Mises Wire

“Corporate Social Responsibility” Only Strengthens Corporate Power over the Public

“Business Roundtable Redefines the Purpose of a Corporation to Promote ‘An Economy That Serves All Americans’ ” was the headline of a recent statement put out by this “association of chief executive officers of America’s leading companies.” The statement went on to say:

Since 1978, Business Roundtable has periodically issued Principles of Corporate Governance. Each version of the document issued since 1997 has endorsed principles of shareholder primacy – that corporations exist principally to serve shareholders. With today’s announcement, the new Statement supersedes previous statements and outlines a modern standard for corporate responsibility.

Putting aside the fact that neither in logic, nor in law, nor in morals does an individual CEO, let alone the lobbying arm for CEOs, have the ability to “redefine the purpose of a corporation,” it does prompt the question of what the purpose and responsibilities of a corporation actually are, and who decides this.

From Monopolies to Free Corporations

Historically, corporations were creatures of state-granted monopoly privileges. For example, in 1600 Elizabeth I chartered the British East India Company with a monopoly in trade to the East Indies, and at the same time specified in great detail what the Company could and could not do. Other charters, issued over the years, granted monopolies in dealing in various commodities, settlement rights, etc.

Early settlements in colonial America were products of this corporate monopoly system, for example the Massachusetts Bay Company. But as American society democratized and monarchial power waned, the nature of the corporation changed, although the form remained similar. By the early 1800s, a corporation was no longer a monopoly. And although it still required a charter from the government, this was typically a formality.

In the United States, corporate charters are today issued at the state level, via a process that in many cases amounts to a mere rubber stamping. In some states you can even file to create a corporation online.

In this relatively liberal regime, the explicit purpose of the corporation is determined by its owners. They are the ones who voluntarily come together to engage in some enterprise. They are the ones who put their money behind some new risky venture. And they are the ones who draft the articles of incorporation and corporate bylaws. So long as certain formalities are met, the issuance of a state charter is automatic.

However, the temptation to revert to the older monopoly privilege nature of the corporation is ever present, and this remind sus why we should not conflate industrialists with free-market capitalists. Being pro-business is not the same as being pro-free markets. Competing in a free market is one of the hardest things a businessman can do. Cozying up to the state — i.e., rent-seeking — is often much easier. Many a businessman would prefer a state-granted monopoly, and many a politician desires the power to grant and withhold such privileges.

A Return to State Monopolies under Fascism

A case study in this reversion can be seen in Germany under National Socialism.

In a 1933 memorandum, “Nazi-Socialism,”Reprinted-in-the-Appendix-to-The-Road-to-Serfdom-Text-and-Documents-The-Definitive-Edition- Friedrich Hayek observed that the rising new German order was far from reactionary, and in spite of their persecution of the communists, National Socialism” was “a genuine socialist movement.”

Hayek went on to discuss the curious mutual embrace of German industry and the new regime (with my emphasis):

One of the main reasons why the socialist character of National Socialism has been quite generally unrecognized, is, no doubt, its alliance with the nationalist groups which represent the great industries and the great landowners. But this merely proves that these groups too—as they have since learnt to their bitter disappointment—have, at least partly, been mistaken as to the nature of the movement. But only partly because—and this is the most characteristic feature of modern Germany— many capitalists are themselves strongly influenced by socialistic ideas, and have not sufficient belief in capitalism to defend it with a clear conscience.

In other words, the relationship between the Nazi state and industry was not evidence that the Nazis had capitalist leanings, but that the German businessmen had socialist leanings.

However, with the rapid transition to a war-time command economy, the German industrialists went from supporters of the state, to instruments of the state:

The new pattern of power was implicit in the sociolegal framework of the economy. Eliminated were the four essential freedoms of private capitalism, namely, the freedoms of trade, contract, association, and markets. Freedom of trade was replaced by an economic obligation (Wirtschaftspflicht) to the party-state...

Rights to economic activities were regarded as a privilege conferred upon individuals by the government. The rule was: No job or shop without governmental approval. Everyone had to register; laborers needed their labor-book, firms their charters. For no one could enter, terminate, or maintain a business without satisfying an increasing set of personal and material prerequisites.1

Note the mention there of the corporate charter, now pressed to the service of the state.

But why would the businessman go along with such impositions? What is the advantage for them? In The Vampire Economy: Doing Business Under Fascism, Günther Reimann quotes a German newspaper explaining some of the ramifications of the 1937 German Corporations Law:

The chairman of a corporation is the organ of business leadership. . . . Up to now the chairman was subject to far-reaching control by the Supervisory Board [elected by the stockholders]. This has been changed. The Supervisory Board now only has the right to appoint and recall the chairman. Under the new law the management of the corporation becomes the sole responsibility of the managing director. He is now therefore independent of the chairman of the Supervisory Board, and is not subject to the latter’s instructions. (Reimann, p. 188)

In other words, the managing director (akin to the CEO) of the corporation gains power by being freed from responsibility to the board and to shareholders. In exchange he is increasingly beholden to the state and to political forces. He replaces market entrepreneurship with political entrepreneurship.

Corporate Social Responsibility

The Corporate Social Responsibility (CSR) movement has, since the 1970s, pushed a narrative that corporations ought to serve more than their shareholders (their owners). They ought to (and even be required to) serve a wider range of “stakeholders,” including employees, customers, the community, etc.

Proponents of CSR typically want to use the state’s power to grant or deny corporate charters—that old privilege-granting authority of 17th century British monarchs—to force corporations to dilute their owners’ property rights. The idea is to require a federal (not just a state-level) charter, and to make its issuance subject to further political demands.

For example, in 1996 then U.S. Senator Jeff Bingaman (D-NM) led Democrats proposing legislation that would have enabled a federal corporate charter for a new kind of corporation, an “R-Corporation.” (R for “Responsible.”) Requirements for such corporation would include limits on CEO pay, minimum spending levels for retirement and education benefits for employees, offering of a standard health insurance plan, profit sharing with a minimum participation rate, spending at least 1/2 of its R&D in the United States, etc.2 Corporations so-chartered would be given preferential treatment by the government, and would be rewarded with special tax breaks and regulatory relief.

Fortunately, Bingaman’s R-Corporation proposal went nowhere.

However, 23 years later we see his ideological heir in Elizabeth Warren and her proposed “Accountable Capitalism Act,” which takes Bingaman’s voluntary federal charter, and makes it mandatory for corporations with more than $1 billion in annual revenue. Among a long list of requirements, Warren would require that 40% of board of director seats to be chosen by the workers, not the board of directors.

It is in this context that we read the Business Roundtable’s rhetorical capitulation to a longstanding demand of the collectivist left.

A Fundamental Misunderstanding

Note that the word “responsibility” in CSR bears little resemblance to how that term has been understood by moral philosophers over the past 2,500 years. Only an individual can be responsible, and only so with respect to his own property. Collective responsibility is a barbarous concept, something associated with the greatest depravities in history. And if I one day set out (without your permission) to “be socially responsible” with your bank account, I’d justly be charged with theft and sent to prison.

So, how can it be any less wrong if a CEO, the agent of the shareholder principals, aims to “be socially responsible” with assets not owned by him?

This is not to say that a corporation does not have an impact on society. It does. However, the profit-seeking motive of the shareholders, far from being a negative for society, is a boon. As Mises pointed out in his essay “Profit and Loss” (reprinted in Planning for Freedom and Twelve Other Essays and Addresses):

Now one of the main functions of profits is to shift the control of capital to those who know how to employ it in the best possible way for the satisfaction of the public. The more profits a man earns, the greater his wealth consequently becomes, the more influential does he become in the conduct of business affairs. Profit and loss are the instruments by means of which the consumers pass the direction of production activities into the hands of those who are best fit to serve them. Whatever is undertaken to curtail or to confiscate profits, impairs this function. The result of such measures is to loosen the grip the consumers hold over the course of production. The economic machine becomes, from the point of view of the people, less efficient and less responsive.

The businessman ought to be unapologetic of the profits he seeks and the profits he makes, knowing the critical role which profits play in the economy:

In a free economy, in which wages, costs and prices are left to the free play of the competitive market, the prospect of profits decides what articles will be made, and in what quantities—and what articles will not be made at all. If there is no profit in making an article, it is a sign that the labor and capital devoted to its production are misdirected: the value of the resources that must be used up in making the article is greater than the value of the article itself.3

The Irresponsibility of CSR

Imagine a construction worker, concerned about society at large, deciding to use less concrete in his project, with the intent of repurposing the savings to wage increases for the workers. Or a pharmacist, dispensing lower-dosage pills than prescribed, and using the money saved to benefit other “stakeholders.” We would consider these both to be crimes.

Profit, like concrete and medicine, serves a critical purpose, and to dilute it does real harm, like diluting concrete or medicine.

Or imagine a charitable institution, a non-profit, like a university, with an endowment invested in stocks, with any dividends and gains dedicated to the organization’s charitable mission. The CSR movement implicitly endorses the idea that corporate CEOs, whose expertise is in making and selling widgets, ought to also be dilettantes in figuring out how to improve their communities, and in the process earn lower profits to pass on to charity-shareholders, whose own expertise is precisely in how to do good for the community. This is a fundamental breakdown of the division of labor.

A corporate charter is a license, a permission to engage in commerce in commercial form. To revert this from its current form as a rubber-stamped registration back to a privilege granted by the state to favored parties is a perilous act. Remember, newspapers, churches, charities, think tanks, even labor unions have corporate forms. Once charter-granting is politicized, it may not end the way its promoters think it will. As Mises famously wrote in Human Action:

No socialist author ever gave a thought to the possibility that the abstract entity which he wants to vest with unlimited power — whether it is called humanity, society, nation, state, or government — could act in a way of which he himself disapproves. A socialist advocates socialism because he is fully convinced that the supreme dictator of the socialist commonwealth will be reasonable from his — the individual socialist’s — point of view, that he will aim at those ends of which he — the individual socialist — fully approves, and that he will try to attain these ends by choosing means which he — the individual socialist — would also choose.

And to the Business Roundtable, we should ask, why they, as Hayek wrote in 1933, “have not sufficient belief in capitalism to defend it with a clear conscience”?

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