Dec 12th 2002 | WASHINGTON, DC
From The Economist print edition
ON DECEMBER 10th, George Bush attended the opening ceremony of “Business Strengthening America” (BSA), an organisation whose aim is “to encourage civic engagement and volunteer service in corporate America”. Also present were Don Evans, secretary of commerce, Steve Case, chairman of AOL Time Warner, and Jeffrey Swartz, boss of Timberland, a socially responsible shoe maker.
The high-profile occasion is the first fruit of a meeting held at the White House in June, when the president called for greater corporate involvement in the community. The collapse of Enron and the rash of subsequent scandals have made all of American business seem like an ogre who leaves entire communities high and dry when things go wrong. BSA wants to change this image by helping businesses to “do well by doing good”.
This issue of corporate social responsibility (CSR)—how responsible companies should be to those other than their own shareholders—is arousing heated debate, and not just in America. In Europe and Asia, the battle is often said to be between Anglo-Saxon shareholder capitalism, which says that companies should pursue exclusively the interests of their shareholders, and stakeholder capitalism, which acknowledges that companies are also responsible to their workers and local communities—often by having representatives from both on their boards.
The debate has also become entangled with that about globalisation. One of the main charges that the anti-globalisation brigade hurls at multinationals is that they behave irresponsibly all round the world. They exploit third-world workers, trash the environment and challenge democratically elected governments.
In all these tussles, the left demands that more rules be applied to companies, to make them more responsible. The right fires back that governments already subcontract far too much of their social policy to companies, using them as vehicles to limit working hours (in France), to promote racial harmony (in America) and to clean up the environment (just about everywhere on the planet).
This debate does not lack hot air; but it does lack a sense of history. How irresponsible have Anglo-Saxon companies been in the past?
Start in the East Indies
In practical terms, all companies—even Anglo-Saxon ones—have to secure what Leslie Hannah, an economic historian who is now dean of Ashridge Management College in England, calls “a franchise from society”. Sometimes that franchise entails specific obligations: Mr Hannah points to ICI's altruistic work designing nuclear bombs for the British government during the second world war.
The franchise comes partly from consumers and other pressure groups in the private sector. As long ago as the 1790s, Elizabeth Heyrick led a consumer boycott, urging her fellow citizens in Leicester to stop buying “blood-stained” sugar from the West Indies. The East India Company was eventually forced to obtain its sugar from slaveless producers in Bengal. Nowadays, the influence of non-governmental organisations, such as Greenpeace, on corporate policy is far more pervasive.
However, the most enduring force on corporate behaviour has been the state. The mantra that, at some ideal moment in the misty past, Anglo-Saxon companies had nothing to do with the state is codswallop. Far from being alien to government, companies are a product of it: it was from the state that they derived the privilege of limited liability. Until the 19th century, monarchs generally gave companies a “charter” only if they were nominally pursuing the public good (which could mean anything from building canals in Lancashire to colonising India).
Indeed, it was the fact that companies were creatures of the state that turned Adam Smith against them. Most pioneers of the industrial revolution also regarded limited liability as a charter for rogues. The Victorians changed the perception, largely because a business arose that needed far more capital than mere partnerships could provide: the railways. By 1862, Britain had made it possible to set up a company, without parliamentary permission, for just about any purpose. The rest of the world's big countries—France, Germany, Japan and the United States—soon followed suit.
There was, in theory, a clear split among them, however. In Britain and America, the new joint-stock companies were freed from any obligation other than to obey the law and pursue profits. By contrast, in continental Europe (and later in Japan), companies were asked to pursue the interests of their various stakeholders, notably those of the state. But how different in practice were the Anglo-Saxons?
In Britain, most of the early companies—with the notable exception of the railways—had few dealings with the government. The gospel of free trade meant that there were no tariffs to go to London to lobby for. Corporate independence was even more noticeable in America. Businessmen created modern organisations that spanned the continent more quickly than the government did. In 1891 the Pennsylvania Railroad employed 110,000 people, three times the combined force of the country's army, navy and marines. Such monoliths could lay down their own rules.
But this freedom was never absolute. Unions sprang up to defend workers' rights, and “muckraking” journalists detailed corporate abuses. “I believe in corporations,” said Teddy Roosevelt. “They are indispensable instruments of our modern civilisation; but I believe that they should be so supervised and so regulated that they shall act for the interests of the community as a whole.” The supervision did not just take the form of antitrust legislation (which eventually broke up Standard Oil in 1911), but also of rules on health, safety, working hours and so on.
The Wall Street crash, a succession of corporate scandals and the Great Depression shifted public opinion on both sides of the Atlantic even more in favour of restricting the corporate franchise. America brought trucking, airlines and interstate gas and electric utilities under government control. In Britain, there was widespread horror at the inability of private coal companies to provide showers for their workers: they too were soon taken into public ownership.
This tightening continued into the post-war period. The British government nationalised the commanding heights of industry and, as late as 1967, John Kenneth Galbraith was arguing that America was run by an oligopolistic industrial state. Since the 1980s, however, the pendulum has swung the other way. Anglo-Saxon business has become more independent, for which it has to thank not only liberalising politicians such as Margaret Thatcher and Ronald Reagan, but also a new generation of more aggressive and numerous shareholders, who have demanded that companies be run in their interests.
This is the capitalisme sauvage that so upsets the French, in particular. But even today, Anglo-Saxon companies are more constrained than many critics suppose. The past two decades have seen a huge surge in social regulation, as various “stakeholders” have organised themselves into powerful pressure groups. In the late 1980s, for example, more than half of America's state legislatures adopted “other constituency” statutes that allow directors to consider the interests of all their stakeholders, not just shareholders. Connecticut even passed a law requiring them to do this.
Good deeds aplenty
There is one clear lesson from this history. Anglo-Saxon companies have often willingly taken on social obligations without the prompting of government. Mr Hannah cites the traditions of the Quaker families who founded so many of Britain's banks and confectionery firms: they had regular meetings where they were expected to justify to their peers the good that their businesses were doing.
Nor has corporate social responsibility been the preserve only of a few do-gooders inspired by religion. The notorious “robber barons” built much of America's educational and health infrastructure. Company towns, such as Pullman, were constructed, the argument being that well-housed, well-educated workers would be more productive than their feckless, slum-dwelling contemporaries.
Companies introduced pensions and health-care benefits long before governments told them to do so. Procter & Gamble pioneered disability and retirement pensions (in 1915), the eight-hour day (in 1918) and, most important of all, guaranteed work for at least 48 weeks a year (in the 1920s). Henry Ford became a cult figure by paying his workers $5 an hour—twice the market rate. Henry Heinz paid for education in citizenship for his employees, and Tom Watson's IBM gave its workers everything from subsidised education to country-club membership.
Critics tend to dismiss all this as window-dressing. But Richard Tedlow, an historian at Harvard Business School, argues that they confuse the habits of capital markets with those of companies. Capital markets may be ruthless in pursuing short-term results. Corporations, he says, have always tended to be more long-termist.
Alfred Chandler, the doyen of business historians, points out that the history of American capitalism has largely been the history of managerial rather than shareholder capitalism. For much of the 20th century, companies were run by professional managers; until the 1980s, institutional investors seldom made their presence felt. Today, more bosses are sacked, but managers still largely ignore shareholders. In Delaware, where around half of America's big companies are headquartered, the corporate code is more sympathetic to managers than it is to owners.
This has often made socially responsible behaviour easier. Rosabeth Moss Kanter, a professor at Harvard Business School, talks about most parts of the Anglo-Saxon world having a “CEO club” that successful businessmen are desperate to join. The price of admission is doing your bit for society.
But this cynical approach can be taken only so far. Most companies try to do good because they genuinely believe that taking care of their workers and others in society is in the long-term interests of their shareholders. The most successful Anglo-Saxon companies have consistently eschewed short-termism in favour of “building to last”. For more than half a century, Silicon Valley's pioneering company, Hewlett-Packard, has been arguing that profit is not the main point of its business.
There are two reasons why acting responsibly is in shareholders' interests.
• The first is that it builds trust, and trust gives companies the benefit of the doubt when dealing with customers, workers and even regulators. It allows them to weather storms, such as lay-offs or a product that does not work.
• The second is the edge it gives in attracting good employees and customers. Southwest Airlines is one of the most considerate employers in its industry: it was the only American airline not to lay people off after September 11th. Last year, the company received 120,000 applicants for 3,000 jobs, and it was the only sizeable American airline to make a profit.
Leave well alone
Since Anglo-Saxon companies have tended to be reasonably responsible in the past, without any government bullying, there must a good a priori case for leaving them alone. The case is strengthened by the fact that companies are most effective as social volunteers when they are doing things that are close to their shareholders' interests. Those interests clearly differ: oil companies tend to emphasise building local infrastructure; Avon, which sells products largely to women, is one of the world's biggest supporters of breast-cancer research. The idea of imposing one-size-fits-all laws is a mistake, for it undermines enthusiasm and prevents companies from exploiting their distinctive strengths. Why should all multinationals have to sign up to the same sort of mission statements that Shell and BP love so much?
In a sense, the corporate social responsibility movement has got it all the
wrong way round. It tends to look for social goods—better housing, better
schools, a cleaner environment—and then seek ways to force companies
to provide them. It might do better to look at the things that the private
sector does not deliver, and then get governments to fill the gaps. Left to
themselves, companies will do more good than people give them credit for. But
they are not here to build a fairer society. That is the job of government.