Corporate Social Responsibility: rethinking the role of corporations in a globalizing world
Madingley Hall, Cambridge, 3-11 October 2002

Introductory Paper
by Sir Geoffrey Owen

Introduction
Over the past twenty years managers of publicly quoted companies, especially large ones, have been under pressure on two fronts. On one side they are urged by increasingly active and interventionist investors to devote themselves single-mindedly to maximising shareholder value; if they do not, they are liable to be replaced by managers who are more attentive to shareholders' needs. This view is propagated most strongly by American investors, and is based on the belief that the American version of capitalism, with its highly developed capital markets and frequent recourse to hostile take-overs, is better than any other model at generating economic growth. The strong performance of the US economy in the second half of the 1990s, when productivity rose faster than in other countries, lent support to these claims.

On the other side managers are facing calls from a variety of external groups, including non-governmental organisations (NGOs) such as Oxfam and Greenpeace, to conduct their affairs in a more socially responsible way. While there is no single, agreed definition of corporate social responsibility (CSR), it is generally taken to involve a concern for the environment, for human rights, and for the health of the societies in which companies operate.

To what extent are these two pressures in conflict? So far there is no clear evidence that companies which have committed themselves most wholeheartedly to corporate social responsibility have been penalised by investors for doing so. On the other hand, some CSR activists believe that companies should give social and environmental considerations at least as much weight in their decision-making as shareholder value. This seems to imply some diminution in the ability of shareholders to ensure that the companies in which they hold shares are run in their best interests.

The debate over how, and in whose interests, companies should be managed has been sharpened by recent events in the US - the slowdown in the economy, the collapse of the stock market boom, and the subsequent revelations about fraudulent practices in high-flying companies such as Enron and WorldCom. These events have cast doubt on the alleged superiority of the American economic model. They have also raised questions over both the morality and the practical effectiveness of the various devices which American companies have used, notably stock options, to encourage their managers to focus on shareholder value.

While the response of the Bush Administration has been to look for ways of reforming the shareholder-based system so that it works better, some commentators believe that the shortcomings in US corporate governance exposed by recent scandals reinforce the case for broadening the definition of directors' responsibilities to encompass, not merely shareholders, but other stakeholders and society at large.

The purpose of this paper is discuss the background to the debate. The next section describes recent changes in the behaviour of investors and the new emphasis on shareholder value. This is followed by an account of the origins and evolution of the campaign for corporate social responsibility. The fourth section discusses the response by companies to the pressure from CSR activists. The final section reviews some unresolved issues.

Shareholder value
Since the 1970s there have been important changes, most marked in the US and the UK but observable also in Continental Europe and in Japan, in the relationship between managers of public companies and their shareholders. Some commentators speak of a transition from managerial capitalism, in which professional managers enjoy a high degree of discretion in the way they use their company's resources, to investor capitalism, in which the direct and indirect influence of shareholders imposes severe constraints on managers' freedom of action.⁽¹⁾

These developments need to be placed in a historical context. In the second half of the nineteenth century, when companies first began to "go public" and allow their shares to be traded on a stock exchange, the founding entrepreneurs and their descendants generally retained a large stake in the business and took an active part in managing it. But as companies got bigger, often through mergers and acquisitions, the influence of the founding families declined. Family managers were replaced by professional executives, and shareholdings were dispersed among a large number of outside investors who were not directly involved in the management.

This process took place earlier and more extensively in the US than in other countries. The size of the US domestic market was conducive to the growth of large, professionally managed companies such as United States Steel Corporation and General Electric, and by the time of the first world war the shares in these companies were being actively traded on stock markets. The UK followed a similar path in the inter-war years, although there were few British companies as big as the American giants. In Germany, by contrast, although some very large companies were formed in Germany before and after the first world war, such as Siemens and AEG, family control remained more extensive than in the US or the UK.

In the US the continuing growth of large companies in the 1920s and 1930s, and the apparent passivity of most shareholders, raised concerns about the power and accountability of senior executives.⁽²⁾ Some observers drew the conclusion that the concept of shareholder sovereignty, on which company law was based, was no longer appropriate, and that the duties of directors should be framed more broadly to accommodate, not merely the interests of shareholders, but the public interest. But how was the public interest to be defined? The obvious danger was that managers would be left free to make their own judgements of what the public interest was, and the problem of accountability would remain.

While this debate did not lead to any changes in company law, it focused attention on what came to be called the principal-agent problem - how to ensure that the agents, the managers of publicly quoted companies, always acted in the best interests of their principals, the shareholders. This issue became a lively topic of debate in academic circles after the second world war, but at that time - the 1950s and 1960s - there was no sense of crisis, and no pressing need for reform. The US economy was performing well, and most companies could keep their shareholders happy with regular dividend payments and a steadily appreciating share price. The accountability issue was still there, but it did not loom large in the minds of either managers or shareholders.

This comfortable state of affairs came to an end in the 1970s. A combination of events, including the slowdown in the world economy following the oil crisis of 1973-74 and the increase in competition from Japan and other Asian countries, exposed weaknesses in the management of American companies, especially in those sectors, such as automobiles, which were most exposed to international competition. This coincided with change in the pattern of share ownership and in the role of the stock market.

Thanks to the growth of pension funds, mutual funds and other collective savings vehicles, an increasing proportion of the shares in American corporations had shifted from individual investors to large institutions which, because of the size of their holdings in particular firms, had the power and the incentive to influence management decisions. At the same time several Wall Street firms saw an opportunity in the existence of poorly managed companies. By engineering a change of management, through the mechanism of the hostile takeover, they could achieve an improvement in performance, and secure a substantial financial gain both for shareholders in the acquired company and for themselves. The 1980s saw a sharp increase in takeover activity, much of it involving the break-up of the large conglomerates that had been built up in the 1950s and 1960s.

Some commentators deplored what they saw as the anti-social behaviour of the predators, breaking up companies and communities in the pursuit of financial gain. There was also concern over "short-termism" - the extent to which managers, anxious to ward off a hostile takeover, felt obliged to sacrifice the long-term health of their company in order to maintain short-term profitability. Nevertheless, the combination of investor activism and hostile takeovers shifted the priorities of company managers in the direction of maximising shareholder value. Any doubts about whether this shift might have damaging economic consequences were largely removed by the spurt in US economic growth during the 1990s. The dynamism of the American economy was widely attributed to the size and depth of its capital markets, and the speed with which resources could be switched from low-growth to high-growth sectors of the economy.

The new focus on shareholder value spread to other countries during this period. The British financial system went through much the same transition as its American counterpart during the 1980s, with more shareholder activism and more takeovers. More surprising was the change that took place in Germany. For most of the post-war period the stock market in Germany had played a smaller role than in the US or the UK. Family ownership was still significant, and there was no tradition of hostile takeovers. In addition, directors of large German companies were obliged by law to concern themselves, not just with shareholders, but with other stakeholders, principally employees; under the German system of co-determination employee representatives sit on the supervisory boards of large German companies. By the 1980s, however, this system was coming under growing strain. This was partly due to the appearance of Anglo-American institutional investors on the share registers of many leading German companies. These investors pressed for better financial performance, and the companies were obliged to respond, not least because they needed access to US financial markets; several German firms have had their shares listed on the New York Stock Exchange.

How far, and how quickly, the German system will move in an Anglo-American direction remains uncertain. Some observers saw the take-over of Mannesman by Vodafone in 2000 as a historic turning point, signalling the end of the taboo on hostile takeovers. Since then, however, takeover activity in Germany has been at a low level, and there is still strong resistance, on the part of politicians, trade union leaders and some managers, to the wholesale importation of American practices. This resistance has been stiffened by the recent corporate scandals in the US.

Thus the American model is no longer as triumphant as it was five years ago. Does this create an opportunity for those who wish to transform investor capitalism into what they call stakeholder capitalism? Is a greater commitment to corporate social responsibility a necessary condition for rebuilding the reputation of profit-seeking private enterprise? It is certainly true that managers of large companies, especially those with a high international profile, are under pressure from activists who want them to behave differently, and that those activists enjoy a good deal of support from the public at large, and from governments. The nature of the challenge is described in the next section.

The rise of the CSR movement
The role of companies in society has been a controversial topic for almost as long as the corporate form has existed. During the post-war era of managerial capitalism, discussed in the last section, some heads of large American corporations saw their role as balancing the interests of the various "constituencies" which they served - shareholders, employees and the community at large. This provoked a furious response from Milton Friedman, the well-known economist, who denounced the whole concept of corporate social responsibility. "Few trends", he wrote in 1962, "could so thoroughly undermine the very foundations of our free society than the acceptance by corporate officials of a social responsibility other than to make as much money for their stockholders as possible. This is a fundamentally subversive doctrine. If businessmen do have a social responsibility other than making maximum profits for stockholders, how are they to know what it is? Can self-selected private individuals decide what the social interest is?"⁽³⁾

Despite these strictures, the notion that companies have responsibilities which go wider than the interests of shareholders did not go away. A particular issue was the extent to which companies should be permitted to support philanthropic causes not directly related to their primary purpose of making money for their shareholders. On a strict interpretation of the Friedman doctrine, companies should not make such donations; the shareholders themselves should make decisions on which charities they want to support. However, the general principle that emerged from court judgements in the US during the 1950s and 1960s was that corporations did have authority to make "contributions of reasonable amounts to selected charitable, scientific, religious or educational institutions, if they appear reasonably designed to assure a present or foreseeable future benefit to the corporation".⁽⁴⁾ Deciding what was "reasonable" was left to the discretion of the managers.

This approach was subsequently broadened in a way which loosened the link between the contribution made by a company and its business objectives. While there is room for argument about the amounts of money and management time that may be involved, there has been little opposition from shareholders to such organisations as the Per Cent Club, which encourages firms to devote a proportion of their profits to charity, or Business in the Community, which promotes the active involvement of companies in tackling social problems - such as youth unemployment, crime and urban dereliction - in the areas where they operate.

Social activism of this sort has generally aroused little controversy. In the last few years, however, a different and more far-reaching view of corporate social responsibility has come to the fore. This has arisen from the confluence of two factors. The first is the phenomenon of globalisation, and, in particular, the growing visibility of large, multinational companies whose activities are thought by some observers to have a profound and sometimes damaging impact on the quality of life in the countries where they operate. Their potentially harmful practices include exploitation of labour, a lack of concern for the environment, and an undue influence on local politics.

The second factor, closely related to the first, is the rise of campaigning groups, known as Non-governmental Organisations or NGOs, which are dedicated to the promotion of particular objectives, such as environmental protection or human rights. These bodies, increasingly well organised and with a growing international membership, have become active in trying to persuade or compel companies to cooperate in advancing their cause.

Some of the NGOs have existed for a long time; Oxfam, for example, was founded in 1962, Amnesty International in 1961, Friends of the Earth, one of the leading environmental groups, in 1969. At first these groups had little direct involvement with companies; Oxfam, for example, was mainly concerned with organising relief for countries affected by famines and other natural disasters. More recently, however, they have come to see companies, particularly multinational companies, as part of the problem they are trying to solve.

This is particularly true of environmental groups, which have strongly criticised the environmental activities of oil and mining companies. Greenpeace, for example, has been at the centre of the campaign to prevent the use of genetically modified foods in Britain, launching a highly effective campaign against Monsanto, one of the principal companies engaged in this industry. Oxfam, too, while eschewing the violent methods used by Greenpeace, has attacked companies which, in its view, are not doing enough to combat poverty and ill-heath in developing countries; a particular target has been the pharmaceutical industry, accused of keeping drug prices unduly high and of doing insufficient research on diseases which are most prevalent in developing countries.

NGOs concerned with corporate social responsibility have won considerable support for their cause from governments and other official bodies. In Europe, for example, the European Commission published in 2001 a Green Paper entitled "Promoting a European framework for Corporate Social Responsibility". The aim of the paper was to launch a wide debate on how the EU could promote CSR - "how to make the most of existing experiences, to encourage the development of innovative practices, to bring greater transparency and to increase the reliability of evaluation and validation". Two years earlier the UN Secretary General, Kofi Annan, launched the Global Compact, the purpose of which was to encourage companies to embrace nine principles of corporate social responsibility, relating to the observance of human rights, the establishment and upholding of labour standards, and the protection of the environment.

So far these and other initiatives rely for their effectiveness on voluntary compliance by businesses. However, some proponents of CSR believe that this does not go far enough. The hardest line has been taken by those NGOs - so far still a minority, but a highly vocal one - which see global capitalism as the source of many of the world's ills. This anti-capitalist strain is reflected in a number of books, such as Naomi Klein's No Logo, which denounce the greed and irresponsibility of multinational corporations - and the extent to which international bodies such as the World Trade Organisation and the International Monetary Fund are beholden to the interests of private business. However, even more moderate commentators such as Will Hutton, an influential British writer, doubt whether self-regulation will produce the changes in behaviour that are necessary. In a recent paper Hutton has urged the British government "to put corporate Britain on notice". The commitment to corporate social responsibility, Hutton argues, must be embodied universally by the business community within five years; if it is not, the government should legislate for the necessary changes in a new Companies Act.

Thus companies are facing, not only the prospect of increasingly hostile scrutiny of their own internal affairs, but also the possibility of legislation which will impose new and potentially onerous obligations upon them. How are they responding to these pressures?

The response of companies to CSR
There is a spectrum of possible responses to the CSR movement, ranging from a firm refusal to cooperate at one extreme to enthusiastic engagement at the other. So far most companies have adopted policies that are nearer to the latter than the former. They have done so partly for defensive reasons. Cases such as that of Monsanto and Nike (attacked for alleged exploitation of child labour in developing countries) have shown that companies can suffer serious damage as a result of an NGO campaign. There are clear dangers for a company in getting into a fight with an NGO, especially if - as is the case with several environmental groups - that NGO enjoys considerable support among employees and customers. Another factor favouring accommodation with the CSR movement is the growth of "ethical investing", the creation by banks and other financial services firms of investment funds which are limited to companies that meet certain minimal level of ethical behaviour, or commitment to CSR. Companies which find themselves excluded from these funds are under some pressure to alter whatever it is about their behaviour which the promoters of the funds find objectionable.

There are, however, some companies, of which Shell is an outstanding example, which have gone a long way beyond defensiveness. In the mid-1990s Shell came under fierce attack from NGOs over two issues - the plan to sink the Brent Spar oil platform in the Atlantic Ocean (a plan that subsequently had to be abandoned in the face of protests from environmentalists), and the execution of Ken Saro-Wiwa in Nigeria; the latter episode led to allegations that Shell had used its influence to prop up an authoritarian regime. In these two cases, as a senior Shell manager wrote later, "the group was taken unawares to some extent by the way conflicting values and perceptions were converging. It was a timely lesson in how the underlying expectations of the societies around us had changed".⁽⁵⁾

Since then Shell has taken steps to integrate social, environmental and economic considerations into its decision-making at all levels. As one of the company's documents puts it, "we have moved on from what you might call corporate philanthropy, which often meant handing over money and sitting back, to the more structured approach of social investment". This involves, among other things, an effort to measure Shell's contribution to society in ways that go far beyond financial reporting. A company statement speaks of developing "management systems, indicators, metrics and targets across a spectrum of economic, social and environmental dimensions of business performance".

While few other companies have gone as far as Shell, there is a growing support for the concept of "triple bottom line reporting" - a regular annual report which gives equal weight to the company's financial performance, its environmental record and its contributions to society. An army of consultants has grown up to advise companies on how to present their reports. There is, addition, a powerful business organisation, the World Council for Sustainable Development, which is pushing companies in the same direction.

To stand aside from this consensus takes some courage. An interesting example is ExxonMobil, an oil company, which, while not specifically rejecting CSR, has taken a harder line than Shell and BP on environmental issues. It has argued that many of the demands made by environmental groups are based on unsound evidence and misleading arguments. In particular, ExxonMobil has consistently opposed the Kyoto Protocol, and has spent only minor amounts on alternative energy sources. The result has been an attempted boycott of ExxonMobil products orchestrated by several NGOs.

Whether others will follow ExxonMobil's lead remains be seen, but its stance - which so far does not appear to had adverse economic consequences for the company - shows that accommodation to the CSR activists is not the only viable policy. It also draws attention to the fact, or at least the possibility, that what the NGOs say about the environment and other issues is not always correct. Indeed it is arguable, as some opponents of CSR contend, than an uncritical acceptance of the analysis and prescriptions put forward by the CSR activists could be economically damaging. This aspect of the debate is discussed in the concluding section.

Some unresolved questions about CSR
That companies should be encouraged to behave in a socially responsible way seems an unremarkable proposition. Their activities should be guided, not only by what is legally permissible, but by what is morally right. But there is a distinction between requiring companies to behave ethically, or in a socially responsible way, and requiring them to take on, whether voluntarily or under compulsion, obligations that do not relate directly to their primary purpose of providing goods and services which people want to buy, and maximising the return on the money entrusted to them by their shareholders.

Underlying much of the pressure for CSR is a misunderstanding of what companies are for, and how their contribution to society can best be measured. This is the notion that making profits for shareholders is immoral, or at best amoral, and that a company can only fulfil its social responsibilities by the other things that it does, over and beyond its profit-making role, to help society. Yet there is an ethical dimension to business activity in itself, and to profit as an indication that the activity is being carried out well. Bill Gates's contribution to society is best measured, not by how much money he gives away through the Gates Foundation, but by the ability of his company, Microsoft, to develop innovative software.

Equally, it is wrong to think of companies as having a "licence to operate" which must be paid for through contributions to society unrelated to profit-making. As Norman Barry has pointed out, the device of incorporation can be explained entirely in terms of individual motivations and agreements. "Permanent form, collective responsibility for civil actions and, most important, limited liability, can all be explained as the consequences of individuals pooling their resources and forming a common organisational structure under the common law. This is precisely what happened in the UK and the US; the role of the public authority was simply to register what were originally private actions. In no way is the corporate form a gift from the state which has to be earned via the fulfilment of social and moral duties".⁽⁶⁾

Similarly David Henderson criticises the CSR activists for suggesting that "society" has given business a set of opportunities or privileges which impose "costs" on the community and for which business must now be expected to pay. "The obvious point is not made that corporations and company law, including the so-called privilege of limited liability, can best be viewed as a set of highly convenient arrangements from which everyone stands to benefit, the more so now that shareholding by ordinary people, whether direct or indirect through pension funds, has become so widespread".⁽⁷⁾

Barry, Henderson and other critics have highlighted the anti-market stance of some CSR activists. But the CSR movement is not simply the creation of a group of anti-capitalist agitators. It reflects, at least in part, a genuine change in the environment in which business operates. There is a widespread demand for greater openness on the part of companies, and an entirely legitimate interest in the wider social impact of what they do. Managers of large companies increasingly have to operate on the assumption that virtually everything they do, however secret, will one day be exposed to public view; the impact of such revelations on their reputation, in the eyes of employees as well as customers, has to be taken very seriously.

Thus there is a business as well as a moral case for companies to behave in a socially responsible way. The big question is how far down this road they should go, and, in particular, how far they should go along with definitions of corporate social responsibility which could damage their ability to make profits and, in the long run, undermine the market economy.

It is arguable that one of the responsibilities of business leaders to defend the market economy from ill-informed attacks. This is especially important at a time when the tide of hostility to global capitalism is running strongly. For example, it is taken for granted by some NGOs both that global inequality is increasing and that part of the blame lies with multinational companies. Both propositions are highly questionable, and businesses should be prepared to say so. On other issues, such as environmental damage, businesses should be willing to participate actively in the public debate, being open about what they do but contesting criticisms which they believe to be false or exaggerated.

None of this is meant to imply that the issue of corporate social responsibility, or more generally of corporate governance, lends itself to simple, black-and-white answers. Politicians have to make difficult judgement as to the appropriate balance between self-regulation and legal compulsion. Business leaders have to consider how best to protect the reputation of their companies and what sort of dialogue to conduct with NGOs and other bodies which may have the power to inflict damage on their business. Should they, for example, voluntarily commit themselves to new forms of reporting, on the social and environmental impact of what they do, however costly such additional burdens might be? Are the costs of these reporting arrangements outweighed by the benefits, in protecting the company against reputational risk?

A more fundamental question is whether, as some commentators suggest, we are witnessing, and should welcome, a genuine change in the relationship between business and society. According to this argument, companies, whether they like it or not, have come to acquire social responsibilities that go beyond profit-making; those responsibilities need to be defined more precisely, probably by governments, and the health of society depends on companies living up to them. The opposing view is that the health of society is likely to be damaged if companies are distracted from their primary role of supplying goods and services which people want to buy, and making money for their shareholders. Managers have enough trouble meeting those challenges without diverting them to saving the world.

Notes

¹ Marina Whitman, New world, new rules: the changing role of the American corporation, (Harvard, 1999).

² Adolph A. Berle and Gardiner C.Means, The modern corporation and private property (London, 1932).

³ Milton Friedman, Capitalism and freedom (Chicago, 1962)

⁴ American Law Institute, Principles of corporate governance (1993) Section 2.01, p 71

⁵ Philip Watts, "The international petroleum industry: economic actor or social activist?" in John Mitchell, ed., Companies in a world of conflict (London, 1998).

⁶ Brian Griffiths, Robert A.Sirico, Norman Barry and Frank Field, Capitalism, morality and markets (London, 2001).

⁷ David Henderson, Misguided virtue, false notions of corporate social responsibility (London, 2001).