Social responsibility won't save corporate America

Washington

WE'VE been here before: one of those portentous moments when corporate America promises to be more socially "responsible". These episodes are, it seems, a permanent feature of modern capitalism.

Just this week, the Business Roundtable, a group representing the leaders of major corporations, issued a "statement on the purpose of a corporation" that was widely hailed as rejecting the notion that "companies must maximise profits for shareholders above all else", as The Washington Post put it.

Instead, companies are supposed to balance the interests of shareholders, workers, customers, suppliers and communities. The actual language is so vague that it is unclear what it actually means. Here is the crux of the Roundtable's statement:

Since 1997, the group has maintained that "corporations exist principally to serve their shareholders. It has become clear that this language on corporate purpose does not accurately describe the ways in which we and our fellow CEOs endeavour every day to create value for all our stakeholders, whose long-term interests are inseparable".

What does this mean in the real world? No one knows. There are no specific targets nor ways of meeting, measuring or enforcing them. There is nothing on over-the-top executive compensation, which is the source of much public outrage.

This is mostly a public relations exercise, designed to preempt more federal regulation. This sort of trade-off is a juvenile way of thinking: Politicians win plaudits from the public when attacking unpopular businesses. Why would they give that up?

Nor will they voluntarily sacrifice efficiency goals, which after all are the sources of higher wages as well as higher profits. Will they keep open factories that are unprofitable or marginally profitable? Seems unlikely.

On the other hand, many policies and practices that are deemed enlightened are already widespread. Companies do not pay higher salaries and offer vacations and other fringe benefits simply because they are being nice. If they did not offer these benefits, they would lose their best workers to firms that do.

Now, of course, there are many exceptions to these generalisations. Many firms are miserable places to work. Some managers are gratuitously cruel or simply inept. But it is unlikely that these managers will alter their behaviour merely because the Roundtable says so.

As noted above, we have already been here. In the first decades after World War II, large US corporations adopted a social and political model very much like the model recommended by the Roundtable. There was much talk of "stakeholders", not shareholders. Companies were supposed to attend to their social responsibilities.

"Capitalism" as a term went out of style because it recalled the harsh norms of big business and was associated with the Great Depression of the 1930s. Business had partially redeemed itself with its prodigious production. Corporate leaders did not want to return to the disrepute of the 1930s. "Mixed economy" became the operative term.

HIGHLY RESPECTABLE

This face of corporate responsibility was highly respectable for a couple of decades and then collapsed in the 1970s and 1980s - a story well told by sociologist Mark Mizruchi of the University of Michigan in his book The Fracturing of the American Corporate Elite.

Businesses succumbed to many factors, including high inflation (a consequence of government policy), competition from foreign firms -- especially Japanese - and poor profits and stockmarket gains. This last factor gave rise to hostile corporate takeovers by investors who thought that they could do better. Layoffs ensued, and even CEOs lost their jobs. Mr Mizruchi reports this astonishing figure: In the 1980s, almost a third of Fortune 500 firms vanished through bankruptcy, mergers and sales.

The corporate responsibility fad of the 1950s and 1960s was premised on the belief that American technological and managerial superiority was so pronounced that companies could achieve both their traditional financial goals as well as the less traditional agenda of providing higher living standards and employment security.

What we know with hindsight is that this confidence was a conceit of a moment in time. America's economic competitors were preoccupied with rebuilding from the devastation of World War II, and the US domestic economy was boosted by the pent-up demand for cars, homes, appliances and televisions. All these factors gave Americans a false sense of power.

These lessons of history have been either forgotten or ignored. But they have not gone away. Rather than heap endless new responsibilities on companies, we would be better off having them tend to their traditional tasks - including maximising profits - while assigning to the broad public sector matters of large social responsibility. WP