Lecture 4

"The social responsibility of business is to increase its profit"

Arguments :

• Moral responsibility
• Only human beings have a moral responsibility for their actions
• Shareholder interests
• It is managers' responsibility to act solely in the interests of shareholders
• Expertise of businesspeople and democracy
• Social issues and problems are the proper province of the state rather than managers

Moral responsibility

• Friedman : if profits are used for philanthropic purpose, then this goes against interests/rights of shareholders if :
• Philanthropy doesn't increase profits and/or
• Shareholders have not consented to the use

Expertise

• Friedman : assuming social responsibility requires specific expertise
• Policymakers and politicians have such expertise businesspeople don't
• So against : BC nederland UK plc (public limited company)

Democratic legitimacy

• Friedman : social responsibility has to have democratic legitimacry, so backed by what "the people" want
• Democracy = government of the people by the people for the people
• Corporate philanthropy doesn't have that legitimacy, because "CEO/board decides"

Friedman's approach

• Maximize shareholder wealth
• Conditional on :
• Ethics and law
• So : no breaches of ethics and law
• But : as long as that condition is met, then maximize shareholder value

Arguments for CSR

Corporate social responsibility

• "Contrast" with Friedman's approach may have been significant in 70s
• Today all firms engage in CSR
• Corporate sustainability
• Social responsibility
• Stakeholder management
• Corporate citizenship
• Business ethics
• Triple Bottom Line
• ESG
• Refers to a corporation's responsibilites or obligations toward society
• Business ethics is both a part of corporate social responsibility and part of the justification for corporate social responsibility

Carrol's model for CSR

CSR : Economic Reasons

• Firms have business reasons for CSR
• Extra and/or more satisfied customers
• Employees may be more attracted
• Forestall legislation

CSR : Moral reasons

• Firms have moral reasons for CSR
• All corporate activities have social impacts
• Corporations cause social problems
• pullution
• Corporation rely on the contribution of a wide set of stakeholders in society, not just shareholders
• "Business decisions do have social consequences. Businessmen cannot make decisions that are solely economic decisions, because they interrelated with the whole social system."

CSR and law

• Political obligation to obey the law even if it seems unreasonable
• Sanctions are to reinforce moral obligation, don't define it
• You may have other moral obligations too
• Generally : Correct response to bad law is acting as a citizen - in extreme cases civil disobedience

CSR is more than the law

• Lots of things are legal but that doesn't make them morally right

Triple Bottom Line

• Sustainability refers to the long-term maintenance of systems according to :
• Economic factors
• Social factors
• Environmental considerations

ESG

• Environmental
• Social
• Governance

Shareholders as stakeholders

Duties of Managers

• Duty to act for the benefit of the company
• Duty to care and skill
• Duty of diligence

Corporate Governance

• The rules, processes, and structures through which corporations are directed and controlled in the interests of shareholders and other stakeholders

Executive Remuneration

• CEO salary = high

Normative Arguments

• Utilitarianism
• "We couldn't attract talent if we paid any less"
• Justice
• Rawls : What is a just distribution ? "A High CEO salary is only justified if the least well-off benefit"
• Non egalitarianism : "A high CEO salary is justified if earned in a fair, free and fully competitive market"
• Virtue Ethics
• What would a good manager / virtuous organizations do ? "Earning such a high wage might indicate greed, which is not virtue "Depends on what you do with the money"

Financial Markets

• In a perfect market : all publicly information is in the stock price. Traders should be able to make autonomous decisions but :
• Insider trading
• Unfair advantage
• How to counter asymmetries ?
• Credit-Rating Agencies (CRAs)
• Bridge information asymmetries between shareholders and corporate actors
• true and fair view of the firm

Some problem with CRAs

• A lot of power and influence in financial markets
• What if they get things wrong ?
• Can be conflicts of interests

Sustainable finance

• Socially responsible investment is the use of ethical, social and environmental criteria in the selection and management of investment portfolios

Dow Jones sustainability Index

• "Best in class approach"
• Companies accepted into index chosen along following criteria
• Environmental sustainability
• Economic sustainability
• Social sustainability
• However, often based on :
• Questionable data
• Questionable criteria