Virtue and the Market

Corporate Social Responsibility Under the Microscope

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BERKELEY, California, NOV. 19, 2005 ( Ethics and corporate conduct continue to be hot topics. A book published earlier this year gives a succinct oversight of the main issues involved in the concept of corporate social responsibility.

Written by University of California professor David Vogel, «The Market for Virtue» (Brookings Institution Press) starts off asking what it means, in fact, to be a virtuous company. There is a vast amount of literature on the subject and thousands of diverse policies among companies regarding ethical conduct.

A multitude of matters falls under the heading of corporate social responsibility: working conditions in factories in developing countries; child labor; guaranteeing fair prices for agricultural producers; environmental concerns; and human rights.

Vogel observes that companies can have differing motivations for following virtuous policies. Some can be defensive, to ward off hostile publicity, while others can stem from a genuine commitment to social goals. In any case, he adds: «The supply of corporate virtue is both made possible and constrained by the market.»

There is a market for virtue, he notes, but it is limited. From a market perspective, businesses can justify social-responsibility policies, under some circumstances. But there are limits to this, and there is also a large space available for less-responsible competitors.

This is due to the advantages, and limits, of market capitalism. On the positive side, firms are free to innovate and citizens have the possibility to influence corporate practices through their decisions about what to buy and where to invest. On the negative side, because ethical policies are voluntary and companies are subject to market discipline, firms will only follow them when it makes good business sense. So, corporate social responsibility can remedy some problems, but are not a complete solution.

Rising concerns

Concern over ethical questions has risen sharply in recent years due to increasing globalization and economic deregulation. These developments have produced many benefits, but they have also generated dissatisfaction with some of the negative consequences, Vogel says.

Part of this discontent has been focused by non-governmental organizations in campaigns against companies they accuse of unethical practices. And the growth of global brands — and the new communications technologies — has made companies more vulnerable to boycotts and negative publicity.

Consumers, Vogel notes, are paying more attention to factors related to social responsibility in their purchases. But he warns that surveys purporting to show large percentages of the population as willing to change their buying habits should be taken with a grain of salt. Brand loyalty remains strong and shoppers are generally reluctant to change well-established habits.

Governments are also getting involved. According to Vogel, since 2000 Britain has had a minister for corporate social responsibility and six European governments require that pension funds consider social practices in making investment decisions.

Businesses, for their part, are cooperating. The World Business Council for Sustainable Development was founded by 170 companies after the 1992 U.N. summit on the environment. And the U.N. Global Compact has attracted more than 1,300 corporate signatures. As well, about 2,000 companies now publish reports on their social or environmental performance, up from around 500 in 1999.

Good business?

Many businesses argue that «good corporate citizenship is also good business,» explains Vogel. But there are also critics who maintain that creating wealth for shareholders is the sole function of a company. Vogel rejects this argument, arguing that profit and non-financial goals can be combined.

In fact, he notes, the typical business book on corporate social responsibility emphasizes its links to profitability and concentrates on firms that are financially successful. Moreover, if a company takes the initiative through self-regulation, it can be better placed if and when new government regulations appear. And a more responsible firm faces less risk of consumer boycotts or shareholders unhappy with its practices.

This does not mean, Vogel clarifies, that the more socially responsible firms will reap higher profits. But nor will they necessarily be less profitable for having added ethical objectives to their goals. More than 120 academic studies have analyzed the relationship between ethics and profits, he notes. The results are mixed. Some find a positive relationship, others a negative one, and still others a toss-up.

Vogel comments that it is hard to draw broad conclusions from the studies, in part due to varying analytical methods. For example, one summary of 95 studies found that financial performance was measured in 70 different ways, with 49 types of accounting measures. Equally important, the correlations drawn from surveys of companies’ behavior and profitability cannot establish the direction of causality, Vogel notes. It is not clear if more-responsible firms are more successful, or if the more-successful companies simply have more money available to spend on good business practices.

An even more problematic question is whether being responsible enhances a company’s reputation. Corporate social responsibility is only one component of a reputation, Vogel notes, along with other factors, such as consumer satisfaction and financial performance. Moreover, firms have to aim at a moving target, since activists continually pressure for more progress.

In the end, the more-responsible firms and less-responsible ones alike have to survive in highly competitive markets. Both are subject to shifting consumer preferences and to poor management. And firms that fall into financial straits might find it difficult to sustain many of their ethical practices.

Market for virtue

Vogel contends that social welfare would often be better served if the voluntary standards adopted by some companies were made the subject of national or international laws. But, aware that often this is not going to happen, he believes that a firm’s ethical policies, even if only second-best, are better than nothing at all.

Vogel points to a number of areas where improved corporate practices have brought about concrete results. These include a reduction in the use of child labor and an improvement in safety conditions in many factories that supply clothing and toys; an increase in the prices some agricultural producers in developing countries receive, particularly for coffee; and a lessening of the negative environmental impacts.

Even so, adherence to voluntary codes varies widely and is difficult to verify. But it’s not just companies that have a responsibility, Vogel points out. If consumers were willing to pay more for products, then workers in developing countries could be paid more. And if governments in some countries continue to demand bribes, then corporate commitments to avoid fomenting corruption will be undermined.

Combining business with ethics is addressed in the Compendium of the Social Doctrine of the Church. The economy has a moral dimension, explains No. 332, which means the growth of wealth should be accompanied by a concern for solidarity and a spirit of justice and charity.

The effort to create projects capable of encouraging a more equitable society and a more human world is difficult, acknowledges the following numbers. But such effort needed to preserve the moral quality and meaning of economic activity.

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