CSR and Stockholder Value

By Daniel O'Connor of Integral Ventures, LLC

Gary Becker addressed the perennial question: Do Corporations Have a Social Responsibility Beyond Stockholder Value?

Do corporations have any responsibilities beyond trying to maximize stockholder value, adhering to contracts, implicit as well as explicit, and obeying the laws of the different countries where they operate?  My answer is "no", although maximizing value, meeting contracts, and obeying laws help achieve many of the goals by those claiming corporations should be "socially responsible" by taking care of the environment, considering the effects of their behavior on other stakeholders, and contributing to good causes.  Still, laws and contracts, and individual use of their own resources, rather than corporate behavior, should be the way to implement various social goals.

In many respects, his answer to the question is aligned with Milton Friedman's well-known views on CSR, which are grounded in a positive neo-classical market theory together with a normative preference for individual economic freedom. 

In a previous essay, I presented an overview of my integral reconstruction of Milton Friedman's perspective on CSR, highlighting the previously unexamined parallels between his view of how markets should and do work and the CSR advocates' view of how socially responsible corporations should and do work with their customers, employees, investors, and other stakeholders.  I believe it applies equally well to Gary Becker's perspective.

Without repeating this reconstruction, I will simply state one of my conclusions: If market participants conducted themselves as Becker and Friedman apparently believe they really should (normative theory) and already do (positive theory)--that is, in a manner consistent with the mutual pursuit of transparency, choice, and accountability in every market exchange--then it would not be unreasonable to claim that the only social responsibility of the corporation is to maximize its value to stockholders.  Such a claim would be justifiable because it is premised on a pre-established standard of conduct between the corporation and all its stakeholders--a standard that, not insignificantly, would please all but the most radical of CSR advocates.  However, the burden of proof that market participants actually do conduct themselves up to this standard would fall to those who claim that stockholder value is an adequate measure of corporate social responsibility.  They would have to demonstrate that the CSR agenda is not wrong, but moot, simply because corporations and their stakeholders are already engaged in the mutual pursuit of transparency, choice, and accountability in every market exchange.

Besides, if a corporation is voluntarily engaging in practices that its management or other interested observers label CSR, isn't it properly a matter for that corporation's own stakeholders--including its current and prospective stockholders--to evaluate this conduct according to their own individual value functions?  In fact, isn't that what they already do, with or without the blessings of economists?  It seems entirely inconsistent with both the positive and the normative market theories of Becker, Friedman, and the like to argue that, when it comes to one particular set of business issues that fall under the banner of CSR, we otherwise rational, self-interested, self-organizing market participants have mysteriously lost our way amidst the confusing and enticing rhetoric of social responsibility.  If markets are as efficient as Becker and Friedman have long claimed and if markets ought to be as free and open as they have long argued, then shouldn't we allow market participants--rather than market observers--to determine precisely where to set the evolving standards of corporate social responsibility?  Furthermore, even if markets are not as efficient or as free as Becker and Friedman might like to believe, what market-based justification is there to denounce the entrepreneurial efforts of those market participants whose value functions and market exchanges have self-organized into the CSR agenda?

I would like to believe that this perspective could transform the decades-old pro-market/anti-market debate over CSR into a more constructive dialogue about how we can foster the higher standard of market participation in which all of us, in our various roles as customers, investors, employees, managers, and directors, pursue mutually-agreed-upon and ever-evolving levels of transparency, choice, and accountability in all our market exchanges.  This is the Integral Value Proposition--a market-based, socially-conscious method of creating real value for everyone in and around the corporation.  It is not only the way markets are supposed to work, but the way they really do work when they are at their value-creating best.

© 2005 by Daniel J. O'Connor.  All Rights Reserved.

See Also:

• CSR: Cosmetic Treatment or Systemic Reform?
• CSR: Just Good Business?
• In Defense of CSR?
• CSR's Grim Reaper
• The Dismal Science of Business Ethics
• Stockholders: The New Special Interest Group
• Who Governs the Corporation?

Comments

[ebuddha]

I think you are absolutely right here. Costco would be a case in point. Various analysts have criticized Costco for being "too concerned" about employees and customers, and not concerned enough about shareholders.

But then is up to the shareholders, not to buy the stock, right?

The value delivered in this behaviour doesn't necessarily appear on a 3 month quarterly report - but does show up in quality of the employees, low turnaround, low theft, etc.

In terms of the larger point - assigning a substantive value to social, environmental, personal concerns, and not restricting one's value to the last 3 month quarterly report.

Won't there always be an issue, in the sense that what counts is the PRODUCT or PROCESS that the "customer" buys, and the HOW of this product or process being produced - whether the product was produced in a socially responsible manner or not - is of a secondary nature?

[Daniel O'Connor]

"Won't there always be an issue, in the sense that what counts is the PRODUCT or PROCESS that the "customer" buys, and the HOW of this product or process being produced - whether the product was produced in a socially responsible manner or not - is of a secondary nature?"

I think this is captured in the basic construct of the mutual pursuit of transparency, choice, and accountability. For example, those who care about how a product comes to market will incur the marginal cost of greater transparency, thereby allowing them to make more informed choices for which they are willing to be accountable. Some who gather this information will sell it or give it away so that others will have lower-cost access to the story about how the product came to market. In time, whole new markets will form in which the back-story of production is rendered transparent to customers and investors who fund the companies that want to do business in these markets.

The key point is to shift our frame of reference from that of the presumptuous observer--who imagines that s/he can precisely determine for everybody else the appropriate division between pro-market and anti-market versions of this amorphous "social responsibility"--to that of the engaged participant--who gradually learns how to create ever more value through market exchange free from deception, coercion, unaccountability, and other factors that impair the natural evolution of consciousness.

[Dave Iverson]

* If markets are as efficient as Becker and Friedman have long claimed and if markets ought to be as free and open as they have long argued, then shouldn't we allow market participants--rather than market observers--to determine precisely where to set the evolving standards corporate social responsibility?

Yes. But markets are neither that efficient nor that open. See my two-part expose on "(in)efficient markets, spin, and speculative frenzy" over at Economic Dreams-Economic Nightmares (July 21, 22). http://forestpolicy.typepad.com/economics/

* The key point is to shift our frame of reference from that of the presumptuous observer ... to that of the engaged participant--who gradually learns how to create ever more value through market exchange free from deception, coercion, unaccountability, and other factors that impair the natural evolution of consciousness.

And how is this to happen? I guess that we might argue that the internet (as mass communication) is helping, but there is as much "spin" at work in internet etherwaves as elsewhere.

There is plenty of "spin" on TV, not only in commercials, info-mercials, etc. but also embedded in programs and particularly painfully embedded in the so-called news. And none of us needs to get started on "political spin."

So while I champion your push for better informed, engaged comsumers, managers, shareholders, boards of directors, etc. I suspect that you'd agree with me that we need much better checks and balances in government as well. And at some point in time we all need to find a way to hold the press up to higher standards of behavior too.

You've made good points about feedback loops toward learning/betterment in all arenas, not just the marketplace. Even Frederich Hayek used to rail against corporations weilding undue pressure in restraint of trade. Is there no role for government in the "restraint of trade" arena? I'm among the first to admit that any government is fraught with problems, corruptions and what not. But so is the so-called private sector.

We need to work both channels, public and private. No?

[Daniel O'Connor]

Yes, certainly. I was in my post critiquing the inconsistency I see in efficient/free market advocates arguing against voluntary CSR on the grounds that it is inefficient/unfree... A big contradiction that I haven't seen anyone else highlight. But of course I do not assume markets are optimally efficient or free, but rather far from it, depending upon one's definitions of freedom and efficiency.

In my view the key role for the state is in regulating markets to ensure significant degrees of transparency, choice (freedom from coercion), and accountability, thereby helping market participants create value in ways that support genuine development.

[gary Lammert]

Limited

I am riding on a limited express, one of the crack trains
of the nation.
Hurtling across the prairie into blue haze and dark air
go fifteen all-steel coaches holding a thousand people.
(All the coaches shall be scrap and rust and all the men
and women laughing in the diners and sleepers shall
pass to ashes.)
I ask a man in the smoker where he is going and he
answers: "Omaha." Kindly visit
The Economic Fractalist http://www.economicfractalist.com/

[Daniel O'Connor]

Hi Gary.

What's up with the non-sequitur/commercial plug for your blog?

You gotta pay rent for this kind of ad space ;-)

Anyway, I found your site interesting.

I do wonder at the predictive powers of fractal mathematical theories of the market. They often seem very impressive at "explaining" past performance, while being rather poor at predicting future performance... Elliot Wave theory being a case in point.

Daniel

[wondering]

Maximize value for shareholders is complex. I think it can be argued that focus on short term stock prices has distorted many companies long term potential.

[wondering]

I thought Friedman also wrote that a purchase was like a vote. So I would think choice of products and investments can be a statement of values, the assumption that only some are acceptable is contrary to freedom.

[Daniel O'Connor]

"Maximize value for shareholders is complex. I think it can be argued that focus on short term stock prices has distorted many companies long term potential."

Indeed it is complex... beginning with the assumption so many people make that "maximizing shareholder value" is always identical to "maximizing today's stock price." As you point out, long-term value can be undermined by efforts to maximize today's stock price.

"I thought Friedman also wrote that a purchase was like a vote. So I would think choice of products and investments can be a statement of values, the assumption that only some are acceptable is contrary to freedom."

Yes he did write this... even went so far as to say that the market is a form of "participative democracy." And yes, clearly, even in the absense of Friedman's views on the subject, it is obvious to me that all our actions, including our choices in the marketplace, are governed by and therefore represent our values (though interpretations will differ regarding what values are implied by specific actions).

Daniel

[Kevin Carson]

Good post. I think a lot of current corporate irresponsibility results from government-created externalities. Government intervenes to protect corporations from the consequences of irresponsible behavior.

The regulatory state was actually supported by big business because it superceded older common law tort remedies, with penalties considerably reduced. It's a lot cheaper to pay the least-common-denominator penalty imposed by a regulatory agency than to deal with an angry local jury, in an area experiencing a cancer cluster after their groundwater was polluted. Restoring the law of private nuisance against polluters and other malfeasors is the way to go.

Likewise, cost-pricing of access to natural resources and infrastructure would force companies to internalize costs and use resources responsibly.

[Daniel O'Connor]

Thanks for the comments, Kevin.

History is rife with examples of the collusion between big government and big business to design regulations that ultimately undermine small businesses and households, whether through the externalization of costs or the erosion of the legal means to hold big business and big government accountable for their actions.

Such collusion seems to contradict the principles of both market economics and political democracy, though it is often justified by reference to these very principles.

Daniel