Making meaning of CSR

By William Watson

When BP says it will pay the whole cost of the Gulf of Mexico clean-up, even when its maximum legal liability may be much less, is it making a virtue of necessity ? After all, the U.S. government is promising to “stand on its throat ” to make it pay. Might as well volunteer for what is going to happen anyway.

Or is it trying to salvage whatever glimmer of good publicity it can from the oily sludge? Or, finally, is it exhibiting “corporate social responsibility” and being a good “corporate citizen.” (Many people who object to the idea that corporations can be legal persons nevertheless want them to be good citizens.)

A new paper by the French economists Jean Tirole of the University of Toulouse and Roland Benabou of Princeton puts corporate social responsibility (CSR) under the lens of mainstream economics. Mainly, we don’t understand corporation social responsibility. Corporations should seek profits, we think. To do so they must produce desired goods and services at low prices. If they do, society is well served.

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The French economists suggest CSR could be three things. One, maybe there really is a free lunch and the traditional incentives managers supposedly face – “Thou must always maximize this quarter’s stock price!” – are perverse, diverting them from longer-term investments that would both raise profits and improve the lot of mankind, seals, little babies and the stratosphere, the sorts of profit opportunities Al Gore thinks abound in the world.

Once firms do get CSR, however, their eyes supposedly are opened to all these profit opportunities. Needless to say, economists are skeptical that not just lunch but almost any dining occasion you can think of is free.

Two, though individuals, not corporations, should engage in charity, maybe altruistic shareholders rationally take control of corporations to do charity they’d find difficult without corporate help. If you want to raise the welfare of poor coffee growers in Peru, you could try sending them cheques but, well, Starbucks probably knows where lots of them live so it might just be easier to take over or maybe just shame Starbucks so that it pays higher wages.

Or, three, maybe managers have simply seized corporations and are indulging their own charitable preferences — which may actually be motivated not by inherent altruism but by a megalomaniacal desire to be seen to be doing good:

Bill Gates presumably enjoys his current public image as malaria-eradicator more than his 1980s image as 20th-century robber baron. Charity may take place at the expense of profits and economic efficiency but, so what? Shareholders can’t do anything about it.

Maybe it doesn’t really matter which CSR model is driving the new CSReality. But economists always prefer to try to know what’s really happening. Anecdotes abound but after a review of the literature the French economists conclude it’s very hard to make comprehensive data on profits or stock prices say what’s truly motivating most firms.

They do make a couple of interesting points along the way, however. The first – and it’s one of the best things I’ve yet heard about CSR – is that it may obviate the need for corrective or Pigouvian taxes. (See the Post’s No Pigou blogsite.) If you get all firms obsessing about their carbon use and competing to show who has reduced their footprint most, you don’t need as big-or maybe any -carbon tax.

Unfortunately, CSR may be most effective before it’s a big deal. Lots of literature in the new school of behavioural economics suggests, not really surprisingly, that people give more when their gift is publicized.

Thus if the lower limit for having your name entered in the registry of givers is $250, there’s typically a non-random bunching of gifts at $250 or just a little higher. (I’m proud to say I recently donated $249 – an otherwise inexplicable amount — to one such charity. We Canadians aren’t supposed to be publicity-seekers. Oh, but now I’ve gone and ruined the anonymity by mentioning it!)

If CSR is just entering an industry, early movers get a big advantage by being able to crow about all the do-gooding they’re doing. When there aren’t many of them, it’s easy for each to get noticed.

But if more and more firms are practising CSR, the impact is reduced: In all the self-advertisement, no one notices. (It now takes several minutes for all the now very forgettable sponsors of the PBS News Hour to be introduced.) In fact, it only becomes effective again when there are just a few hold-outs left. It’s much easier to stigmatize them.

Another key problem the French economists focus on is rating agencies. Do we take firms’ word for how CSR they are or do we seek outside verification? That’s a no-brainer. The people who value CSR most are typically paranoid about corporations and fully expect them to lie. But if we do seek outside verification by using the equivalent of rating agencies, how do we avoid all the problems with such agencies that have become apparent in the financial markets in the past three years?

And should the agencies merely codify what different firms have done in the way of CSR or should they also comment on its likely effectiveness – e.g., solar panels are a very expensive way of addressing most energy concerns – or even on the intrinsic worthiness, or not, of the objective?

As a kind of rating agency of such things ourselves , we have no doubt the market will work out this and similar questions.

(Source: National Post )