Why Shouldn't Corporations Be Socially Responsible (A Summary)

- By Christopher Stone

As the title indicates, below is a summary of the four prominent arguments used to support the assertion that corporations have no social responsibility

Christopher Stone starts off by noting that in “ordinary morals” people are expected to act in ways that benefit others as well and that such acts are usually held in high esteem by society. With this essay he sought to critically appraise the four positions which deny social responsibility for corporations. According to these positions corporations should be “steered almost wholly by profit” instead of focusing on the general well being of society and/or the environments in which they operate. Corporations should focus only on those acts which benefit themselves directly.

1. The Promissory Argument

This argument states that corporations have an implied 'promise' to their stock-/shareholders to maximise profits. Accordingly management has the sole responsibility of keeping that promise – acting in ways that seek to maximise stockholders' profits.

Christopher Stone is of the opinion that this view is mistaken. He argues that very few stockholders invest their money in a corporation and receive a promise from management that profits will be maximised. He argues also that even such a promise were made it wouldn't have been made directly to the stockholder since very few stockholders invest their money directly into a corporation. Consider that the shares anyone owns have probably been around for many many years and have been passed on to many hands/owners. Who then does the corporation owe the keeping of the promise to? Not only that but since a corporation's management changes ever now and then, the 'new' managers may simply not hold the view that a corporation's sole purpose is to maximise profits.

Stone further makes another point against this view. The first being that even if we inferred that a promise has been made and needs to be kept, there is no reason why we can't accept that “sometimes it is ... morally justified to break promises in the furtherance of other social interests of higher concern. … My promise to appear in class on time would not ordinarily justify me from refusing to give aid to a drowning man.” Stone makes this point to drive another home: the fact that a promise has been made to maximise profits does not mean in each and every act and each and every possible way one must seek to maximise profits even if its means poisoning consumers and polluting the environment; again, even if that was the express promise made by management to stockholders, who of us would consider it a respectable and/or morally justifiable promise?

2. The Agency Argument

This is an argument which has among its proponents Milton Friedman. It states that stockholders appoint management as their agents. Milton Friedman expressed this position, in his 1970 New York Times article, as follows: “The key point is that, in his capacity as a corporate executive, the manager is the agent of the individuals who own the corporation or establish the … institution, and his primary responsibility is to them.”

Stone considers Friedman's view wrong “both as to the state of the law (the directors are not mere agents of the shareholders) and on his assumption as to the facts of corporate life (… management is more often using its control over the proxy machinery to designate who the directors shall be, rather than the other way around).” He says Friedman's argument is basically that management “ought to morally to consider themselves more the agents for the shareholders than for the customers, creditors, the state, or the corporation.” Stone then asks why this should be the case? - and to what extent ought this to be the case?

According to Stone the agency argument is not only undermined by its inconclusiveness but also by corporate practice. He points out that oftentimes shareholders find themselves at odds with the company's management and having to take each other to court or forcing votes at annual general meetings because they have differing opinions as to which direction the corporation must follow. “If the managers truly considered themselves the agents of the shareholders, as agents they would be expected to show an interest in determining how their principals [that is, the shareholders] wanted them to act – and acted accordingly” stone points out.

3. The Role Argument

This argument is based on roles – the roles that people play and the obligations that attach themselves to the roles in question. In moral reasoning people are expected to fulfil certain obligations/duties, even without expressly assuming them, just based on the roles or status they occupy.

Stone thinks this is a somewhat stronger argument provided by the proponents of “anti-social responsibility” because this argument closely resembles the facts. According to this reasoning since management, as has been shown above, never made a promise to the shareholders to maximise profits, “nor did the shareholders designate the directors their agents for this express purpose”, management then acts only as fiduciaries. As fiduciaries management then has a legal responsibility not to engage in “self-dealing” and not to “waste” the assets of the corporation. Stone then points out those who are for social responsibility do not, as is implied by this argument, expect management to assume expenditures that would “expose the officers to legal liability; what we are talking about are expenditures on … pollution control, above the amount the company is required to pay by law” but not in excess of what is considered reasonable and may lead to a violation of management's fiduciary duties ('amount required by law' < 'expenditure incurred' < 'expenditure that would violate fiduciary duties').

To problematise the role argument Stone asks this question: “What is there about assuming the role of corporate officer that makes it immoral for a manager to involve a corporation in these expenditures [that is, expenditures for social responsibility]?” A man who has the role of fatherhood and therefore responsibilities towards his children cannot use that as a “moral argument … to leave unsightly refuse piled on his lawn, spilling over into the street, on the plea that he had obligations to give every moment of his attention to his children, and was thus too busy to cart his refuse away.” Why then do those who make this argument expect it to carry moral weight on the basis that managers are busy discharging their obligations to shareholders to undo the damage caused to the environment by their activities?

Stone considers the agency argument to suffer “from the problem that the strongest moral obligations one can discover” for it “have at most only prima facie force, and it is not apparent why those obligations should predominate over some contrary social obligations that could be advanced.”

4. The Polestar Argument

Stone considers this to be the strongest moral argument that can be advanced by those who are against corporations assuming social responsibilities. This argument says “if the managers act in such a fashion as to maximise profits – if they act as though they had promised the shareholders they would do so – then it will be best for all of us.” Note: a pole star is a directing principle. This argument then is called a pole star argument because, it is claimed, advancing the interests of shareholders will be a “means of charting a course toward what is best for the society as a whole.” Increased profits mean increased tax revenue due to governments which can in turn be used by the state to pursue social ends (to benefit the poor, for example).

Stone points out that there are many assumptions that need to be made for this argument to hold water, and that it has an implicit positivism - “a feeling … that moral judgments are peculiar, arbitrary, or vague – perhaps even 'meaningless' in the philosophic sense of not being amenable to rational discussion.” For those who make this argument “profits (or sales, or price-earnings ratios [in a nutshell quantifiable data]) at least provide some solid, tangible standard by which participants in the organisation can measure their successes and failures” rather than relying on arbitrary moral claims. Another variant of this argument says managers and directors, even if they did possess the skills and expertise, do not have the authority to decide for society as a whole. Stone points out that Friedman makes this point when he says “if a corporate director took 'social purposes' into account, he would become 'in effect a public employee, a civil servant.'”

Stone excuses himself from “getting deeply involved in each of these arguments” and points out that indeed policy choices (decisions made for society as a whole) are vague. However, he notes that there a number of cases/decisions taken by directors in pursuit of profit which have implications for society as a whole and as a result could be construed to be for “social purposes.” He says though those who advance these arguments have ground to stand, “their essential failure is in not pursuing the alternatives.” Following Friedman, Stone agrees that “to the extent” that the markets and the law can be relied upon to manage corporations to be “within desirable bounds” it is preferable to let corporations service the needs of society than to give that responsibility to unelected “public officials” [that is, managers who pursue social ends without a mandate from society]. Stone includes the to “the extent” to point out that there are indeed situations where both the law and markets fail dismally to “keep corporations within desirable bounds.” According to him those who are against social responsibility fail to note that the existence of such points to the need to consider “alternative measures of corporate control.”