Tag: #socialresponsibility

Constructing Social Portfolios: A Quantitative versus Screening Approach

By Alina Hofer, Lea Katharina Kasper & Dr. Kristjan Jespersen 

◦ 5 min read ◦

When we talk about ESG, one could argue that there is a strong bias focused on climate investing, reaching net zero targets as well as good corporate governance and diversity themes. But there is much more to ESG. The “Social” dimension of ESG is hugely under explored and developed and covers under studied issues such as how companies treat their employees and care for the responsibility of their products. Still further, assessments linked to human rights codes and social impacts is only now receiving the attention it truly deserves. Although the importance of these topics is undisputed, we see that attention to particularly address the social dimension has been lacking, whereas awareness of other ESG risks has been rising immensely during the past years. 

Not only is the general knowledge and focus on the social dimension of ESG limited, its overall  implementation in portfolio management has not been sufficiently experimented with and addressed.

The delay to properly implement the “S” in ESG is often explained because of the challenges to quantify, assess, and integrate social factors generally.

However, this argument should not be a sufficient justification for neglecting the “S” in ESG and for investigating a possible relationship between a good social rating and superior financial performance. To tackle this lack of awareness, we constructed two portfolios which integrate Refinitiv’s Social ratings based on different integration strategies and test their performance towards the market between 2012-2021.

When integrating social – or other ESG – ratings into the investment process, we find there is often disagreement on how to best consider these factors in portfolio construction. Currently, it is most common to apply screening or best-in-class strategies. These approaches aim to remove assets that do not fulfill certain criteria from a defined investment universe. Negative screening would mean to remove those companies that perform worst from the pool of assets. Inversely, an investor could also only continue with those firms who at least have a certain minimum rating. For both approaches, the portfolio weights are then allocated to the assets that remain. This is done using conventional indicators such as value, size or expected risk-adjusted returns. In our study, we, however observe a clear shortcoming of this approach: After screening out the worst 10% “social performers” and allocating weights based on a risk-return trade-off, the portfolio does not necessarily promise a higher overall ESG score than a portfolio would reach which does not consider the ratings at all. Although the portfolio yields a solid financial performance, this raises the question whether any ESG-related impact has been made with this integration approach.

To make sure an investor can improve his exposure to assets that score well in the social dimension, we integrate the rating scores directly into the optimization problem of our second portfolio. This leads to a very different outcome on the social rating:

Looking closer at the mechanics of this approach, we extend the traditional Sharpe Ratio with the ESG factor, meaning to add by how much it a company “outscores” the market average. This results in the following “Social Sharpe Ratio”:

We add a fifty percent weight split, which can be flexibly adjusted towards investor preferences. And we now balance a risk-return-social trade-off. This explains why the second approach over 9 years constantly beats the market average in respect to the integrated Social factor without sacrificing any performance on the financial side. In fact, we find that in 5 out of 9 years, the second strategy would have also led to higher risk-adjusted returns measured by the Sharpe ratio. Moreover, returns were consistently higher compared to the market benchmark. This result is quite remarkable, given that it is often questioned whether investors need to sacrifice returns in order to make their investments more socially responsible. 

Lastly, our study resulted in one more unforeseen twist when it comes to integrating ESG ratings. That is, the question whether we can actually trust the rating scores. To answer this, we must first understand how scores are created. Rating providers look at an immense amount of publicly disclosed information, reports and policies. And based on what company’s report, rating scores are aggregated. However, it is clear that a firm would only report on things they do well. In fact, we observe that with increased reporting, ESG scores also improve. But what about the real-life actions and impacts? Some rating providers offer a combined score, which also considers media reports on the involvement in controversial actions. As these scores are only available at an aggregate level, we calculate them on a single-pillar level using Refinitiv’s methodology, which adjusts for firm size and industry. Looking at specific examples in our portfolios, we found that the impact of such controversy involvement on the overall score could still be larger. Nevertheless, we stress that in order to have a complete picture of a firm’s ESG behavior, the impact of these controversies needs to be reflected in investment decisions. 

To sum up, given the results of our research, there are three things we aim to highlight:

  • It is crucial to increase investors’ awareness of “Social” matters and provide a better landscape for impact investments in this specific dimension.
  • Integrating ESG ratings does not always promise a better ESG performance for the whole portfolio. Therefore, it is necessary to focus on strategies that lead to actual impact.
  • Third, looking beyond the information that is disclosed by companies themselves, more attention should also be addressed to “real life actions” when making investment decisions. 

About the Authors

Lea Kasper has recently graduated with a MSc. in Finance and Investments (cand.merc.) from Copenhagen Business School. Her interest and enthusiasms about sustainability and how to more efficiently integrate non-financial factors in investment decision-making contributed to her choice to further investigate this topic throughout the master thesis. 

Alina Hofer has recently graduated with a MSc. in Finance and Investments (cand.merc.) from Copenhagen Business School. Being passionate about creating impact through ESG-aligned investments, she was excited to further focus on her interest in this field throughout the master thesis.

Kristjan Jespersen is an Associate Professor at the Copenhagen Business School. He studies on the growing development and management of Ecosystem Services in developing countries. Within the field, Kristjan focuses his attention on the institutional legitimacy of such initiatives and the overall compensation tools used to ensure compliance.

Image source: SustainIt

Corporate Social Responsibility (CSR) in Asia: Then and now

By Wendy Chapple & Jeremy Moon

◦ 3 min read ◦

This blog post is a repost and has first been published by Business and Society (BAS) blog on 27th of April 2022.

It is both a bit weird and a great honour to be invited to reflect on our paper, “Corporate Social Responsibility (CSR) in Asia: A Seven Country Study of CSR Web Site Reporting”. The process has given us a chance to reflect on what we knew then, what we know now, and how much things have evolved. Our reflections cover memories of the context and origins of the paper; the data available – and unavailable – to us at the time; the approach we took – and what we see as its virtues – and the results; and the relevance of the paper to CSR in Asia today – nearly twenty years on.

As is often the case, the origins of a well-known paper are curious. Our paper grew from the internationalization strategy of the University of Nottingham (UoN) where we then worked in the International Centre for Corporate Social Responsibility (ICCSR). UoN had opened a campus in Malaysia and was opening another in China. So, the Vice-Chancellor encouraged us to engage with our colleagues there …which made us think that we should probably know a bit about Corporate Social Responsibility (CSR) in Asia … hence the paper. Little did we know what this would lead to!

Thanks to the ICCSR, we had the funds to employ researchers with whom we analyzed web site reporting of 50 companies’ CSR in seven Asian countries: India, Indonesia, Malaysia, the Philippines, South Korea, Singapore, and Thailand (bringing a range of business systems in terms of size, religion and culture, political system, and economic development). Hang on, you say, what about China? Our answer is simply that at that time there were barely any Chinese MNCs with English language website reporting… which is certainly not the case now! Although our choice of sample skewed the population to the larger companies with a strong international business profile, this did not concern us as it strengthened the testing of the CSR-shaping role of national business systems.

We focused on broad CSR waves, i.e. community involvement, socially responsible production processes, and socially responsible employee relations. Whilst it enabled broad generalizability of the character of CSR nearly twenty years ago, it does raise some questions of compatibility with current CSR agendas in Asia. However, the more inductive identification of component CSR issues (e.g. community development; education & training; health and disability; environment) makes the findings amenable to temporal comparison, providing a more fine-grained analysis of activity within the waves. We also focused inductively on the dominant CSR modes (i.e. how the issues were addressed). This is when things got interesting. We started to see distinctive country patterns emerge in terms of issues within the waves (e.g. community issues were particularly prominent in India, Thailand, Malaysia and the Philippines, but less so in the other three countries), but this was not the case in the modes. The modes deployed within each of the waves were strikingly similar: philanthropy dominated community investment, and codes  and standards dominated production processes. In other words, the “what” rather than the “how” was nationally distinctive.

Some conclusions now seem uncontentious, most obviously that ‘community involvement’ is the CSR priority in Asia. Similarly, there is no “Asian CSR” model, but a set of nationally distinctive patterns of CSR behaviour, resulting from the national business systems, rather than development. Reflective of the impact of globalization on CSR, we found that companies operating internationally were more likely to adopt CSR than those operating only in their home country. One might expect that international exposure might lead to an increase in similarity of approaches across countries; however, we instead found that the CSR of the multinational companies operating in Asian countries tended to reflect their host rather than their home countries, reinforcing the national distinctiveness. However, this finding may be a little simplistic in the light of emerging tensions between international CSR approaches and host country experiences.

It is great to see that CSR in Asia has attracted a volume of research and we are delighted that our paper has been a reference point for some of this research.

Blog Editor’s note: The authors’ paper, “Corporate Social Responsibility (CSR) in Asia: A Seven Country Study of CSR Web Site Reporting” , is open access until December 31st 2022 as part of the journal’s 60th anniversary celebrations

About the Authors

Jeremy Moon is Professor at Copenhagen Business School, and Chair of Sustainability Governance Group. Jeremy has written widely about the rise, context, dynamics and impact of CSR.  He is particularly interested in corporations’ political roles and in the regulation of CSR and corporate sustainability. He is the Project Lead of the RISC research project.

Wendy Chapple is a full Professor of International Business and CSR at the Vienna University of Economics and Business (WU Vienna). She has played central roles in programme design and development, designing CSR related programmes and has been programme director for MSc and MBA programmes in CSR in the UK.  Wendy gained recognition for the development of faculty, programmes and research, by winning the Aspen Institute faculty pioneer award in 2008.  At WU, she will contribute CSR and Sustainability modules to the CEMs and undergraduate programmes.

Photo: Wikimedia Commons

Responsible to whom and for what?

Contestations of CSR across time, space, and experience … and a Call for Papers 

By Jeremy Moon

◦ 3 min read ◦

It is well known that globalization of business has thrown up a host of new governance challenges and new governance solutions. Conspicuous in this regard are the various ‘responsibility remedies’ for challenges posed in the supply chains of multinational corporations.

The growth and transformation of supply chains, particularly in agricultural products and garments has reflected a pattern of business expansion and penetration of host country markets. These have been followed by revelations of short-comings in the treatment of workers and communities, and in environmental responsibility. And in turn, these have been followed by responsibility remedies, often in the form of partnerships, international standards and multi-stakeholder initiatives.  

Formerly, if corporations were asked to whom they were socially responsible they might well have answered ‘to their communities’ or ‘to their stakeholders’. The concept of responsibility to communities makes sense in an industrial model of production in which the company, its management and workers are united not only by association with the company but also by the place in which the company had its most obvious impacts. The concept of responsibility to stakeholders is premised on its offer of an alternative to exclusive responsibility to shareholders, combining an ethical and a functional logic. But with global supply chains, the concepts of community and stakeholder responsibility are stretched.  In the former case this is to relationships with no face-to-face interaction or even common identity with place and culture. In the latter case it is to corporate relationships with workers who have no contractual relationship with the respective corporation, and may even be unaware that they are working in that corporation’s supply chain.

So we have witnessed numerous alternative models of supply chain responsibility often in the form of partnerships of businesses and civil society organizations, sometimes also involving local, national and international governments. The legitimacy of these partnerships, standards organizations and Multi-Stakeholder Initiatives (MSIs) is usually premised on some reference to, what are taken to be, universal principles, and on the plurality of participants, particularly those reflecting societal voice – ostensibly the surrogates of community and stakeholders.

But notwithstanding the legitimacy that these responsibility remedies initially attracted, research increasingly sheds doubts on their ability to resolve the responsibility question because they tend to obscure conceptions to whom and for what business is responsible for, and specifically by marginalizing representation from the global South – or the production-based economies of the supply chains.  

In my own work, I have seen tensions between host governments and international remedies for oppressive labour standards, with the former regarding such ostensibly well-intentioned initiatives as subversive to their own authority. There are tensions between host country suppliers and international brands and retailers with some of the former going out of business for not readily complying with new standards or complaining that they bear disproportionate costs of factory upgrading. And there are tensions experienced by workers whether with their own governments for regulatory failure, with their immediate employers for low wages and poor conditions, or with international supply chains which structure their livelihoods. But these tensions are often not articulated by virtue of the weak labour organization (often compounded by political environments hostile to organized labour). 

As a result from global South perspectives the new variants of the social responsibility model look ill-suited to the ‘on the ground’ economic, social and environmental challenges, at best. At worse, they look like a legitimization of a continuing model of exploitation.

A forthcoming special issue of the journal Human Relations, ‘Contesting Social Responsibilities of Business: Experiences in Context‘ is devoted to addressing such issues.  Core questions that the SI is designed to address include:

  • How do individuals, groups and communities from various geographic and geo-political contexts experience the imposition of social responsibilities and practices from businesses of all forms? 
  • How are social responsibilities and their related institutions and practices transformed, subverted and/or resisted within, across and outside of organizations and workplaces?

Moreover, the SI editors will also welcome papers on wider issues arising from the social responsibility of business, specifically to highlight perspectives borne of contextual experiences.  

A Special Issue workshop will be held on Thursday 16th September 2021 (applications by Monday 21st June 2021. To be considered for this special issue, full-length papers should be submitted through the journal’s online submission system between February 1st and 28th 2022.

For full details on the call, the workshop and the submission processes please follow this link.

About the Authors

Jeremy Moon is Professor at Copenhagen Business School, Chair of Sustainability Governance Group and Director of CBS Sustainability. Jeremy has written widely about the rise, context, dynamics and impact of CSR.  He is particularly interested in corporations’ political roles and in the regulation of CSR and corporate sustainability.

On behalf of the Guest Editors: Premilla D’Cruz, Nolywé Delannon, Lauren McCarthy, Arno Kourula, Jeremy Moon and Laura J. Spence; and the Human Relations Associate Editor: Jean-Pascal Gond.

Under the radar: How companies can redefine what we consider socially responsible

By Verena Girschik

◦ 2 min read ◦

Notwithstanding promises of win-wins and synergies, we have good reasons to question whether companies address social problems in society’s best interests. As many critics have pointed out, companies tend to promote solutions that foster their commercial interests – often without considering their broader social impact.

Do our suspicions stop them? Of course not. Companies are usually well aware of any concerns and continuously evaluate the risk of prompting a controversy around their social activities. When they don’t have the social license to operate, they simply cultivate relations with organizations that do and get them to act on their behalf. Using such relational strategies, companies’ efforts remain hidden from public scrutiny insofar as they operate under the radar. Smart!

It’s not quite that simple, however. Legitimate organizations such as NGOs are just as aware of those widespread suspicions, and they are therefore often reluctant to work with companies. Indeed, if an organization’s relations with companies are perceived to be inappropriate, the organization risks exacerbating concerns around corporate influence and may thereby jeopardize its legitimacy too. The widespread suspicions of companies’ intentions thus make it more difficult for companies to participate in social change. Let’s call this a legitimacy barrier. 

Overcoming the legitimacy barrier through relational work

How do companies overcome the legitimacy barrier and become legitimate actors in social change? In a recent publication (Girschik, 2020), I theorize how companies may engage in relational work to cultivate and shape their relations with legitimate organizations in such ways that redefine their involvement as socially responsible and thus legitimate. The paper details that companies can take four interdependent steps:

  1. Cultivating communal relations: As a first step, companies can form or strengthen personal relations with people who work for legitimate organizations and who are likely to be interested in addressing the social problem in question. On a personal rather than organizational level, it is easier to align and create a shared understanding of potential courses of action.
    
  2. Extending organizational support: Once a shared understanding is evolving, the company can start diligently targeting resources that enable the other organization to boost its activities and address the social problem. Such support has to happen on the organizational level to make sure that it is not considered for individual gain.
    
  3. Articulating a partnership: Because the second step produces salient practical outcomes and illustrates the benefits of corporate involvement, it opens a window of opportunity to formalize collaboration through a partnership agreement. As part of this agreement, the company can participate in defining not only further courses of action but also the company’s role.
    
  4. Differentiating as a socially responsible company: At this point, the company’s competitors have likely become interested and may try to imitate the company’s involvement by forming partnerships with the same or similar legitimate organizations. That’s a good thing for the first-moving company because it promotes the legitimacy of such partnerships. And benefiting from its strong relational embedding, the company is likely to outperform competitors through superior compliance with expectations. Being perceived as less sincere, competitors’ efforts are thus less strategically valuable and the first-moving company stands out as most socially responsible.

This process is time- and resource-consuming, but my study shows that it may pay off: it may enable companies to legitimate their involvement in social change while securing a competitive edge.

For better or worse?

These four steps explicate subtle yet consequential efforts through which companies may shape social change. The good news is that it is not easy and takes genuine long-term commitment. The bad news is that companies’ commercial interests may inform and mold trajectories of social change while their actual influence is hidden under a CSR veil. We need to keep deconstructing the relational constellations through which companies establish and exert their influence. 

Reference

Girschik, V. (2020). Managing Legitimacy in Business‐Driven Social Change: The Role of Relational Work. Journal of Management Studies, 57(4), 775-804.

About the authors

Verena Girschik is Assistant Professor of CSR, Communication, and Organization at Copenhagen Business School (Denmark). She adopts a communicative institutionalist perspective to understand how companies negotiate their roles and responsibilities, how they perform them, and with what consequences. Empirically, she is interested in activism in and around multinational companies and in business–humanitarian collaboration. Her research has been published in the Journal of Management Studies, Human Relations, Business & Society, and Critical Perspectives on International Business. She’s on Twitter: @verenacph

Source: photo by Kelly Sikkema on Unsplash

Friedman’s critique of CSR at 50: birthday surprises

By Jeremy Moon

Sorry I am late in sending a 50th birthday card for Milton Friedman’s essay “The Social Responsibility of Business Is to Increase Its Profits [1]. Many would say that it is a birthday not worth celebrating. I agree with my colleagues Steen Vallentin (see blog) and Sandra Waddock (see blog) that we should move beyond Friedman’s assumptions and prescriptions. So why do I use a seemingly outdated newspaper article in my introductions to courses on corporate social responsibility (CSR)? In Steen’s terms, should I continue to flog the ‘somewhat dead horse’? As I think this horse still has legs I wouldn’t flog it, but I would continue to take some of the CSR journey with it. And here’s why. 

By reading and thinking about “The Social Responsibility of Business Is to Increase Its Profits” students have gained insights into how business and its context changes, and into some key abiding issues (e.g. the relationship of business responsibility to government, the purpose of business). Friedman packs an awful lot into the essay. Despite my belief that it is anachronistic and misguided in parts, Friedman – sometimes unwittingly – brings a few interesting surprises to the class.

Surprise No. 1 is that it was even worth penning a critique of business social responsibility in 1970. It is sometimes assumed – especially in business schools – that business concerns with responsibility and sustainability are relatively new fads (the sad truth is that many schools have been slow to address these concerns). But, yes, there was a lot of talk about CSR in the late 1960s USA, and Friedman castigates GM Motors for its social initiatives. So CSR is not new but it has its ups and downs. Its focal issues, modes and rationales differ over time and vary among contexts.  

The biggest change to CSR since 1970 is probably globalization bringing with it global supply chains and new corporate agendas of responsibility for labour & human rights and for the natural environment. Friedman envisaged that the only governments relevant for social issues were democratically accountable (i.e. American) and thus did not envisage the difficult responsibility issues for corporations in sourcing from, and selling to, countries which are undemocratically and corruptly governed. 

Surprise No. 2 is for those who know that Milton Friedman had already achieved fame or infamy for his libertarian position. In his book Capitalism and Freedom (1962), he presented government as inefficient and ineffective on key public policy issues. As Sandra Waddock points out, neo-liberalism, of which Friedman is a standard-bearer, generally contends that ‘less government is invariably good’. Yet in “The Social Responsibility of Business” Friedman is positive about government as an accountable and competent actor for resolving societal problems.

Friedman suggests a dichotomous view of the responsibilities of government and business because he assumed that business could best pursue its responsibilities – to increase profits – unencumbered by public policy obligations, and that government could legitimately raise taxes to address social issues. But this dichotomy rather belies the realities, then and now, of business organizations seeking favorable governmental intervention in markets and society… and of governments seeking business contributions to addressing societal challenges.

Surprise No. 3: Friedman acknowledges the virtue of social investments by business … ‘excuse me?’. Yes. In a rather over-looked passage, he comments that: 

It may well be in the long-run interest of a corporation that is a major employer in a small community to devote resources to providing amenities to that community or to improving its government. That may make it easier to attract desirable employees …or have other worthwhile effects.

M. Friedman (1970). “The Social Responsibility of Business Is to Increase Its Profits”, p. 124 col. 3.

This looks like an early version of the business case for CSR – re-labeled Creating Shared Value by Porter & Kramer [2]? But Friedman just doesn’t want you to call social investments CSR. Like today’s critics of CSR, Friedman sees this cloaking of a business strategy as a form of “window-dressing” and as “approaching fraud”. This introduces the fascinating point of class discussion about whether something can be described as socially responsible if it also benefits the benefactor, and specifically the corporate benefactor?

Surprise No. 4 is for students of business and management.  It lies in Friedman’s misrepresentation of corporate governance. His main argument about CSR constituting misuse or even theft of shareholders’ property is predicated on his contention that shareholders are the legal owners of publicly traded corporations. But in fact the corporation itself owns its assets: indeed the whole point about limited liability is that shareholders are exempted from liabilities that would otherwise rest on owners [3]. Of course, there are duties to shareholders – legal and ethical – but these are tempered in corporate governance regulation and judicial rulings (details vary among jurisdictions).

This is also a surprise for some corporate critics who see the problem of corporate irresponsibility as simply a function of a shareholder model [4].  In other words, they believe Friedman’s myth of the managers simply being the agents of shareholders. That this myth has achieved such standing is, perhaps partly testimony to the appeal that Friedman’s argument has had… and another reason why I like to introduce him to students.  

Surprise No. 5 is one that, in retrospect, Friedman himself may have had to face. It is clear that investors do not conform to his fairly unidimensional assumptions of shareholders’ motivation: not all are interested in short-term profit. Some are motivated by long-term security of their investment and others by values (e.g. avoidance of risky products, preference for products not tested on animals). Today we see evidence of greater mainstreaming of investor concerns with sustainability issues that Friedman would have contended are beyond corporate responsibility and which are properly in the sphere of government (see Rasche blog).  

Of course, much else has changed which students like to ponder, including:

  1. the extent to which corporations adopt the business case for responsible and sustainable goods and services, be it for their own sake, or reflecting changing consumer, employee or investor preferences or, more broadly, reflecting their understanding of the expectations of societies and regulators.
  2. the institutionalization of CSR through private authority (principles, standards, audits, reports) and its intersection with civil society and democratic government.
  3. skepticism about corporate motivation for “promoting desirable social ends” is no longer the sole prerogative of libertarians like Friedman (and Hayek).  I now also comes from the very socialist perspectives that Friedman feared the most.

So yes, we certainly need to move on, but we may move on more assuredly if part of our journey (on horseback or otherwise) is engaged in the conversation he spurred (sorry for flogging these equine metaphors…). 

References

[1] M. Friedman “The Social Responsibility of Business Is to Increase Its Profits”, New York Times Magazine, 13 September 1970.

[2] M. Porter & M. Kramer “Creating Shared Value”  Harvard Business Review, Jan  – Feb 2011.

[3] E.g. Lynn A. Stout. The Shareholder Value Myth: How Putting Shareholders First Harms Investors, Corporations, and the Public, 2012.

[4] E.g. Not Fit-for-Purpose: The Grand Experiment of Multi-Stakeholder Initiatives in Corporate Accountability, Human Rights and Global Governance (Summary Report), MSI Integrity, 2020.

About the Author

Jeremy Moon is Professor at Copenhagen Business School, Chair of Sustainability Governance Group and Director of CBS Sustainability. Jeremy has written widely about the rise, context, dynamics and impact of CSR.  He is particularly interested in corporations’ political roles and in the regulation of CSR and corporate sustainability.

Photo Source: Milton Friedman blowing out the candles on his birthday cake, while his wife Rose and other party attendees look on. 15 July 1987. ©Hoover Institution Archives.

Making the case for and against and beyond Friedman in 2020

On the anniversary of Friedman’s “The Social Responsibility of Business Is to Increase Its Profits”

By Steen Vallentin

September 13th marked the 50th anniversary of the publication of Milton Friedman’s famous New York Time Magazine essay entitled “The Social Responsibility of Business Is to Increase Its Profits”. This has occasioned a slew of testimonials and opinion pieces on Friedman’s legacy in general and the legacy of this free market manifesto in particular. 

Not surprisingly, the tone of testimonials have differed. From those lamenting Friedman’s enormous influence on the discipline of economics, economic policy, modern business and finance over the last three to four decades in particular, to those celebrating these very same developments. One commentator, in The New York Times, speaks of how a generation of C.E.O.s have been brainwashed to believe that the only businesses of business is business. That the sole responsibility of business is to make money. 

Dwindling relevance

Anti-Friedman sentiment, and this is nothing new, takes aim at the single-mindedness and moral blind spots of free market capitalism, market fundamentalism, the shareholder paradigm, finance capitalism, you name it.

Indeed, ‘Friedman was wrong’ was for many years a recurrent theme in arguments made in support of CSR and stakeholder capitalism. But Friedman is not as relevant as he used to be.

In recent years, as far as specialized discussions of CSR go, the Friedman doctrine has increasingly been displaced by ‘the Porter doctrine’, that is, the strategic view of business responsibilities promoted by renowned, now retired, Harvard Business School professor Michael Porter along with Mark Kramer.

Porter & Kramer’s more accommodating brand of economic instrumentalism – encapsulated in the influential notion of Creating Shared Value (CSV) – has turned out to be much better attuned to present circumstances than the message of Friedman’s antagonistic and polarizing opinion piece.

The critique of free market capitalism has arguably gained urgency and currency with the climate crisis and calls for sustainable development and green transition. This is not to say that the Friedman doctrine has been abandoned by all those who used to support it.

However, given the opportunity to reflect, supporters of Friedman tend not to dwell much on the minutiae of the 1970 essay.

The devil is in the detail, and few seem to be willing to argue that what Friedman wrote 50 years ago is a proper representation of how the problem of corporate social responsibility is constituted in the year 2020.

The strength of Friedman’s wonkish essay was always its crude simplicity. For many years it seemed to encapsulate everything that needed to be said about CSR – according to mainstream economists and ideologues of a similar persuasion and the discipline of neoclassical economics. In other words, very little needed to be said. 3000 words were enough.  

However, with the rise of ESG and sustainable finance it seems to be dawning even on the disciplines of economics and finance that more indeed needs to be said – and that the crudeness of Friedman falls terribly short in capturing the challenges, risks and opportunities ahead.

Friedman’s article has served as a moral cornerstone for the shareholder value paradigm. Its moral shortcomings are increasingly showing, though.

The Friedman doctrine nonetheless

What supporters of the Friedman doctrine nevertheless argue, is that he was (and is) right about fundamentals: that the shareholder value paradigm is a superior economic principle and form of governance. The argumentative support structure for this paradigm does, however, need adjustment in order to achieve better alignment with changing historical conditions, opinion climates, societal norms and expectations.

In other words, supporters of shareholder capitalism need to fight for their cause. They need to renew their engagement in the ongoing ‘battle of ideas’ over business and society.

Their main opponent in this battle is well-known, but has been gaining new and more widespread support as of late. The opponent is stakeholder capitalism, the virtues of which have found high-level affirmation recently in the Davos Manifesto of 2020 and in the Business Roundtable statement on the purpose of business from 2019. 

Importantly, the American brands of stakeholder and shareholder capitalism have a common denominator. Both Friedman and R. Edward Freeman (the great popularizer of stakeholder thinking) have described themselves as libertarians. Stakeholder capitalism, US-style, begins and ends with voluntary initiatives and stakeholder engagement by business. Government and regulation are not supposed to have central roles to play in such endeavors. They are supposed to work better, more smoothly and efficiently without government interference. 

Thus, the first line of battle – for Friedman supporters – has to do with regulatory failure. Sure, there are market failures that we need to take account of when assessing the responsibilities of business. But regulatory failure should be no less of a concern. 

The second line of battle has to do with principles and practices of governance. According to its supporters:

Stakeholder capitalism is supposed to be more open, democratic, responsive and responsible than its counterpart. But what does stakeholder governance mean in practice, at the corporate level, unchecked by government regulation and without agreed upon rules of engagement? It is far from clear. 

Will it ultimately be good for business and society if companies are governed in accordance with the diffuse model and principles of ‘stakeholderism’? It is equally well imaginable that stakeholder capitalism can turn out to create less value for the stakeholders whose interests it is supposed to reflect and serve, and that stakeholders will ultimately be worse off if this is the direction the development of the economy takes. And it may be that shareholder capitalism, with its more clearly defined purpose and governance principles, is ultimately better equipped to keep business leaders on their toes and create value not only for shareholders but for stakeholders at large. So the argument goes in conservative circles.

Ideology and the ongoing ‘battle of ideas’ over business and society

While many of these arguments seem to fly in the face of public opinion of the more progressive kind, we must acknowledge how, in a polarized opinion climate, public opinion is divided on many political topics. Andrew Hoffman (2012) speaks of how the climate change debate in the US has become enmeshed in the so-called ‘culture wars’. Acceptance of the scientific consensus regarding climate change is now seen as an alignment with liberal views consistent with other cultural issues that divide the country (i.e., abortion, gun control, health care, and evolution). This tendency has only worsened under the Trump presidency.

On top of this we can observe how sustainable development and green transition are evolving as government-driven agendas, involving a high level of social and economic planning – not to mention the COVID-19 crisis and how the pandemic, for better or worse, has provided a large-scale affirmation of the primacy of government intervention in dealing with grand societal issues.

Under these conditions it has once again become relevant to speak not only of broader socialist tendencies in politics and society, but also of how CSR/corporate sustainability can be a Trojan horse or slippery slope leading from market capitalism into a new socialist order. In other words, the ideological underpinnings of the CSR debate are once again becoming more apparent.

This calls for more in-depth studies of the ideological commitments sustaining the theory and practice of CSR. It does not necessarily call for rejuvenation and regurgitation of Friedman’s short essay, though. Friedman is not as relevant as he used to be in discussions of CSR. The anniversary has done nothing to change this.

We need to look beyond Friedman and see him (only) as one part of the larger ideological tapestry. We need contextualized, updated engagements, not more flogging of a somewhat dead horse.

References

Hoffman, A.J. (2012). Climate science as Culture War. Ross School of Business Working Paper No. 1361, June 2012 / Stanford Social Innovation Review, 10 (4).

About the Author

Steen Vallentin is Director of the CBS Sustainability Centre and Associate Professor in the Department of Management, Society and Communication at Copenhagen Business School. His research is centred on CSR (corporate social responsibility) and sustainable development in a broad sense.