An Analysis of The Economist’s Analysis of CSR

Right before this year’s World Economic Forum, where 2000 of the world’s most powerful people paid upwards of $35,000 apiece to spend four days in the Swiss Alps discussing how capitalism can improve the state of the world, The Economist’s deputy editor, Clive Crook, launched a savage cover story attacking corporate social responsibility (CSR), dismissing it as a mostly delusional practice that reduces both profits and social welfare.

In lobbing this daisy-bomb into an otherwise chummy garden, The Economist dissected CSR by dividing it into four permutations, concluding that the bulk of it falls in the bottom right-hand of this box:

VARIETIES OF CSR

In response, we decided it would be only fair to apply a similar framework to The Economist’s analysis of CSR to see how it measures up:

VARIETIES OF ARGUMENT

In its analysis of CSR, The Economist aptly defined its terms and then made its assertions. Some of these were based in fact. Some not. Some were clear, others confused. When The Economist was good, it was both clear and factual. When it was confused in a land of fiction, we labelled it delusional.

GOOD ECONOMIST
Let’s start with the Good Economist Box. This box is chock-full of clear and reasonable observations and nuanced definitions—work for which The Economist has a storied reputation.

The Economist argues:
CSR and the notion that businesses must participate in solving larger societal problems, has won the battle of ideas. But CSR includes its fair share of tokenism, and is sometimes used mischievously to lobby for illegitimate barriers to entry and protectionism. This harms consumers and denies workers in poor countries an opportunity to work.

The practice of corporate philanthropy has little to do with CSR, and is a form of borrowed virtue unless it is integrated with employee involvement and volunteerism. Reputation is every company’s greatest asset and its protection acts as insurance against scurrilous behaviour. Capitalism does function on top of, and one way or another is moulded by, prevailing popular opinion. Greed is bad for society and leads to fatsoes and bankruptcy. Self-interest of an enlightened kind is good for everyone: the long-term viability of a firm and society. Decency is not just good for business, it is essential. When it comes to maximizing long-term owner value, honesty is not just the best policy, it is the only feasible policy.

Sometimes the aims of the business and rational self-interest will clash with ethics, and when they do, those aims and interests must give way to good business ethics. The same goes for acting within the law. For capitalism to work to everyone’s benefit, prices need to reflect true social costs and benefits in a fair competitive marketplace. Unfortunately, many market prices diverge from the corresponding shadow prices that would direct resources to their socially best uses. That’s where the government comes in. Getting the most out of capitalism requires public intervention of various kinds, and a lot of it: taxes, public spending, and regulation in many different areas of business activity.

CK responds:
Sounds like an issue of Corporate Knights, eh? Read on.

AN ABUSE OF LITERARY LICENSE IN THE LAND OF FICTION
From the top left, things start to go downhill. This is where The Economist just starts making things up.

The Economist argues:
Everything is a-ok. Unadorned capitalism works just fine so there is no need for fundamental reform – those CSR wonks are woefully misguided. They think the great capitalist juggernaut – which we have to thank for our high standard of living – is a psychopathic beast. In fact, these charlatans falsely claim that narrow profit maximization is bad for society. We all know this is rubbish, of course. All profit-seeking naturally leads to the public good. The rot of the CSR people is in equating greed with self-interest, thus concluding that private enterprise is tainted. This makes them ethically stupid.

CK responds:
Au contraire. When CSR pushers recognize that unhelpful levels of greed are present in today’s market economy, which is all too focused on the short-term, this is not the same as saying greed is omniscient, as The Economist concludes. Worse, to pretend that short-term greed does not pose a threat to today’s market system, as The Economist merrily suggests, means that this venerated publication has stuck its head in a hole and joined the ranks of the drone-like yes-men who are the enemy of any system that values rejuvenation.

The Economist argues:
Some of these harebrained CSR blokes are brazen enough to suggest that recycling waste makes good business sense, which of course is usually a grand waste of money.

CK responds:
That’s a strange assertion, especially considering that reducing waste helps create a culture of efficiency and makes regulators happy. For example, when Bolton, Ontario-based Husky Injection Molding set its mind to this task in 1998, its waste diversion rate was 93 per cent, meaning that for every 100 pounds they used to trash, they now trash only seven. This also generated a cool million: $760,696 in recycling revenue and the elimination of $321,295 in disposal costs. Those crazy Canucks.

The Economist argues:
Some of the CSR flimflammery seems to promote the delusion that the free market does not always get the prices right. The use of materials, for instance, is an area where private and social benefits are typically well-aligned.

CK responds:
Yeah right. This both contradicts what The Economist said in its introduction and is something that would get you laughed out of any commodities trading floor or boardroom. If the prices are always right, why do nickel company executives check the price of nickel every 10 minutes? Why is coal, environment and health scourge number one, also so cheap?

STATE OF CONFUSION: PERNICIOUS ECONOMIST
Up back into the northeast quadrant, The Economist substitutes fabrication for confusion.

The Economist argues:
Most large companies are well-run, exist in a competitive market, obey all laws, never fudge the truth and operate in a manner consistent with the long-term interests of their owners. And they serve the public interest as a result.

CK Responds:
No thanks. We don’t buy swampland in Florida anymore.

The Economist argues:
When maximizing long-term owner value in a just and fair way conflicts with the public interest, throwing the public interest to the wayside is the ethical thing to do.

CK responds:
While this may be theoretically correct, it is practically impossible, which is perhaps why The Economist cannot provide any real examples. Acting in accordance with standards of decency in a broad sense (often above and beyond what the law requires) is always good for society.

The Economist argues:
CSR, for the most part, is not actually concerned with business ethics or standards of ordinary decency. Recycling and platitudes about saving the world, on the other hand, are in abundant supply. This is why we see CSR as a cosmetic treatment, at best; at worst it serves as a dangerous distraction from real problems, or enticement to solve problems that don’t exist. Good management attributes such as following the law, telling the truth, and treating stakeholders in a way that is good for the firm’s reputation are nothing special and don’t deserve to be praised or dignified by the term corporate social responsibility.

CK responds:
Being a good corporate citizen, like being a good citizen, is about doing a job, staying out of trouble, having the courage, know-how (innovative capacity), and foresight to align those two with a legacy of improving the world. Although this may seem mundane, it is far from a given. Any corporation that can pull it off deserves CSR kudos.

The Economist argues:
If you don’t agree with us, why don’t you just take a hike. If you’re one of those bleeding hearts who believes the business you are working for is causing harm to society at large, the right thing to do is not to work for that business.

CK responds:
The measure is not whether a company is doing damage or not, it is how much can the damage be reduced. Capitalism’s most valuable assets and allies are those clear-minded enough to see that there is a problem, and who are willing to work within the system to solve it. The all-or-nothing, everything’s rosy or take your ball and go home approach of The Economist is neither helpful nor realistic in today’s world.

The Economist argues:
Another perplexing proposition of the CSR dunces is that managers should serve multiple stakeholders as if they are somehow as important as the shareholder. You cannot deem stakeholders to be equal coowners of a business without repudiating the very idea of ownership. And where the law does not create accountability to nonowners, there is none.

CK responds:
The shareholder as ultimate stakeholder is a recent phenomenon, and it is likely to morph with other stakeholders given the massive increase of scale that private enterprise has undergone in the past few decades. Maximizing shareholder value serves as a useful organizing principle, but in a world as intertwined as ours, it is only feasible such that the constraints of ordinary decency are adhered to with respect to customers, employees, environment and the government. Ownership can change. Ask any company that has been nationalized, or bought out because it was put in a weakened state as result of indecent behaviour. As management guru Peter Drucker put it, “Any business can be put out of business overnight, as soon as society decides it no longer offers a useful and necessary function.”

The Economist argues:
Even if this multi-stakeholder hurrah did make sense, how on earth do you measure the so-called triple bottom line? Measuring profits is fairly straightforward; measuring environmental protection and social justice is not. The triple bottom line is not so much a license to operate as a license to obfuscate.

CK responds:
This is at once a defeatist and glorified notion of modern accounting. Measuring profit is by no means straightforward. Take BCE Inc. and two different accounting standards. Using Canadian GAAP, their 10-year profit to 2003 was $21 billion. Using US GAAP, their profit shrinks to $6.5 billion. How straightforward is that?

Measuring environmental performance or social impact is also rife with variation, but that doesn’t mean it shouldn’t be done or that human ingenuity cannot figure out a way. Emissions can be measured. So can toxic releases and there are increasingly sophisticated methods for measuring things like social impact.

B-GRADE FICTION: A DELUSIONAL ECONOMIST
In this box, The Economist shows how confused it is, but compensates well for it with a large dollop of fabrication.

The Economist argues:
There is really no nice way to say it. The CSR bunch is out to lunch. They think making profits, that most admirable of activities, in itself contributes nothing to the planet and its people.

CK responds:
This reveals the real rot of The Economist analysis: almost anyone will agree that profits are not always synonymous with improving the planet, but it is almost malicious to conflate this position with the
CSR position that honourable profit maximization, in many cases, does contribute to the public good.

The Economist argues:
Perhaps the real root of the CSR folks’ deluded worldview is an imagination fueled by pessimism; they mistakenly think that the environment is under threat, pollution is on the rise, and that certain denizens of commerce have too much in common with the mafia. So far as environmental externalities are concerned, most leading advocates of CSR seem to be in the grip of a grossly exaggerated environmental pessimism. Natural resources are not running out, if you measure effective supply in relation to demand.

CK responds:
Sorry. Our mistake. Thank you for clarifying the myth of a finite world. Nevermind the Millennium Ecosystem Assessment Synthesis Report conducted by 1,300 experts from 95 countries, which found that approximately 60 per cent of the ecosystem services that support life on Earth—such as fresh water, capture fisheries, air and water regulation, and the regulation of regional climate, natural hazards and pests—are being degraded or used unsustainably.

The Economist argues:
On the whole, rich countries are less polluted than poor countries, not more. The reason is that wealth increases both the demand for a healthier environment and the means to bring it about. Environmental regulation has been necessary to achieve this, to be sure, because pollution is indeed an externality. But it is not true that the problem has been left unattended in the rich world, that things are therefore getting worse, and that CSR initiatives have to rise to the challenge of dealing with this neglect.

CK responds:
The first part is partially on the money. Wealthy nations do not cut down trees and haul lignite to huts in order to cook and stay warm. But then, how many SUVs not belonging to the UN do you see in Sierra Leone? It is also a gross retreat to the Ivory Tower and abrogation of facts to pretend that toxic releases, deforestation, water pollution and air contaminants are not increasing almost everywhere. Fortunately, greenhouse gas emissions are set to be scaled back in most OECD countries—as chlorofluorocarbons (CFCs) and nitrogen oxides (NOx) were before it—largely on the back of the Kyoto Protocol, a treaty The Economist dismisses as “deeply flawed.”

The Economist argues:
If you can imagine it, these CSR twits are serving up pestering notions that strong environmental protections are not already in place in Europe and the United States. Overall, the evidence fails to show systematic neglect, or any tendency, once government regulation is taken into account, for economic growth to make things worse.

CK responds:
Excuse me. Have you been to China lately? Or smelled the rancid air in a major industrial capital on a smog alert day, or tried taking a swim in the great rivers and lakes that now post signs saying ‘Swim At Your Own Risk’ and ‘Be Sure to Thoroughly Rinse on Exiting?’

The Economist argues:
Perhaps most disturbing is the attack on the character of our leaders. This is what the communists tried to do. Some folks like Michael Moore claim to see little difference between Halliburton and the cosa nostra. It’s true that now and then executives do commit crimes. Usually, they are found out and punished. If you believe that the big multinationals are essentially criminal enterprises getting away with murder (perhaps literally), you are beyond the reach of an article about business ethics.

CK responds:
Where did those volumes of legal infractions and non-compliance orders against every large company in the world come from? When Vioxx killed 40,000 people prematurely, no one went to jail, nor for that matter—beyond a few token examples—did anyone else for lesser breaches at other companies. We didn’t know the price of admission to a discussion about business ethics requires one to be a delusional apologist.

The Economist argues:
CSR has no business, and becomes particularly dangerous, when it is invoked by companies that freelance public policy, especially in trade agreements, where some companies are calling for rules and  standards to be harmonized and extended, both at home and abroad. Anything that tries to raise standards must be sinister protectionism and the sooner that the CSR mask can be ripped off the better.

CK responds:
Partially true, but mostly false and misleading. The absence of minimum standards drives an inefficient price system that externalizes costs and reduces the public good. Out of self-interest, smart companies will try to correct these prices, so doing the right thing for the long-term viability of their industry does not put them at a short-term competitive disadvantage. The bigger danger that The Economist neglects to mention is when companies fight tooth and nail to forestall progressive public policy.

The Economist argues:
The butt of the problem with CSR wackos is that they want business to solve government’s problems. Businesses cannot be trusted to get it right, partly because they lack the wherewithal to frame intelligent policy in these areas. The proper guardians of the public interest are governments, which are accountable to all citizens. It is the job of elected politicians to set goals for regulators, to deal with externalities, to mediate among different interests, to attend to the demands of social justice, to provide public goods and collect the taxes to pay for them, to establish collective priorities where that is necessary and appropriate, and to organize resources accordingly. The proper business of business is business. CSR simply does not understand the division of labour under capitalism.

CK responds:
Where do we start? The Economist seems to not understand the extent to which public policy is part of the domain of business. Who do they think is paying the bills for the 150,000-strong lobby industry perched on Washington DC’s K Street? Business is going to influence public policy. Accept it. Business has a penetration and capacity
that outstrips any government, let alone those in the developing world, which it dwarfs. Large companies like Shell are really government relations firms. The naked truth is that the business of business now includes government in many cases.

It is better to recognize this reality than run from it. Companies of a more civilized nature like Shell who is calling for an international carbon tax to battle climate change, or Nike who is calling for international requirements for running shoe factories to be audited to determine labour conditions, recognize this reality and are rationally pursuing a self-enlightened long-term strategy of profit maximization. Good on them.

IN CONCLUSION
Before condemning The Economist, a sport of great zeal at recent CSR conferences, it is important to understand where it is coming from. It believes in a strict separation of powers between government and business loyal to a classical ideal of free-market economics, and it cannot come to terms with a worldview that has met its demise. It does not want to cede that business has something to prove. As an extension of that, it pretends everything is more or less hunky dory. For the sentimental, it is difficult to disparage The Economist for its nostalgia, a yearning for an earlier age, when capitalism was still a battle defined by zero-sum games. But like a suffering old dog, it needs to be put of its misery. It is dangerous and unhelpful to hold onto a world that no longer exists. The thinking in The
Economist’s CSR analysis reflects a world that existed when the venerable paper was first launched September 2, 1843.

Business and society, however, no longer exist to each other’s exclusion. In the last 30 years, the private sector, along with shareholders, have burgeoned from being a minority player (albeit an important one) to being the overwhelming force in today’s world. Thank the failed experiment of a German refugee named Marx, insatiable appetites of multinational corporations for new markets, and the general retreat of the public sector in our market society. This reality changes everything. If the private sector owns the world, it is pretty tricky to disentangle the two. Corporations don’t succeed in societies that fail and vice versa, and this is the driving force behind corporate social responsibility.

In the 21st century market society, shareholders are no longer the sole dependents of corporations. Everyone is.