The Triple Bottom Line Blog

Supercapitalism, the new book by Bill Clinton's secretary of labor Robert Reich, is an interesting analysis of how the rules of business have changed in recent decades, and the implications for public policy.

The nutshell version of Reich's thesis is that today's hypercompetitive global marketplace has stretched the traditional boundaries between business and government almost to the breaking point. Reich wants citizens to demand that those boundaries be redrawn, so that democratic institutions can reassert their control over vital quality-of-life issues (such as economic equality, health care, and the environment) rather than ceding them to the free market.

Reich's book is worth a look--it's well written and a quick, easy read. For the purposes of this blog, I want to focus on chapter 5, "Politics Diverted," in which Reich casts a skeptical eye at the corporate social responsibility (CSR) movement. Because this is a position one might not expect a political liberal to take, it is one of the "counterintuitive" elements of the book that is drawing considerable attention.

The arguments Reich deploys against CSR Reich fall into two broad categories. First, he makes the point that CSR may actually damage efforts to improve the behavior of businesses by diverting attention from the need for tough government regulations. For example, after listing some of the famous books written by reformers about industry abuses of the public trust (The Jungle, Unsafe at Any Speed), Reich comments:

The purpose of these and other exposes was not to pressure individual companies to change their ways but to incite political action so all companies would have to. These efforts were not substitutes for political action but preconditions for it.

Reich's point here is well taken, insofar as some kinds of business reform can't be based purely on voluntary efforts but require government action, with teeth, to be effective. (I for one wouldn't be happy about buying medicines that had never been tested by the FDA but only by some voluntary, industry-sponsored, and industry-run agency.)

But Reich's other criticisms of CSR seem less well considered. At times, he writes as if there is really no such thing as CSR. For example, he is loath to credit companies with behaving "responsibly" when their choices are driven, in part, by profit considerations:

Logically, when the extra benefits of some product accrue to consumers individually, they may be willing to pay more for it. This doesn't make the product "socially responsible" . . . Wendy's restaurants have stopped frying their food in trans fats, which have also been banished from Oreo cookies and Frito-Lay snacks. General Mills now makes its Cheerios and Wheaties out of whole grain. These changes were not made because these firms became more socially virtuous but because consumers have become more conscious about their own health.

Similarly, companies that pay good wages and offer good benefits in order to attract and retain high-caliber employees are not being "socially responsible"; they are merely practicing good management.

I think this redefinition of "socially responsible" business as merely "good management" over-simplifies the question. For example, it leaves unexplained why the definition of "good management" in the snack business has changed in recent years to include the notion of meeting basic health standards. Isn't this a positive phenomenon that deserves some explanation rather than being explained away as if it didn't exist?

By the same token, Reich's account fails to explain why some companies choose not to switch to healthier snack recipes, or why others continue to underpay their employees. How and why do competing firms follow such conflicting definitions of "good management"? Don't social or ethical values have something to do with the choices these companies make?

Reich then goes further, asserting that, in fully competitive free markets like those existing under today's "supercapitalism," CSR is, strictly speaking, impossible:

A 2004 report by the World Economic Forum at Davos applauded the efforts of some forward-looking multinational companies to reduce greenhouse gas emissions but concluded that voluntary actions were inadequate to counter effects of climate change.

Of course they're inadequate. Supercapitalism does not permit acts of corporate virtue that erode the bottom line. No company can "voluntarily" take on an extra cost that its competitors don't also take on--which is why, under supercapitalism, regulations are the only means of getting companies to do things that hurt their bottom lines.

Part of Reich's point is certainly valid: Most people agree that the problem of global warming is too big to be dealt with on a purely voluntary basis. But notice the scare quotes Reich uses around the word "voluntarily." He is casting doubt on the very notion that corporations have any choice about the policies they pursue. In Reich's world, CEOs don't even have free will. Driven by the unyielding demands of a personified "Supercapitalism," they have no choice but to obey the dictates of the marketplace, which, in the case of global warming, means emitting greenhouse gases as long as they can get away with it.

The real world is a little more complicated--as suggested by the fact that various companies have, in fact, adapted widely different policies in regard to carbon emissions.

And Reich's dismissal of CSR as inadequate, or even purely mythical,shouldn't be taken too literally. In the real world, where consumer demands, public opinion, pressures from interest groups, market dynamics, and government involvement interact in complex ways, the CSR movement has had a definite impact.

For example, when a few major corporations respond to public demands by adopting pro-environmental or pro-labor policies, it ratchets up the pressure on Congress and the administration to implement regulations requiring such policies, so as to "level the playing field" among competitors. If government fails to act, voluntary organizations may be formed to set and enforce industry-wide standards, with similar effect.

These kinds of phenomena don't appear in the overly simplistic landscape Reich paints, but in the real world, they do happen. And they wouldn't happen without pressure from the CSR movement.

Bob Reich is smart, he writes well, and his central thesis is dead-on--that the new economy demands a re-examination of the relationship between democracy and capitalism. But when it comes to CSR, I think he's off the mark.

Labels: Management and Organization, Robert Reich, Role of Government, Supercapitalism

What a difference two years makes. Back in 2005, Britain's respected, slightly-right-of-center newsmagazine The Economist published an entire special section (subscription required) devoted to "debunking" the concept of corporate social responsibility. Taking the Milton Friedmanesque stance that "The selfish pursuit of profit serves a social purpose," the magazine argued that companies have no business spending shareholders' money on needless frills like worker-friendly or eco-sensitive policies. The editors didn't quite declare "Greed is good," but they came close.

Now, after two years in which CSR has grown steadily more mainstream--and Friedman's assaults on it have become more marginalized--we find The Economist rushing to defend CSR. The context is an article about Supercapitalism, the new book by Robert Reich, secretary of labor in the Clinton administration.

In an interesting twist, Supercapitalism (which we haven't yet read) criticizes CSR from a left-wing perspective. Reich makes a twofold argument. First, he says (as summarized by The Economist), that many companies use CSR simply to grab credit for the incidental social benefits produced by policies whose real objective is maximizing profits.

Second--and more important--Reich worries that liberals who praise companies that act responsibly are being lulled into ignoring a more important issue: namely, the need for tougher government regulations that could prevent corporate misbehavior altogether.

And here, of course, is the reason for The Economist's turnaround. If there's anything a conservative defender of corporate prerogatives fears and hates worse than left-wing agitators demanding reform, it's government officials demanding reform--and enforcing those demands through the power of law. So now, in the face of Reich's call for re-regulation, the magazine leaps to the defense of the same CSR it viewed as a threat not so long ago:

[D]one well, CSR can motivate employees and strengthen brands, while also providing benefits to society. Understanding and responding to the social context in which firms operate is increasingly a source of new products and services, observes Jane Nelson of the Prince of Wales International Business Leaders Forum. Telling firms they need not act responsibly might cause them to under-invest in these opportunities, and to focus excessively on short-term profits.

Well, yes. Corporate social responsibility can indeed produce good results for both shareholders and the broader society. And it does so by encouraging long-term rather than short-term thinking and the search for lasting rather than patchwork solutions to society's biggest economic, social, and environmental challenges.

You might call such a philosophy "sustainability." It's a worldview some of us have been advocating for quite some time. And it's nice to welcome such a prominent convert to the case as The Economist. Isn't it interesting to see how a renewed threat from the left--and, perhaps, the resurgent political fortunes of Democrats in the United States--can open some people's eyes to the value of a reasonable middle ground?

Labels: Robert Reich, Role of Government, Supercapitalism, The Economist