Corporate responsibility: a broken moral compass?

The business and finance world is facing up to its responsibilities. The term "Corporate Social Responsibility" (CSR) has by now become firmly established in the business lexicon and features in the MBA syllabus of most business schools. Large US and European companies have, in the main, adopted some kind of commitment to CSR, even if they prefer a different nuance - sustainability or corporate citizenship - and they publish lengthy reports just to prove it.

It would appear then, that the question of whether one can in fact talk meaningfully of collective responsibility has been answered and the argument that corporations are moral agents has been won. Naysayers still exist but they are in a shrinking minority and their arguments have not moved far from those of Levitt (1958) and Friedman (1962) who regarded a company's sole responsibility to be to its stockholders. Bakan (2004) has argued that a corporation's legal status prevents it from acting in anything other than its own self-interest and not for moral reasons. In reply, others (Crane & Matten 2004) argue that corporations have moral agency independent of their members, pointing to their internal decision structures as well as the beliefs and values embedded in organisational culture.

Responsibility: legal obligation or social duty?

If we accept that a company is a rational moral agent, how do we define its moral obligation in relation to other agents with moral standing? And for that matter, to whom or what do we extend moral standing (what about non-humans or the non-biotic environment, for example.)?

What does "responsibility" actually mean and to whom does it extend? With what ethical theory or framework can can make sense of it? Since "duty" is a close synonym, there is something distinctly Kantian about the principle of responsibility in terms of moral philosophy. Many CSR advocates would probably be quite comfortable with a deontological approach which judges acts as inherently good or bad regardless of their consequences derived perhaps from a utilitarian calculus. But we still need to ask: to whom does a business have a responsibility? Easy, the CSR advocate may claim, "to society".

Leaving aside the huge question of what we mean by "society" (a topic for a later post, perhaps), the cynic may reply that society does so by setting the "rules of the game" through the laws and legal frameworks that govern and constrain corporate actions, restrict the autonomy of its management, establish accountability (to its owners), and thereby define the responsibilities it expects of corporations.

As such, collective bodies such as corporations can be held legally responsible for their past actions, albeit subject to tricky issues such as intention, causation, limits of control, burden of  proof, negligence and when to impose strict liability. Moreover, laws codify the moral framework within which society detemines that companies should operate. In which case the quest for more responsible businesses should focus on public policy; fans of CSR should perform a monitoring role from the outside looking in, as quasi-regulators and whistleblowers who form part of civil society.

Beyond compliance....and into a moral muddle

This is not good enough for most CSR advocates. The scope of a company's responsibility is not adequately defined with reference to the law and extends beyond mere compliance with it. A company's legal responsibilities are most pertinent after-the-fact, in apportioning blame and seeking restitution. But CSR has come to mean some form of prospective responsibility: the behaviour and conduct of corporations in relation to wider society.

These obligations are typically expressed, for example, in stakeholder approaches, the concept of extended producer responsibility, or in some version of legitimation theory expressed in terms of an implicit contract or a social licence to operate. These now well enshrined management principles seem to be firmly rooted in deontological ethics. Is duty the ethical principle is at work in assigning corporate responsibility beyond legal compliance?

A Kantian approach might regard corporate responsibility towards a society viewed as a “kingdom of ends” in which its moral imperative lies in a universal respect for human dignity. But perhaps an emphasis on rationality and universal morality would attract other objections since moral agency in a pure Kantian approach means that corporations must exercise their own moral judgements in relation to its actions, rather than simply obeying universal rules (including those codified in laws, presumably). This would fly somewhat in the face of any desire to promote common or harmonised standards of behaviour of the form we typically see in codes of practice beloved by CSR advocates and practitioners.

For some the alternative is to appeal to enlightened self-interest or, in its more sophisticated form, shared value. In this formulation it is rational for a company to act responsibly towards "society" because, in so doing, it ultimately benefits itself (or more precisely, its stockholders). In its cruder form this rationale for CSR is therefore just a form of ethical egosim masquerading as duty. The company doesn't really have a moral duty to society at all. Friedman wins afterall.

Escaping responsibility

The theoretical ethical foundations for corporate responsibility are murkier than we might suppose. It feels right that companies should have obligations – or duties – to wider society but it is not entirely clear why - or what exactly they are. Instead, in the absence of a commonly accepted moral framework, the social norms of corporate behaviour emerge from a bustling bazaar of competing expectations birthed by the postmodernist ethical gut-feel.

The corporate commitment to the vague concept of sustainability offers little as a surrogate, hinting at a common ethical dimension to corporate goals (inter-generational justice) but leaving its application open to a wide range of interpretations. In the end, the trade-offs at the triple bottom line come down to a choice, subject to the preferences of management, over the relative weight (significance) and (possibly incommensurable) values they attach to the externalities (social or environmental impacts) associated with business activity. Whatever the ethical basis is for decision-making in a "sustainable business", it appears to be broadly consequentialist in nature. In the end the search for consensus results in loose agreement to codes of practice, guidelines and reporting frameworks detached from any firm ethical mooring.

The difficulties become even more apparent in the financial world. Here responsible investors are cast as moral agents with a fiduciary duty to a collective of principals. What exactly does responsibility mean in this context? Is it to act (i.e. invest) only in a manner which is in some sense morally right in relation to wider society, or to act in a certain way in relation to other agents (i.e. invest) only if those agents are themselves acting morally (i.e. “responsibly”) in relation to other objects of moral concern (“society” or “the environment”).

It turns out then that regarding corporate responsibility as an ethical duty may not be helpful after all. In the absence of firmly established ethical foundations and an appeal to a vaguer moral impulse, we we must perhaps accept as inevitable a relativism in business ethics, and welcome a healthy debate instead. In which case, there is no one-size-fits all standard of corporate behaviour and no universally accepted truth of corporate social responsibility.

Perhaps its time to look elsewhere for a guiding moral framework for corporate conduct. Those that use alternative terms like “corporate citizenship” may have consciously done so. Would it be better to appeal to a neo-Aristotelian ideal of morally virtuous character and a commitment to community expressed in a shared conception of the human good. Should we talk of Corporate Virtuosity, instead? Or what might feminist ethics have to say about the obligations of corporations to others in society with its focus on empathy, care and harmony in social relationships? Or further, perhaps the Judeo-Christian concept of “love” in one of its forms might do a better job of defining in more precise terms the nature of the obligation corporations have to others.

There is a clear and well established case for the economic and legal responsibilities society requires of corporations. The ethical responsibilities it expects from them are not so clear cut. We can't rely on the ethics of duty to establish universal norms of good behaviour. For the good of corporate social responsibility, perhaps its time to abandon it altogether and find a new moral compass?

Reconnect?

A London (re-)connection

When it became clear last autumn that the Occupy movement were to inhabit a permanent campsite at the the steps of St Paul’s Cathedral, the Bishop of London called Ken Costa. Under the auspices of the St Paul's Institute the Bishop asked Costa, a former senior investment banker in the City of London, to explore how we could “reconnect the financial with the ethical”. Although the choice of a City insider may not have inspired the confidence of those tent-dwellers anxious for some radical out-of-the-box thinking, the subsequent engagement has been constructive and as Chair of the “London Connection” Costa has been a regular and thoughtful participant in the media debate.  What struck me, however, about Costa’s mission was not whether there is a place for ethics in financial markets (there is) but, rather, what he meant by “reconnect”?  It suggests a re-discovery of an earlier era in which financial markets operated within in a different moral framework than they do today. Certainly, to many observers it would appear financial markets don’t operate within any recognisable moral framework at all – they are amoral, if not immoral. But a cynic may claim ‘twas ever thus.

To Costa it wasn’t. He has reminded us that the godfather of free market capitalism, Adam Smith, was first a moral philosopher who wrote The Theory of Moral Sentiments before he popularised the market’s invisible hand and the pursuit of self-interest in The Wealth of Nations.  For today’s staunchest defenders of neo-liberal ideology, Smith’s philosophy remains essentially valid, even as the Occupy movement points to the self-evident failures of egoist ethics in an unsustainable world mired by recession, social unrest, injustice, and impending ecological disaster. They would argue that recent financial history alone suggests that the unbridled pursuit of self-interest is a by-word for immorality. The old tussle between liberty and justice is being fought out in a new arena.

Simple economics

It is doubtful that many high-powered traders and bankers in Wall Street and the City have actually read Adam Smith. They have however inherited a tradition of free-market thinking and a vested interest in its claims. Most will have been taught to believe in an economic creed which places unquestionable faith in markets to deliver wealth and progress if unmolested by the State. They, like many others, are given to believe in strict “laws” of economics which are as established and reliable as the laws of physics. In the words of Oliver Williamson, “in the beginning, there were markets”. It is as if markets evolve naturally according to the same laws of nature from which life itself flourishes. This is the neoliberal orthodoxy deeply embedded in the culture of the financial markets. Markets needn't fail. But governments always do.

But markets do not emerge like this at all. Neither is human society much like homo economicus portrayed in Economics 101. Most of us that have had some education in economics need to be reminded that introductory courses in the principles of economics describe a world in abstract, subject to simplifying assumptions almost to the point of absurdity (anyone know the “assume a tin-opener” joke about economists?). We are taught competitive markets work well if all the assumptions of perfect competition hold true. But they never do. A properly functioning market is a fictional benchmark against to judge the operation of real markets. 

My first economics text book described a market as “a place where buyers and sellers meet”. That’s it. It didn’t have a lot to say about what happens when they do. It had little to say about the relationships between “economic agents”; nothing of the role of trust, of shared values or of mutual obligation. Economics is a social science that really wants to be a natural science.  As a science, there is no place for value judgements, only empirically reasoned inductive method. Economics as a profession became separated at birth from its philosophical forebears in the white industrial heat of 17^thcentury enlightenment thinking that one cannot derive an “ought” from an “is”. Thus, Hume’s “naturalistic fallacy” paved the way for the separation of reason from morality and justified the value neutrality of science. Economics adopted the language and method of science, developed its own cold utilitarian calculus, and refused to be drawn into questions of right and wrong that it felt belong to the (unscientific) realm of politics. According to Betton and Hench (2002), “when this happens, business is left to ‘create value’, divorced from any real sense of values.”

But economics doesn’t have to be like that. Economics can be re-connected with the ethical. My first brush with development economics as a postgraduate student was a breath of fresh air – it was economics with a beating heart. Development economists do not flee from normative judgements. Theirs is a narrative of justice, freedom, quality of life, voice, empowerment, with a moral imperative. Their discipline goes beyond the traditional stream of neoclassical economics and its narrow concerns with allocative efficiency; it necessarily deals with the economic, social, political and institutional mechanisms of socio-economic change. Ethical or normative value premises are central features of what Gandhi called "the realisation of human potential". Similarly, the branch of new institutional economics (NIE) inhabited by Nobel Prize winners Elinor Ostrom and Oliver Williamson starts with a rejection of the simplifying assumptions of the neo-classical tradition. Here markets are seen as institutions, subject to formal and informal rules and duties upheld by the State and impossible without it. Without enforceable property rights there can be no markets. But, equally, alternative communal forms of ownership are possible and with them new opportunities for collective responsibility and action. It turns out the tragedy of the commons is not inevitable.

Virtuous markets

Free market economics is a tarnished brand. That is not to say that free markets are bad – or good for that matter. They are necessary but not sufficient for a just and stable society. We need to abandon the ideological baggage that now hinders any discussion of “free markets” and understand that markets are no more than social institutions – a place where human beings meet to exchange goods (not bads). This is a feature of human society that pre-dates the Adam Smith and the birth of the economics profession, without which human flourishing is simply not possible.

But even though markets will survive the current crisis in confidence, the legitimacy of our unreformed financial institutions may not be so easily recovered. And neither should they. Part of Ken Costa’s quest to connect the financial with the ethical must be to establish commonly-held values in businesses and institutions that engage in socially valuable commercial exchange. Arguably, a strong sense of shared values has long been chased out of our pluralist society by a version of political liberalism which prizes individual freedom and autonomy above all else. At the same time, western liberal democracies have nurtured a postmodern relativism in ethics which frees us each to follow our own moral impulse on matters of right and wrong. Little surprise then that corporate and voluntary industry codes of practice have done so little to change the culture of the financial markets or the behaviour of its individual participants.

Some say the loss of a conception of the common good that accompanied Enlightenment thinking calls for a reaffirmation of much older neo-Aristotelian-Thomist tradition of virtue (Macintyre). But then, how does one actually encourage the development of virtuous moral character? It isn’t enough to change the rules and impose regulations, as necessary as that may be. You can punish bad behaviour – with reference to clear rules – but you can’t legislate for moral virtue. You can, however, dismantle the perverse incentive structures in the financial sector that rewards a disposition towards vicious rather than virtuous behaviour, as Aristotle might say. Hence an examination of the link between bankers pay and risk-taking is a necessary first step.

But to go further than that we need to bring about a reformation in the culture of financial institutions, of the values they espouse as well as the behaviours they applaud. This is a huge challenge of leadership which is only possible if policy-makers, regulators, and those at the very top of these institutions recognise that the business and financial culture needs to change and are able and prepared to critically examine its roots. The world of business and finance does not exist in a social vacuum. There must also be a genuine market for virtue, a source of effective demand for ethical business practices, products and services in the wider society (Vogel 2006).  Government and civil society has a role to play in fostering the market for virtue and associated institutional change, including the informal "rules of the game" by which we all participate in the market economy. Norms, values, and mores are just as important in conditioning and restraining human behaviour as laws and regulations. It is both a top-down and bottom-up process.

The dialogue with capitalism’s discontents is a social learning process which will require the free exchange of ideas in an atmosphere of mutual respect.  Happily that seems to be the happening in a small but meaningful way in an extraordinary piece of deliberative democracy brokered by St Paul’s.

Welcome to ReSt

This is the first blog for Responsible Stewardship Limited - or ReSt - the consulting company I set up to provide advisory services in the area of corporate social responsibility (CSR) and responsible investment. After a career spanning twenty years as a financial analyst, researching and writing on the European corporate bond and credit markets, I have became increasingly concerned by the effects of the growing global ecological crisis on both the natural world and human society. Having trained originally as an economist, my interest in environmental and social issues led me to pursue part-time postgraduate studies in sustainable development, environmental management, and biodiversity conservation (CeDEP) before eventually deciding to quit financial markets altogether in 2011. I am however still involved as a consultant to a major global investment management company, advising on the implementation of their responsible investment policy and on the analysis of environmental, social, and governance (ESG) risks in investment portfolios. I am also a member of the management team for the UK arm of a Christian nature conservation charity, A Rocha (A Rocha International). On these Blogger pages, I hope to share my thoughts and observations on the political, moral and ethical dilemmas facing business, finance and wider society in the quest for a more just and sustainable world.