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The writer is a professor at the University of Chicago’s Booth School. This piece draws on work with Luigi Zingales
Private US companies are now dialling back their diversity, equity and inclusion efforts after ramping them up in the past decade. Others have revised their pledges on going green. Were statements by companies acknowledging their social responsibility ever anything more than performative political theatre?
CEO views on corporate objectives have been changing, especially in what is arguably their most important official statement, the annual letter to shareholders. In the 1950s, we find these typically mentioned one or two corporate performance objectives such as improved financial performance, growth, and better customer service.
In the mid 1960s, as the civil rights movement rose in the political and public consciousness, CEOs made more statements about increasing the diversity of their workforce. But these died down in the 1970s as the political environment changed with Richard Nixon’s successful appeal to angry Southern whites and economist Milton Friedman’s exhortation that the only social responsibility of business is to increase profits.
The global financial crisis, where profit-minded CEOs took excessive risks, highlighted the limitations of Friedman’s views. In its aftermath, the number of objectives CEOs espoused in their letters to shareholders rose to an average of seven by 2020. Many of these were social goals ranging from improving DEI and sustainability to increasing philanthropy. A growing number dropped statements that they intended to maximise shareholder value.
Perhaps expressions of a wider purpose were intended to rebuild corporate legitimacy. They were also a response to a fractured politics where the government seemed unable to tackle major challenges like inequality or climate change. However, once again, as political opposition has grown, firms seem to be abandoning their pledges fast. Given their flip flops, what social responsibility can we reasonably expect of corporations? How much credibility should we place on their promises?
We should start by recognising that the primary purpose of a private corporation is to sell a desirable product or service at an attractive price, while obeying the laws of the land. Doing so merits privileges such as limited liability, an indefinite life, and the legal right to co-ordinate intra-firm activity. Any private corporation that fails to achieve its primary purpose loses society’s license, no matter what other purpose it serves. This is what sets a corporation apart from an NGO.
However, profits and share prices are only a partial and sometimes distorted measure of whether a company is working towards its primary purpose. Many actions that further these efforts, some of which fall under the rubric of corporate social responsibility, involve upfront costs but pay off over time. For example, a corporation may perform better if it nurtures talent in traditionally overlooked groups or places. A firm can reduce costs by reducing its energy footprint, also thereby attracting young talented green-minded employees. Appropriately thought through by the board and articulated by management, companies can defensibly take on some social responsibilities. These need not shift with the political wind.
There are social actions that do not directly benefit the corporation’s purpose but society at large. Tempting as it is for the corporation to step voluntarily into the breach, these are probably better left to governments. Take Unilever’s attempt in the early 2010s to make its operations more sustainable. While initially considered farsighted and sensible, these efforts went beyond its operations, supply chain and even customers to changing practices across the world. The company lost sight of its primary purpose of making better consumer products.
Furthermore, corporate governance is simply not structured to guide decisions on which communities get clean drinking water or what emissions mitigation technology industry should adopt. These are political decisions, best made by those who have the mandate of the people.
Of course, this mandate changes, with dizzying consequences for corporations. Where DEI programmes were once helpful in obtaining government contracts, now they can get companies debarred as contractors. Constant policy change is no way to tackle the challenges of our time, but this is what corporations face until nations settle on what works. But many will simply relabel the social policies that are necessary for their primary purpose and continue as before. That is as it should be.
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