When business corporations are created, the community does not give something away, says Robert G. Kennedy in this week’s Acton Commentary. Instead, in order to pursue the economic benefits offered by the corporate structure, the community offers something in exchange.
The full text of his essay follows. Subscribe to the free, weekly Acton News & Commentary and other publications here.
The Social Responsibility of Business
In 1946, Congress enacted changes in the tax code that permitted publicly held business corporations to deduct charitable donations in amounts up to 5 percent of their federal taxable income. Congress, of course, did not require companies to make charitable donations, but it did encourage them to do so. The legislation became one more landmark in a running controversy about corporate social responsibility.
Simply put, this controversy concerns the question of whether publicly held business corporations (sole proprietorships and partnerships must be treated somewhat differently) have a duty to the communities in which they operate that goes beyond the duty to obey the law in the conduct of their operations. If they have such a duty, questions remain about why they have that duty and what exactly it requires them to do.
By contrast, the attention given to the study of business ethics over the last several decades has served to reinforce the conviction that business corporations have a social responsibility that requiresthem to use some of their resources to address needs in their communities. These resources may be cash, or physical property, or even the time and energy of their employees. Ordinarily, the needs addressed are outside the scope of the normal operations of the company. As a result, corporations make significant contributions to the arts or to social service organizations. In doing this, advocates argue, they are merely being good corporate citizens and giving something back to the society. We may call this the strong view of corporate social responsibility.
Many opponents of this view insist that business corporations have no responsibility to society beyond obeying the law as they go about their operations. Their principal and overriding responsibility is to shareholders, and it is a responsibility to conduct the operations of the company in such a way as to maximize the wealth of these shareholders. We may call this the weak view of corporate social responsibility. Perhaps the best-known proponent of the weak view is Milton Friedman, the Nobel laureate in economics.
Over the last decade or two, as some version of the strong view has become the common opinion in business schools and executive suites, thinking about the nature of the business corporation and its relationship to the community has also changed. Quite often the moral quality of a company has been evaluated in terms of its commitment to social responsibility. In practice, however, this has created at least two kinds of problems, which on occasion have been serious and that, in any event, should provoke us to reconsider the wisdom and soundness of the strong view of corporate social responsibility.
The first kind of problem is that the specific nature of corporate contributions sometimes becomes an obstacle to the successful conduct of business. Several companies have received unwelcome publicity and have been the target of customer outrage because of their support for or opposition to controversial social programs. A few years ago, for example, Berkshire-Hathaway decided to curtail its corporate giving after customers of one of its companies objected to Warren Buffett’s own generous support of population control activities. More generally, socially responsible investment funds often screen stocks by examining the company’s corporate giving. As these funds have become larger and more numerous, their impact on corporate giving practices is likely to be felt. In many cases, a contribution approved by one fund will cause another fund to reject the investment.
A second sort of problem is more subtle, but its effects have been displayed quite dramatically over the last two years. There can be a dark side to corporate philanthropy, as companies such as Enron have demonstrated. Enron conducted a very generous corporate giving program, and this tended to make people reluctant to examine the company’s business practices too closely. In Enron’s case, a member of the audit committee of the board was also a faculty member at a university that was a grateful beneficiary of the company’s largesse. In other cases, corporate donations have funded projects directed by the spouses of members of Congress or other officials. Even where there are less egregious conflicts of interest, nonprofit organizations and the people who benefit from their services can bring influence to bear to support their donors over against the community as a whole (as for instance when artificial barriers prevent competitors from entering a marketplace). A related problem arises when such corporation-sponsored organizations, through political or intellectual activity, seek to undermine the market system itself, thereby making more difficult the extension of prosperity to an ever larger number of beneficiaries. For these reasons, we need to ask whether the strong view of corporate social responsibility is well-grounded in a proper understanding of the nature of a business corporation and whether it is an accurate description of whatever social responsibility it may have.
The relative newness of the corporate form has caused us to puzzle about its nature. The law, for example, regards it as if it were a person for some purposes and as if it were an object of ownership for other purposes (while at the same time insisting that “persons” cannot be owned). In still other contexts, the law considers corporations not so much to be things as to be networks of contractual relationships. Nevertheless, in each of these instances the determining principle behind the relevant legal concept of the corporation is rooted not in some conclusion about the nature of the corporation but rather in a problem the law wishes to resolve. Treating the corporation as if it were a person or an object of ownership or a network of contracts allows the courts to resolve the problem at hand, but we should not be misled by this into thinking that the law has told us what a corporation truly is.
Ethicists, economists, and social scientists each similarly grasp an important piece of the whole, relevant to their own disciplines, without necessarily accurately describing the whole. Thus, for ethicists, the corporation is (or perhaps is not) a moral agent; for economists, it is a set of relationships designed to optimize efficiency; and for social scientists it is a social arrangement with its own culture, both like and unlike families and civil societies.
For the Common Good
As we have discussed, business corporations enhance the common good by providing good employment, by producing needed goods and services, and by creating wealth. Their potential to do this is so great, in fact, that the prosperity of a modern society can be directly correlated with the presence in the society of this corporate structure. In principle, therefore, the community permits and protects this form of association because it makes a particularly important contribution to the common good when it functions properly. Additionally, the community retains the right to regulate corporations in order to insure as far as possible that it does function properly and that it does make this contribution.
Business corporations, therefore, by their nature serve the common good when they function as they should. They are not grudging concessions made by society to the greed of executives and investors. As a result, the primary social responsibility of a business corporation is, in fact, to make the contribution to the common good that it is uniquely structured to make. It need not justify its existence on the ground that it addresses broad social injustices or performs general works of charity.
Yet, the rationale sometimes offered for the strong view of corporate social responsibility implies that producing economic benefits is not enough; business corporations must do more. Insisting, for example, that businesses must “give something back to the community” suggests both that they are not adequately contributing to the common good through their normal operations (which include paying taxes) and that their operations unfairly take something away from the community. Neither suggestion bears close examination.
When business corporations are created, the community does not give something away. Instead, in order to pursue the economic benefits offered by the corporate structure, the community offers something in exchange. It offers to recognize the corporation as a stable, enduring entity and to limit the civil liability of its members (i.e., its employees and investors). Any fair assessment of the impact of the corporate structure on communities would conclude that the communities sacrifice little and gain much. (Indeed, one might also fairly ask whether the exchange a community makes in sacrificing tax revenues in order to support nonprofit corporations creates proportional benefits for the common good.)
This does not mean that business corporations have no corporate social responsibility beyond conducting their operations within the law. Where the strong view of corporate social responsibility demands too much, the weak view (that corporations need only obey the law) requires too little. Law by its very nature is reactive; laws and regulations are enacted to prevent harms we have experienced in the past from occurring again. They rarely, if ever, anticipate harms we have never experienced and offer proactive protection. As a result, the law constitutes a minimal set of requirements for ethically sound behavior for individuals and organizations. (That we sometimes think laws or regulations become too detailed in their prescriptions is a different matter.)
Corporations, in other words, like morally upright individuals, have responsibilities that are not adequately described by laws and regulations. These genuine corporate social responsibilities concern both what they ought to do and what they ought to avoid.
On the positive side, corporations have a duty to treat their major constituencies as fairly as they can. They should also be ready to address needs in their fields of operation that are not well served and may not be very profitable. For example, grocery wholesalers and retailers could be open to ways in which they could help to insure that no one in the community goes hungry; construction companies could explore ways in which affordable housing could be built; and pharmaceutical companies could propose creative and effective partnerships with government to make medications available more cheaply.
Concerning what they ought to avoid, business corporations have a responsibility to avoid causing harms to the community (e.g., pollution) even when those harms are not prohibited by law. They have similar duties not to exploit employees or manipulate customers, regardless of whether the specific sorts of exploitation or manipulation are subject to regulation. They also have a duty not to use their economic and political power to secure legislation that is unfairly favorable to them (such as artificial barriers to the entry of competitors to the market).
These examples do not exhaust the possibilities for discharging the responsibilities of business corporations to their communities, but they do illustrate the direction in which these responsibilities run.
Nor do these limits mean that business corporations should not donate money or other assets to the community. Business corporations are at liberty to make whatever donations they wish to address and whatever needs they choose. The key, of course, is the difference between obligation and freedom. What is not required may still be permitted. In the case of business corporations, donations may be made when doing so will not undermine the legitimate operations of the business, when employees and customers will not be harmed, and when shareholders consent.
Corporate philanthropy has accomplished much good. No doubt it should continue vigorously—but not at the expense of a company’s more fundamental and important social responsibilities: to create wealth, to provide good jobs, and to offer products and services that serve genuine human needs. These are the principal objectives of businesses as specialized associations, and it is in these areas that we recognize the tremendous good that business does.
This essay is excerpted from The Good that Business Does, a 2006 Acton monograph authored by Robert G. Kennedy. The monograph is available for purchase in the Acton Book Shop.