics is the poisonous relationship between business and politics. For a number of reasons, businesses have political power far out of proportion to the constituencies they represent. Until we can change that dynamic, corporations will continue to mouth pledges of corporate responsibility while escaping the real kind of responsibility that comes from legal mandates creating a minimum standard for all firms. If we wonder why corporations believe they can be irresponsible, the fact that our political system allows such bad behavior is the place to start.
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