• Tuesday, Aug 16, 2022
  • Last Update : 04:24 pm

Is corporate social responsibility worth it?

  • Published at 12:16 am June 25th, 2017
Is corporate social responsibility worth it?
One of the stranger delusions of our times is the idea of corporate social responsibility. This is not what you might think it is from the name, which appears to indicate that companies should simply be mindful of society and the law as they go about their activities. No, it means rather more than that: It means that a company should take its eye off the ball and instead pander to whatever are the latest fashionable fads that pass across society’s synapses. If, for example, environmental sustainability is this year’s dream then garment factories in Bangladesh will be browbeaten into said sustainability. Put like that it makes sense of course – we do indeed want people to use a scarce resource sensibly, so that there will be more of it to use next year. But I’ve sat on a stage listening to international bureaucrats insisting that said sustainability means diversity in hiring, female managers, higher minimum wages and so on through the standard progressive wishlist. This is not sustainability but it is the sort of thing that people mean when they say corporate social responsibility. Really, that firms should follow that progressive wishlist because, you know, well, they should. More female managers can be justified on the basis of getting more competent managers of course, higher wages might make great sense if there’s a shortage of labour willing to do the work and so on. But this CSR idea wraps, as I say, that wishlist up into a mantra that must be followed. Does the office have a paper recycling system; is organic food served in the canteen; does the company listen to all stakeholders?
But if you do all these lovely things then consumers will see that you are surrounded by a halo of righteousness. Thus they will buy more of your products and you will indeed make more money
At which point we should recall Milton Friedman and his insistence that a company is a method of making money for the shareholders and nothing else. There is more to this than just capitalist moneygrubbing too. Profit is the measure of how much value added there is going on. The prices of the various inputs, labour, and capital reflect their value in other alternative uses. The price of the final product coming out of the other end of the factory demonstrates the value once they are transformed. Profit is the value that has been added in the process, losses the value subtracted. What we all actually live upon, what we consume, is value that has been produced. Thus we’re rather keen that production processes get managed efficiently, produce profit, because that’s more value that has been added. We thus want that concentration upon efficiency. “Ah,” say our CSR boosters. “But if you do all these lovely things then consumers will see that you are surrounded by a halo of righteousness. Thus they will buy more of your products and you will indeed make more money.” At which point reality intrudes. This is an argument that has been made about the Bangladeshi garment industry. If all the workers are paid more then that Made in Bangladesh label will increase sales and wouldn’t that be great. Except, well, no one actually cares. Consumers don’t flock to buy things made by higher paid seamstresses. There are a few who do, certainly, but not enough to actually sway the mass market. So experience would seem to tell us that the CSR boosters haven’t got it quite right. But an anecdote or two is not data, it’s what is known as anecdata, an unreliable guide. Fortunately, this has been properly studied in a new paper titled Corporate Social Responsibility and Capital Allocation Efficiency. The answer is still no. The companies that do CSR love to tell everyone about it in order to gain that halo. So, look through the boasts and check the profitability of the firms. Those that do CSR don’t make greater profits, quite the contrary, they make smaller ones. Or as we might put it, spending money on bumpf is wasting money on bumpf. This should not be a surprise of course. Those outside business never do seem to realise quite how difficult it is to make a profit. It requires constant attention to all of the variables to do it consistently, produce that surplus value through activity. And if we go off and spend money not even trying to make a profit then we’re going to make less profit, aren’t we? Note again that this doesn’t mean that all of the activities in that mantra make no sense. It just means that the justifications have to be different. A child care service at work might well mean that you gain access to more labour, young mothers perhaps. Company paid health care might be worth more to the workers than what it costs you to provide it thus again access to more labour. That is, we go right back to judging all of these things on the basis of whether they increase profits or not. Which is, of course, where we should be: Judging a company and its actions by the profit (legally, obviously) generated. Corporate social responsibility programs simply do not increase profits, thus they do not increase the value being added by the firm.  We should therefore bin the idea, having actually bothered to go out and test it. For the entire point of industry is to maximise the value being added. As to why it doesn’t work, the answer there should be obvious by now. CSR programmes include an awful lot of things that excite those who write CSR programs and the rest of us seem to care rather less than one whit. Simply not enough people do care to make the practice profitable.   Tim Worstall is a Senior Fellow at the Adam Smith Institute in London.