Corporate & Securities Law

The Arid CSR Debate

By Stephen Bainbridge

A couple of weeks ago, The Economist magazine ran a special report on corporate social responsibility.  I finally got around to reading it today and am struck very forcefully by the aridity of the debate.  And I say this as someone who has killed more than his fair share of trees contributing to that debate.

Corporate conduct has negative externalities that the law fails to require firms to fully internalize.  Allowing managers to pursue decision-making norms other than shareholder wealth maximization increases agency costs.  Managers will simply side with the constituency whose interests most closely parallels their own and then use corporate social responsibility as camouflage for decisions that in fact are self-interested. Furthermore, as far as basic corporate philanthropy is concerned, managers mostly subsidize rich folks’ fun, such as operas and NPR. The business judgment rule nevertheless appropriately insulates such decisions from judicial review because concerns for protecting board of director authority outweigh accountability concerns with respect to most operational decisions.  Accordingly, corporate law only subjects “socially responsible” decisions to judicial review only in the context of final period decisions, principally corporate takeovers.

We all know this, right?

We all also know that companies have embraced CSR, especially EU companies.  We also all know that the evidence for a positive link between corporate social responsibility and improved financial performance is weak, at best, and that many studies are seriously flawed because they were conducted by people or organizations with an ax to grind and a dog in the fight.  And even those studies that purport to find a positive relationship have been unable to establish causality.  As The Economists put it, we don’t know “whether profitable companies feel rich enough to splash out on CSR, or CSR brings profits.”

Frankly, I can’t remember the last time I read anything new about CSR (let alone set anything new).

“The words of the Preacher, the son of David, king in Jerusalem. ... The thing that hath been, it is that which shall be; and that which is done is that which shall be done: and there is no new thing under the sun. Is there any thing whereof it may be said, See, this is new? it hath been already of old time, which was before us.”

Full post as published by BusinessAssociationsBlog.com on February 01, 2008 (boomark / email).