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No compromise on business’s role: CCI

THE current popular clamour for companies to apply values and practices seen to constitute ‘corporate social responsibility’ (CSR) has as much to do with political correctness as it does with changing the way business goes about its business.

Its very name dares it to be challenged – who would wish to be the public opponent of things corporately, socially or environmentally responsible?

To provoke a fuller and more rational debate, CCI recently published a paper on the subject, which suggested that even giving expression to disagreement with the prevailing acceptance of CSR might invite a public outcry.

The fervour of Richard Taylor’s attack on CCI’s paper (WA Business News May 23) rather proves this point.

For all of Mr Taylor’s rhetoric – he accuses CCI of using “emotive and negative language” but clearly has no compunction about using it himself – he never once addresses the key arguments raised in the paper.

Our wish was to bring a different view to the debate and to reassert the fundamental principle that the role of business is to produce profits and refresh capital, not to deliver social agendas.

Shareholders entrust their funds to directors to obtain optimal commercial return and it would be irresponsible, indeed immoral, for those funds to be applied or risked in response to another’s aspirations.

The contention of CCI and others is not that businesses can, or should, ignore the social, environmental and community interests in their activities. Quite the reverse.

Concepts such as corporate governance and social responsibility, triple bottom line accounting, ethical investment and stakeholder theories reflect concerns about the impact of business activity on society, the environment and the economy.

Through the media, the Internet, activist groups and non-government organisations, people have a greater willingness and capacity to monitor businesses’ activities than ever before.

And they have the power to reward and penalise behaviour of which they approve or disapprove, through coordinated or individual actions as consumers, investors, protestors, voters, and litigants.

Businesses need to recognise and respond to these developments in their operating environment. Failing to take account of the changing climate of opinion is costly and even potentially fatal.

Furthermore, studies demonstrate that showing methodical regard for the interests of stakeholders, and implementing social, environmental and financial record-keeping can improve the financial bottom line.

Adopting these measures can make good business sense.

But business leaders and policy makers should have a clear conception of how far these views and practices should be accommodated, and why.

Ideas such as stakeholder entitlement and corporate social responsibility are usually presented as eminently reasonable and moderate reactions to justifiable community concern about the unwanted side effects of business activity.

Yet their more radical interpretations are underpinned by assumptions about ownership and property rights, accountability and the operation of the economy, which are both wrong and potentially damaging.

It may be true, as Mr Taylor argues, that “the stakeholder model has been embraced and championed by business”, but there is more than one stakeholder model, and it is important to distinguish between them.

The least controversial stakeholder model is a management tool used to systematically consider the interests of people capable of affecting a business’s performance. However, some models go much further, viewing stakeholders as those entitled by virtue of their stakeholder status to influence the operation of a business.

If business is obliged to further the interests of the community, society, government and environment as

well as owners, a range of questions arises.

p Who is entitled to consideration in how the business is run?

p By what means is that consideration to be achieved?

p Are all stakeholders given equal weight?

p How are inevitable conflicts of interest between stakeholders to be resolved?

p How are new and changing interests to be incorporated into the business plan?

Even if these questions of entitlement can be resolved, harder problems of accountability remain.

Accountability requires a right to information, authority (the right to issue instructions) and sanctions (the right to impose penalties if those instructions are not carried out).

In a typical corporation, directors are accountable to shareholders, while employees and other agents are account-able, through managers, to directors.

If stakeholders were entitled to determine how a business is run, a new structure of accountability would be needed to determine who is a stake-holder, who is to decide when their entitlements are breached, what sanctions are to apply, and to whom.

Such a structure would not be compatible with shareholders’ rights to buy and sell shares and to sack directors.

Giving other stakeholders real influence over how a corporation operates would therefore require an entirely new framework of corporate accountability and sanctions.

It would rewrite property rights and constrain freedom of choice, redefine corporate governance and transparency, and require new institutions of political, social and commercial accountability.

For some people, curbing the corporation in this way represents the greatest appeal of the entitlement stakeholder model.

In CCI’s view, however, this view of stakeholder rights is based on a profound misunderstanding of how modern businesses and economies operate. It assumes that good results can only come from good intentions – that business activity will only benefit society, the community, the economy and the environment if that is what business leaders (or regulators or stakeholders) set out to achieve.

This is not the case.

A market economy – in which the production, distribution, pricing and use of goods and services are primarily determined by people’s purchasing decisions – leads to a better social and economic outcomes than one in which well-intentioned business leaders or regulators try to second-guess people’s wants and needs.

Competition ensures that goods and services are delivered efficiently and provides a perpetual spur for innovation. Consumers decide for themselves what’s best for them.

The virtues of modern businesses are induced and reinforced by the incentive and accountability structures under which they currently operate.

Businesses earn profits by providing customers with the goods and services they want, at prices they are prepared to pay, while proving trustworthy and responsive enough to earn repeat business.

In the process, they must secure and develop mutually beneficial relation-ships with employees, clients, and suppliers. They create jobs, bid up wages, pay taxes, and innovate in the perpetual search for an advantage over competitors.

All of this contributes far more to society than pious good intentions.

It is the reason why free market economies have survived and prospered while command economies have not.

It is for elected politicians to set social and environmental goals and determine laws. Directors of companies have no such mandate.

Stakeholders (as distinct from shareholders) can and do influence businesses by exerting their powers as consumers, investors, electors, activists or whatever. Businesses will continue to monitor and respond to changes in the climate of opinion on social, ethical and environmental issues.

But to seek to reinforce this process by imposing vague and inconsistent social and environmental obligations on corporations though legislation, disclosure requirements or contractual terms would create a confusion of inconsistent entitlements and under-mine accountability.

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