An article in The Wall Street Journal challenges the conventional thinking about companies and their communities.
Having just completed a major Best Practices study of the Corporate Social Responsibility practices of some of the nation's top brands, I was very interested in an article I read today.
"The idea that companies have a responsibility to act in the public interest and will profit from doing so is fundamentally flawed"
That is the provocative premise of an excellent article today in The Wall Street Journal by Aneel Karnani.
"Very simply, in cases where private profits and public interests are aligned, the idea of corporate social responsibility is irrelevant: Companies that simply do everything they can to boost profits will end up increasing social welfare. In circumstances in which profits and social welfare are in direct opposition, an appeal to corporate social responsibility will almost always be ineffective, because executives are unlikely to act voluntarily in the public interest and against shareholder interests.
"Irrelevant or ineffective, take your pick. But it's worse than that. The danger is that a focus on social responsibility will delay or discourage more-effective measures to enhance social welfare in those cases where profits and the public good are at odds. As society looks to companies to address these problems, the real solutions may be ignored."
Another comment from the article:
"Managers who sacrifice profit for the common good also are in effect imposing a tax on their shareholders and arbitrarily deciding how that money should be spent. In that sense they are usurping the role of elected government officials, if only on a small scale."
"The idea that companies have a responsibility to act in the public interest and will profit from doing so is fundamentally flawed"
That is the provocative premise of an excellent article today in The Wall Street Journal by Aneel Karnani.
"Very simply, in cases where private profits and public interests are aligned, the idea of corporate social responsibility is irrelevant: Companies that simply do everything they can to boost profits will end up increasing social welfare. In circumstances in which profits and social welfare are in direct opposition, an appeal to corporate social responsibility will almost always be ineffective, because executives are unlikely to act voluntarily in the public interest and against shareholder interests.
"Irrelevant or ineffective, take your pick. But it's worse than that. The danger is that a focus on social responsibility will delay or discourage more-effective measures to enhance social welfare in those cases where profits and the public good are at odds. As society looks to companies to address these problems, the real solutions may be ignored."
Another comment from the article:
"Managers who sacrifice profit for the common good also are in effect imposing a tax on their shareholders and arbitrarily deciding how that money should be spent. In that sense they are usurping the role of elected government officials, if only on a small scale."
Many have argued that companies can do the most good for society by doing what their mission mandates -- generating profits for shareholders. Creating jobs, paying payrolls, creating wealth -- all of this reduces the strains on society more than philanthropic endeavors undertaken by for-profit ventures. And the profits distributed to shareholders often end up in the nonprofit sector through charitable donations, but the decision-making is left up to thousands of shareholders rather than a company committee -- providing diversity in where dollars are donated and tapping into the "wisdom of the many."
Many, perhaps most, nonprofits generate some of their revenue through their activities. Donated dollars, however, come from one place: business profits. After all, every dollar donated to the nonprofit sector was originally generated by for-profit business activity.
The article is thought-provoking and affirms what I learned from interviewing some of the top companies in the country on their Corporate Social Responsibility practices. Corporate philanthropy only works when a company's for-profit mission and its philanthropic mission are so closely aligned that the company derives a benefit from its giving. Karnani argues that in this instance, the philanthropy is irrelevant. Here I disagree, because the company gains value from a public relations standpoint.
It is a complex but interesting argument that affects all of us. I urge readers to check out the article by clicking here.
Have a great day!
Steve Cebalt, Author
