Corporate Social Responsibility A Dialogue

T. Franklin Harris, Jr.

"The corporate accountability theory, in brief, holds that corporations are responsible to and subject to the will of the people, that is to say, society. The profit motive theory holds that, in the words of Dr. Friedman, "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 ......

The managers and executives of corporations are the employees of the business's shareholders. As such, they have a contractual and thus, moral-responsibility to their employers: "That responsibility is to conduct the business in accordance with their desires, which generally will be to make as much money as possible while conforming to the basic rules of the society, both those embodied in law and those embodied in ethical custom." (Friedman 1990)..

Thus, it is the moral duty of corporate executives to carry out the wishes of the shareholders, who, in the main, invest in order to make a profit. Managers cannot morally engage in any activity that reduces the corporation's profitability."

II

"Nader believes corporations to be on the same level as government. By necessity they must be limited: "Corporations are effectively like states, private governments with vast economic, political, and social impact. A democratic society, even if it encourages such groupings for private economic purposes, should not suffer such public power without public accountability."

III

"The corporate natural rights theory means exactly what it says-the primary social responsibility of corporations is to respect individual, or "natural," rights. This means corporations must respect the rights or "moral space" of individuals: "The boundaries [of this moral space] themselves are set by the principle of the non-initiation of physical force. Thus, one is entitled to pursue whatever goals one desires provided one does not cross another's moral boundaries by the initiation of force." (Den Uyl 1984)..

". . . in 1914 Ford Motor Company increased its wages to $5 a day and reduced the work day from 9 to 8 hours. This policy was not viewed at the time as good business, but as virtually an act of charity." As history shows, Ford went on to prosper as a direct result of this so-called "act of charity."

It follows that certain charitable acts could prove beneficial today. A corporation could locate a plant in a low income area as an act of "charity" The low income area might not be the most profitable place to locate, but a profit could be earned, thus not forsaking the profit responsibility.

The corporate natural rights theory basically states that Dr. Friedman is right about profit being the major goal of corporate business, but that there are other moral responsibilities that must be met so long as they don't directly conflict with the profit-making goal."

Is freedom to choose as much a right of one as another?

Who has the rights to the fruits of labor-the producer or nonproducer?

How is value determined-by political authority, cost of production, or by what others will give in willing exchange?

What actions of men should be restrained--creative actions or only destructive actions?

How dependent is overcoming scarcity on honesty, respect of each for the rights of others, the entrepreneurial spirit, intelligent interpretation of self-interest?

Corporate Social Responsibility A Dialogue

T. Franklin Harris, Jr.

Imagine if you will that ancient Greece's two greatest philosophers, Plato and Aristotle, are alive today and debating philosophical subjects much as they did in Plato's Academy. The subject at hand is the moral responsibility of corporations to the whole of society.

Plato: The debate over the social responsibilities of corporations is perhaps the most crucial, and certainly one of the hottest in the field of business ethics. Corporations, as the largest and most visible members of the business community, stand at the center of any discussion of the role of business in society. Of course, as in any debate, there are different views; thus, there is some contention as to what that social responsibility actually is.

Aristotle: What are the most prominent of these views?

Plato: Well, there are three major schools of thought, each with its own proponents. The first, and probably the most prominent, is the corporate accountability theory. Its major proponent is the "consumer advocate" Ralph Nader.

The second major theory is the profit motive theory. Its most prominent advocate is Milton Friedman. Dr. Friedman was a professor of economics at the University of Chicago for many years, and has received the Nobel Prize for his work in that field.

The third and most recent theory is the corporate natural rights theory. Although it has no defenders of the public stature of Mr. Nader and Dr. Friedman, it does have competent proponents. The specific argument that we shall discuss in favor of this theory is advanced by Douglas J. Den Uyl, a professor of philosophy at Bellarmine College in Louisville, Kentucky.

Aristotle: What are the main thrusts of these arguments?

Plato: The corporate accountability theory, in brief, holds that corporations are responsible to and subject to the will of the people, that is to say, society. The profit motive theory holds that, in the words of Dr. Friedman, "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 ......

The corporate natural rights theory basically states that Dr. Friedman is right about profit being the major goal of corporate business, but that there are other moral responsibilities that must be met so long as they don't directly conflict with the profit-making goal.

Aristotle: It seems these arguments merit a more in-depth discussion.

The Corporate Accountability Theory

Plato: The corporate accountability theory rests upon two major assumptions. The first is that corporations are "creatures of the state," This assumption means that corporations are created by, and indeed could not exist without, government charters. The second assumption is that corporations, because of their size and economic power, are on the same level as governments. They possess as much "public power" as do states; therefore they, like governments, must be Constitutionally limited. As Nader has written, "It makes no public sense to apply the Constitution to Wyoming and West Tisbury, Massachusetts, but not to General Motors and Standard Oil, New Jersey."

Aristotle: This all seems silly to me. What is the basis for these assumptions?

Plato: The argument is basically historical. The first corporations were chartered in England during the 1500s. "The Crown vested governmental authority in certain commercial groups to trade in its name." (Nader 1973) Corporations originated, not as groups of individuals deciding voluntarily to pool their resources, but rather as government agents, contributing to the economic power of the country.

Nader regards the idea of corporations as private property as a relatively new and fraudulent concept. It was only over time, and largely as the result of "corruption and favoritism" that the concept of corporations as private property developed: "In the early 1800s most lawyers and judges still viewed corporations as performing public functions in the public interest. But by 1870... this notion had all but vanished. Corporations now considered themselves private property owned and controlled by their shareholders."

Aristotle: So, if corporations are government creations, then the government has the right to tell them what to do.

Plato: Correct. Corporations are public rather than private property. From this point Nader turns to the American system of government.

Corporations gain their authority from the government, which in turn gains its authority from the people ...

Aristotle: Thus, indirectly the corporations are responsible to the public. The corporation's responsibility is to serve whatever is deemed to be in the public's interest.

Plato: Exactly!

Aristotle: Also, Nader has stated that the Constitution should prohibit certain corporate behavior just as it prohibits certain governmental behavior. Corporations would also be morally obligated to uphold those parts of the Constitution that are commonly thought to apply only to government.

Plato: Remember, Nader believes corporations to be on the same level as government. By necessity they must be limited: "Corporations are effectively like states, private governments with vast economic, political, and social impact. A democratic society, even if it encourages such groupings for private economic purposes, should not suffer such public power without public accountability."

Corporate accountability would require corporations to respect the Fourteenth Amendment, thus requiring due process for an employee before firing, and the Fourth Amendment, which would require a warrant before a company could search the property an employee might have on the job.

Aristotle: I'm afraid these arguments just aren't convincing.

First of all, just because corporations were originally created by the government doesn't mean that they are still "creatures of the state." The English mercantilist system prohibited any private corporate endeavors. The economy was heavily regulated, and government intruded into almost every aspect of citizens' lives. Without government interference, corporations would have sprung up in the marketplace as an efficient means of doing business. In modern times corporations are voluntary associations. Governmental chartering exists only as a holdover from the old system. These charters are unnecessary. Whereas under mercantilism corporations needed charters in order to exist, now, under the American system that largely respects property rights, corporations have the protection of being private property. Contrary to Nader, corporations are owned by their shareholders. They are the ones who paid for their shares as surely as people pay for copies of Nader's books.

Second, since corporations aren't really created by government, the state has no authority to tell them what to do. Morally it doesn't matter how powerful corporations are. They aren't subject to public control. Anyway, Nader's assessment of corporate power is overblown. Corporations don't have military or police power, therefore they cannot force anyone to do anything. Governments are constitutionally limited because they do have the power of force.

Plato: Then, if corporations aren't creatures of the state and are not legitimately subject to public rule, then corporations have no moral responsibility to he "accountable."

Aristotle: Correct.

Plato: Then let's move on to the second argument.

The Profit Motive Theory

Plato: Milton Friedman accepts your argument concerning the fraudulence of "corporate accountability." Therefore, he believes businesses should be allowed to function freely in an unregulated environment. This does not, however, mean that businesses have no responsibilities.

Aristotle: Yes, but Friedman acknowledges the validity of only one responsibility: to make a profit within the bounds of the "rules of the game." But what are those rules?

Plato: To operate within the rules of the game means to "engage in open and free competition without deception or fraud." (Friedman 1990) But Friedman's argument goes further than simply to require that corporations seek to earn a profit. The profit motive theory expressly forbids corporate involvement in social activity even if it is done freely, without government coercion.

Aristotle: Why is that?

Plato: The basis for this claim rests on the necessity to play by the rules of the game, which means honoring contracts. The managers and executives of corporations are the employees of the business's shareholders. As such, they have a contractual and thus, moral-responsibility to their employers: "That responsibility is to conduct the business in accordance with their desires, which generally will be to make as much money as possible while conforming to the basic rules of the society, both those embodied in law and those embodied in ethical custom." (Friedman 1990)

Thus, it is the moral duty of corporate executives to carry out the wishes of the shareholders, who, in the main, invest in order to make a profit. Managers cannot morally engage in any activity that reduces the corporation's profitability.

Aristotle: You say, "in the main." What about people who start businesses for reasons other than profit?

Plato: In that case social responsiveness is acceptable. "The manager of such a corporation will not have money profit as his objective but the rendering of certain services." The key point, however remains "that, in his capacity as a corporate executive, the manager is the agent of the individuals who own the corporation ... and his primary responsibility is to them." (Friedman 1990)

Aristotle: I see, but corporations are made up of individuals. Is Friedman saying that people have no responsibilities other than to make money?

Plato: Not at all. In fact he states otherwise: "Of course, the corporate executive is also a person in his own right. As a person, he may have many other responsibilities that he recognizes or assumes voluntarily-to his family, his conscience, his feelings of charity... But ... he is spending his own money or time or energy, not the money of his employers or the time or energy he has contracted to devote to their purposes."

There is another point to Friedman's argument. When a manager diverts profits into social causes, he is guilty of taxation without representation.

Aristotle: I'm afraid this argument eludes me.

Plato: If an executive spends funds for social causes ,"he is in effect imposing taxes, on the one hand, and deciding how the tax proceeds shall be spent, on the other." Friedman goes on to say: "He is to decide whom to tax by how much and for what purpose, and he is to spend the proceeds-all this guided only by general exhortations from on high to restrain inflation, improve the environ-ment, fight poverty and so on and on."

In short, the stockholder is taxed by diminished returns on his investments, and the consumer is taxed by higher prices for the company's goods or services that might result from decreased profitability.

Aristotle: The "taxation without representation" argument is indeed weak. Stockholders are able to vote for company executives, therefore there is accountability. Also, anyone who is displeased with how a company is run is free to sell his or her shares. It isn't the same as government taxation, where a person can hardly move to another country where he will, incidentally, also be taxed. People don't have to own stock.

As for consumers, if prices for the goods and services of one corporation go up, they are, to use a favorite phrase of Dr. Friedman, "free to choose" the goods and services of a competitor. This is, after all, the whole idea behind a free market economy.

Now, concerning the argument about contractual responsibilities, it seems that although Dr. Friedman is correct in insisting that attention be focused on profit, he is neglecting other moral obligations. True, he says people can do what they want on their own time and with their own money, but executives cannot simply leave their humanity at the door when they come to work every morning. Furthermore, charitable contributions can and do often have effects that are, in the long run, beneficial to business.

Plato: You have indeed hit upon something, young Aristotle. In fact, it was the very same sentiments that led to the birth of the third school of thought.

The Corporate Natural Rights Theory

Plato: The corporate natural rights theory means exactly what it says-the primary social responsibility of corporations is to respect individual, or "natural," rights. This means corporations must respect the rights or "moral space" of individuals: "The boundaries [of this moral space] themselves are set by the principle of the non-initiation of physical force. Thus, one is entitled to pursue whatever goals one desires provided one does not cross another's moral boundaries by the initiation of force." (Den Uyl 1984)

Aristotle: Isn't the natural rights theory the same as the "rules of the game" principle?

Plato: In some ways, yes. But the natural rights theory provides a moral reason why one ought to obey the rules of the game.

Aristotle: How does this allow for corporate charitable acts? Presumably contractual obligations are still valid. Any social responsiveness would still violate the contractual agreement between the owners and the management.

Plato: So it would seem at first glance. But Den Uyl's definition of contractual obligations is more lenient than Friedman's. Den Uyl argues that some acts of corporate "charity" are actually wise business decisions. Therefore, a blanket prohibition against corporate charity is unwarranted.

Aristotle: What examples are cited of corporate charity turning out to be beneficial to the function of business?

Plato: Den Uyl cites the case of the Ford Motor Company: ". . . in 1914 Ford Motor Company increased its wages to $5 a day and reduced the work day from 9 to 8 hours. This policy was not viewed at the time as good business, but as virtually an act of charity." As history shows, Ford went on to prosper as a direct result of this so-called "act of charity."

It follows that certain charitable acts could prove beneficial today. A corporation could locate a plant in a low income area as an act of "charity" The low income area might not be the most profitable place to locate, but a profit could be earned, thus not forsaking the profit responsibility. Also, if the area could be built up economically, it would make customers out of people who had previously been left out of the marketplace. These new consumers would then be able to patronize the business community as a whole, thus also potentially benefiting the original business.

Aristotle: This seems to be a tenuous position. A company could very likely not get enough return from its "charitable investment" in order to justify it in the first place.

Plato: Den Uyl argues that it isn't necessary for corporations to maximize profits: "It could be suggested that the owners do not seek to maximize, but rather wish only a certain rate of return. Provided one is not required to interpret 'maximize' to mean what would be received if all parties had perfect information, this question need not detain us either."

Aristotle: And interpreting "maximize" to mean "perfect information" would be a difficult task. It would make it nearly impossible for any manager to adequately fulfill his responsibilities to the corporation's owners. No matter what action he took, it would be morally deficient. It is impossible for all parties to receive perfect information.

Plato: Also, a bad charitable contribution could be treated the same as any bad business decision. It would be a technical failing, possibly resulting in dismissal for the parties involved, but not a moral failing.

Aristotle: So managers are able to live up to their contractual responsibilities while still showing some consideration for other people. Kindness, compassion, and thoughtfulness still have their place.

Money and Morality

Plato: Now, what conclusions have you drawn?

Aristotle: In brief, the corporate accountability argument is invalid because it fails to justify government regulation and, therefore, the moral responsibility of corporations to submit to regulation. There is no reason to believe corporations are "creatures of the state."

While the profit motive argument is better, it fails to take into account the moral responsibilities of the individuals who run the corporation. There is more to life than profit, and people don't abandon their other responsibilities in the workplace.

The corporate natural rights argument is the only one that reconciles both the primary goal of business (profit) and the other goals of humanity. It reconciles money and morality.

Source: The Freeman, a publication of The Foundation for Economic Education, INC. September, 1991 (Vol. 41 No.9).

Theoretical/Philosophical Issues