December 21, 2006

posted by Deven Desai

"So are McKinsey and its surveyed executives better informed or just misguided?"

Sixty years of Friedman vs. corporate heads in predicting the results of the latter's political engagement would lead any rational person to bet on "misguided."

I have not read the study but would like a copy. Without having seen the report, however, there is a good chance the study might have asked executives the right question the wrong way, causing the study to miss the mark.

CSR, in and of itself, is not a reliable way to measure good corporate citizenship. Complete analysis incorporates a variety of factors, including whether a corporation has an ethical culture and effective compliance program. Making charitible contributions from monies generated in a bad corporate culture is hardly admirable and masks what is actually going on behind the scenes.

The article does address the idea that corporations must be consistent in their approaches to the issues. The chart linked above notes covers some of that point.

Still sorry about the lack of link to the full article. If you go to the link to the chart that is publicly available, you will see that the whole article can be obtained until Dec. 26 if you register with McKinsey. You may not find the article that illuminating, however, as it does not offer the survey methods etc. Nonetheless it does give examples of how McKinsey thinks the public influences norms and where corporations must pay attention. In addition the article explains a little about the need for consistent implementation of the social perspective whatever it may be.

Like "Buy American"

I imagine Friedman would yawn.

I'm not sure why anybody would be surprising that surveyed execs say that they care about "broader contributions to the public good." Nor would even a lesser economist such as myself suffer from shock at hearing the proposition that McKinsey would suggest that firms not only engage in rent seeking ("anticipate and affect the debate in their favor to curtail government regulation or influence regulation"), but that they are not ignorant of the political and social climate in which they seek said rents.

At the end of the day, I'm not sure how this survey could possibly provide empirical "support" in favor of CSR as Friedman used the term.

Josh,

I was not actually suggesting that the survey was empirical evidence that CSR was a good thing. The survey is just that, a survey of views and empirical was supposed to be ironic. Sorry for the confusion. In any event, it is interesting to me that the ideas Friedman addressed in the article more than 30 years ago and his amazement at the way corporate executives made calls for change may still apply.

I know you say it is a yawn but the way Freidman (at least in the article) nods to corporations engaging in CSR moves for certain self-interested motives but then seems to bash those moves is what I find curious. As such it seems to me that even these arguably obvious behaviors and suggestions (which calls into question paying McKinsey for anything perhaps) would be seen as still part of what Friedman calls CSR in his article. Nonetheless, I make no claims to being an economist so if you or anyone else can parse what CSR means to Friedman and his camp as opposed to the survey that would be great and appreciated.

Deven, I missed the irony ... my bad. I wouldn't dare speak to what the McKinsey survey means by CSR relative to Friedman or anybody else. I fear this is one of those terms that has lost all real meaning.

But to the extent that Friedman was concerned that even private actions taken "with somebody else's money" rather than actions that may accrue to the benefit of the firm and its shareholders in the long run, a paragraph from the article you cite gives a good explanation for Friedman's criticism of privately self-interested motives "cloaked" as CSR that you find curious. To quote:

"The shortsightedness is also exemplified in speeches by businessmen on social respon�sibility. This may gain them kudos in the short run. But it helps to strengthen the already too prevalent view that the pursuit of profits is wicked and immoral and must be curbed and controlled by external forces. Once this view is adopted, the external forces that curb the market will not be the social consciences, however highly developed, of the pontificating executives; it will be the iron fist of Government bureaucrats. Here, as with price and wage controls, businessmen seem to me to reveal a suicidal impulse."

Henry Manne in a recent op-ed in the WSJ, agrees with Friedman's view on this point on the grounds that the social responsibility notion will result in corporations that are necessarily "affected with the public interest" and blur the distinction between private and public property at the heart of the free enterprise system.

Whether "CSR" generates social costs of the magnitude contemplated by Friedman and Manne is an empirical question (perhaps McKinsey can ask some execs?), but Friedman was well aware of (and responded to) the otherwise apparent tension between his view that CSR was "bad" (even fraudulent!) and that private firms disguised profit-maxmizing behavior as CSR.

I think Josh's answer is very good except for one point. I don't think CSR has lost its meaning. I think that CSR can be clearly distinguished from the type of corporate behavior advocated by Friedman by recognizing the difference between (a) corporations accounting for the interests of multiple stakeholders versus (b) making trade-offs among those interests **at the margin** in favor of shareholders. Everyone is fine with (a), but CSR advocates don't distinguish (b) or reject it outright.

Josh provided reasons why Friedman disagreed with collective corporate support for CSR principles, even through a "business" mouthpiece like McKinsey, and especially when used as a scam by which manager's serve their personal interests (e.g., in looking good to the media) at the shareholders' expense. But Friedman more specifically opposed any single company lobbying government for preferences as counterproductive to that company's interests.

He considered such lobbying a fool's errand. From tariffs to taxes to regulation, Friedman demolished the idea that any business can sleep with the government elephant and not ultimately get crushed. Companies invariably become dependent on the subsidy, protection, etc., and it never lasts, and the shareholders suffer. That managers keep trying this tack, always from behind the skirt of some CSR-type justification, was a big part of "The Suicidal Impulse of the Business Community" noted by Josh.

Perhaps the more interesting question is whether the overwhelming majority of executives who espouse taking into account the "public good" actually act on those beliefs. Perhaps, as some earlier commentators have suggested, they are merely paying lip service to the concept, or telling the researcher what they think she wants to hear. On the other hand, if they actually behave in ways consistent with their expressed beliefs (and let me be the first to admit, that's a very big IF) that is not so much a body blow to Friedman's views on CSR vs. profit maximization, as to the whole neoclassical view of firm behavior. We have been repeatedly told that if managers do not look to maximizing shareholder wealth, various markets such as product markets, the market for managerial employment, and ultimately, the market for corporate control, will punish the managers. The very existence and continuation in control of large numbers of managers who do not act in accordance with the behavior predicted by the model calls into question the efficacy of those markets in controlling actor behavior.

Body or blow or not, and "big IF" aside, let me take two brief responses to Harry Gerla's comment.

The first is that real evidence (read: not McKinsey surveys) that firms act in ways inconsistent with maximizing shareholder weath AND that these firms survive would be interesting. But not without the latter (which I think is perfectly consistent with what Harry was saying, I think). Often, it is academics and commentators that struggle to understand why certain behavior is profit-maximizing. But we should not mistake our failure to understand certain business practices as a sufficient condition for attaching some pernicious explanation: monopoly, market failure, information problems, a duty for CSR, etc.

Second, the neoclassical view of firm behavior is not so fragile as to rest alone on Friedman's thoughts on CSR. The neoclassical model of the firm does not deny bad behavior, agency costs, shirking, monitoring, etc. But there have been oceans of ink spent on research and evidence demonstrating that firm behavior is remarkably consistent with the predictions of the neoclassical model, not to mention evidence of a pretty well-functioning market for corporate control.

pls i have question can you pls help me?

compare the critcisms of Milton Friedman on corporate social responsibility to the assertions of Thomas Mulligan and how can both sides put the debate to an end.

pls i have question can you pls help me?

compare the critcisms of Milton Friedman on corporate social responsibility to the assertions of Thomas Mulligan and how can both sides put the debate to an end.