Written By: Steven Winter – Corporate Finance
The philosophy of sacrificing self-interest for the public good saw its way into the corporate world as early as the 18th century during the industrial revolution. The concept seems to have been borrowed from the philosophical, moral theory of ethical altruism as introduced by the great French philosopher Auguste Comte. He believed that it was a moral obligation of every individual to serve, help or benefit others, usually at the expense of self-interest.
While Comte’s philosophy attracted a huge following especially from religious scholars, it did not go without criticism. Friedrich Nietzsche believed that it was an ideology fabricated by the weak for the weak and a hindrance to individual pursuit of self-development, creativity and excellence. Ayn Rand, a 19th century philosopher, went further to state that most problems in the world can be attributed to this doctrine. Other philosophers argued that in reality, altruism is nothing but a form of enlightened self-interest.
Adam Smith, the father of economics, asserted his support for altruism when he said that it is not unreasonable that the rich should contribute to the public expense, not only in proportion to their revenue but something more than in that proportion. However, he differed from the view of abandoning self-interest by introducing the concept of the invisible hand. This view suggests that when an individual pursues his or her best interest, society is bound to benefit in one way or another. Based on this perspective, the idea that an organization should take a part of their profits back to the society in the form of CSR (corporate social responsibility) is ill-founded.
First, let us analyze the self-interest principle. Under normal circumstances, businesses exist in a symbiotic relationship with society. In the pursuit of profit, a corporation offers social benefits in the form of goods, services and employment. Even for a business that imports all of its labor and exports all of its products, the benefits to the local community are there in the form of positive externalities. For instance, the establishment of business in a certain locality is likely to facilitate the improvement of public amenities. A big corporation may develop the local road networks in a bid to ease the transport of raw materials and therefore reduce cost. In the process, the local community will benefit, even though the developments were not initially meant for them.
Some may be quick to argue that CSR is there to address the negative externalities that result from the establishment of an enterprise. For instance, the CSR proponents may see it as a moral duty for a business to set apart some of its profits for the rehabilitation of the environment, even if its operation has minimal impact. Even under this argument, the fact remains that while businesses may try to minimize pollution from their operations, they lack the capacity to formulate policies or offer long-term remedies for negative externalities.
It is the duty of the government to factor in the cost of these externalities and implement a taxation strategy that charges companies based on the levels of their impacts on society. If corporations are left to take the responsibility of enhancing public good, society will have to pay the costs in one way or another. In real life, profit-making is the essence of every business, and if public good should be advanced, it should be done in the process of profit-making. This means that the social-responsibility activities should benefit the society and maximize the shareholders’ wealth.
When an organization is forced to erode shareholders’ wealth in the name of corporate social responsibility, it is likely to engage in activities that will harm the society either directly or indirectly. For instance, most companies embrace CSR with the aim of blocking out potential competitors. This means that with fewer competitors, society is denied choices. As globalization continues to intensify competition, organizations are finding it better to comply with stringent regulation and licensing procedures, provided they prevent new competitors from gaining entry into the market.
As one of the critics of altruism once said, the primary motivation towards altruistic actions is self-centered. The business world may embrace CSR in its literal meaning, but in truth they will always use it to further their own personal interests. While the pro-CSR activists may see this as a bad thing, they have to keep in mind that a just pursuance of personal interest will always benefit society. If businesses are to be forced to undertake charity at the expense of shareholders, they will have no option but to devise strategies that will push their costs to society.
If CSR is to be practiced, it should be within the scope of maximizing the shareholders’ wealth, not eroding it.