Corporate Social Responsibility Can't Happen By Itself

emphasis on short-term profitability stunts CSR’s ability to thrive in the market

Posted Oct 1, 10:40 pm in business, business models, culture, economics, ethics, finance, improvements, marketing, sustainability, unfinished thoughts


Regulation is a pretty hot topic. And when I say “hot,” I mean that it has an uncanny ability to divide a crowd. Progressives seem to generally favor regulations as a means of limiting the damage caused by corporate recklessness, and they have been quite vocal in pushing for greater government oversight in what companies can do, and how much they can do it before incurring serious penalties. Meanwhile, proponents of the free market maintain that the only fair and effective way to handle regulation is to allow the market to do the work; they believe in an efficient economic system that automatically controls problems that really matter (i.e. the problems most people care about). I personally can sympathize to some degree with both sides of this debate, but am not convinced that either can be implemented as solutions to the problems we currently face. What follows is my logic.

Before we can go on though, we have to face facts: it’s been obvious to those paying attention that market forces have not been effective in curbing devastating environmental damage caused by companies who have ignored the social costs of their operations. It’s not limited to environmental damages, either. The recent financial meltdown almost certainly would have been prevented with more oversight.

The traditional progressive (read: “liberal”) line about all this is that these corporations are just greedy and soulless, and don’t care about anything but profit. But this views corporate activity within a vacuum, and denies the economic realities underlying their behavior. In the absence of proper incentives, no company will behave in a manner consistent with diffuse, idealized social goals. Companies by their very nature act in ways that are most beneficial to themselves in the marketplace; even companies that try to do social good still have financial and publicity incentives underlying their behavior. Why? Because if they don’t, they effectively get punished by Wall Street and the market; remember that when we’re talking about the stock market, the bottom line is that public companies (i.e. the biggest organizations on the planet, who control the most money) pretty much need to post higher-than-expected profits consistently— or else. On Wall Street, nobody gives a hoot about how socially responsible you are— unless you’re making money from it. And tragically, our system is structured in such a way that companies really cannot afford to piss off Wall Street, for a number of reasons that go beyond the scope of this commentary.

Nevertheless, that is an economic reality; to condemn a company for being socially irresponsible overlooks the conditions that encourage the sort of reckless behavior that we hear so much about. In my opinion, it’s more of an indictment of our social and financial structure than it is of a company to say that they act irresponsibly. Like I’ve said before, we should think of corporations like organisms. They do what it takes to survive now. They typically can’t afford to think too far in the future, because Wall Street does not reward thinking far into the future; Wall Street rewards thinking about next quarter. Whose fault is that? I’d argue that it’s all of our faults. In an environment of high competition and high risk of market punishment, it’s unfair to blame companies for playing the game by the rules we ourselves constructed. Of course, it doesn’t make what they do ethically right, but like in any evolutionary context, the concept of justice doesn’t play a large role in behavioral decision-making; surviving does.

So yes, public companies do operate by almost strictly by financial motives, just like many progressives indignantly charge. But I would argue that this financial motivation should not at all detract from the actions of, say, Wal-Mart, who has done more than almost any other company in the world to enact serious green initiatives. True, they’ve done it for themselves, their own bottom line, and Wall Street— but still, they’ve done it. And if that’s the motivation they need to do it, then perhaps we should encourage that. Besides, if they were supposed to adopt a sudden conscience about their activities and rectify them, whose social goals are they supposed to strive for, anyway? Lots of different social factions have lots of different goals, and many of them have incompatible or actively contradictory goals.

For this reason, it seems fair to place the decision-making process in the hands of the public, through market forces. That allows a sort of collective decision-making process that is free from being regulated by “some guys on a board,” and allows for us to ostensibly have a shared voice in determining the direction that we take as a planet. Unfortunately, however, there are some problems that such market forces don’t resolve. For example, the economically well-endowed have a disproportionately large voice and thus the ability to unilaterally have a strong negative impact with their choices. And there’s still no guarantee that the aforementioned group will pay attention to social well-being if they’re still being held hostage by Wall Street demands. Free market economics as a means of regulation is dependent on not only market efficiency, but ethical, rational, and well-informed decision-making on the part of consumers— many of which are corporate entities.

But as consumers we are neither rational nor omniscient. We are sometimes ethical. But we can’t know everything about all the downstream effects of all our purchases at the time of purchase. This makes it pretty hard to argue the point that the market will be able to curb environmentally damaging business practices through selective consumption.

That may seem like a slam dunk for regulation, and many on the political left would love to see this happen. But it’s not that easy. The problem of regulation is complex, and it is difficult to enact regulation in a way that appears fair to everyone. Here’s the main problem: if there are regulations, who gets to call the shots?

Some might argue that we should use science to guide our regulatory policy, at least with regards to environmental concerns. But what science? Even science can have an agenda. The more you look into scientific research, the more you see how there is a chain of funding. Funding is a political process. People conducting research are subject to biases. No matter what the science says, or the preponderance of evidence suggesting one thing or another, when it comes down to drafting law, there will almost always be some arbitrary component about implementation (e.g. exactly how many tons of CO2 a company can release per year; exactly what chemicals a company can and can’t produce). And those people whose economic interests are being impinged will no more welcome the validity of the science or the arbitrary lines being drawn than a liberal would welcome Sarah Palin’s views if she was placed in charge of preserving endangered wildlife. Ultimately, any laws will be seen as political tools with embedded agendas.

Though it is debatable how much this might change corporate attitudes towards CSR, I think part of the fix is to change the nature of Wall Street. It does not serve companies or society to have such a heavy focus on short-term profitability. This structure denies companies the opportunity to act in ways that favor their own long-term efficiency, the public’s best interest, and the well-being of the planet. If companies didn’t have to keep impressing Wall Street, they could better take actions that could, over the long term, make their operations more efficient, streamlined, and less wasteful. That would be good for their bottom line and for environmental concerns. But that takes time, and it might require a few consecutive quarters of what may appear to be subpar financial performance. Right now, this is a highly risky strategy that most companies wouldn’t consider because they will not be rewarded for it.

Weirdly, even amidst all the talk about reform in the financial industry, I have not heard any talk about this. Admittedly, I’m not sure if anyone has worked out the details about how a “new and improved” stock market system would work, or if anyone has suggested a better set of economic incentives for waste reduction, but perhaps it’s time we started a national dialogue about it. It seems rather important.

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Taxation and Economic Incentivization

Posted May 9, 12:43 pm in business, consumerism, economics, environment, finance, marketing, politics, sustainability, transportation


Back in March, I took a trip to a developing country in Latin America for a project I was working on. As it would turn out, my expenses were fully paid by the institution I was operating under. Very quickly, I noticed something different about the way I was ordering meals at restaurants; I was getting dessert.

I never order dessert at meals.

Then it hit me. The reason I never order dessert is because dessert tacks on an additional $5-$7 onto the bill. It has nothing to do with the fact that dessert is bad for my health and is chock full of empty calories. Sadly, I’d probably order it every time I eat out if someone else was flipping the bill.

Behavioral economists have long realized that one of the greatest drivers of human consumption behavior is economic interest— money. Make it expensive to do something and it discourages the behavior. Behold the so-called ‘sin tax,’ which makes smoking cigarettes slightly more unappealing through an increased price (though apparently the price elasticity of cigarettes is virtually nil).

For her presidential candidacy, Hillary Clinton is proposing a gas tax holiday. Let’s think about the logic here in the context of economic incentive:

1) America relies on gasoline for operation.
2) America’s gasoline prices are going up.
3) A high gasoline tax discourages people from using gas unnecessarily; therefore the opposite, removing the tax, encourages more liberal use of gasoline on a macro scale.
4) Higher use of gasoline ensures higher prices in the future given the reality that gasoline is a limited resource, and increasing reliance on other countries for oil.

This strategy makes no sense. Our country should be doing everything in its power to discourage unnecessary gasoline usage. The government should be providing tax incentives for companies to use renewable energy, and should be making it easier for renewable energy companies to form and grow. Instead, the government is doing the exact opposite, which is not only a terrible long-term strategy for energy policy, but ensures a grim future for the people of the United States in many ways.

Many, if not most, of the world’s current problems come from a single source: consumption. High levels of consumerism and consumption behavior have driven many of the issues that plague the world. Reduce the occurences of this, and we start to address problems like pollution, deforestation, wars (for natural resources), energy shortages, water shortages, and the like in a meaningful way.

Federal Taxation

My own ideal form of taxation would come in the form of a VAT tax instead of the standard income tax that we have in the United States. Many in the US argue over the respective merits of progressive, regressive, and flat-taxes, but if you ask me, the VAT is the most sensible. Basically, my idea is that you don’t pay automatic income taxes to the government; instead, you pay 20-50% on everything you buy (something that everyone in the supply chain has to do— meaning that a single item gets taxed multiple times).

If it were up to me, the percentage of the VAT tax would depend on the nature of the item in question. The amount of tax levied should depend on external costs that society has to bear by the fact that this item is out there in the world. If manufacturing the product has led to environmental destruction in some way, tax it higher. Products made of plastic or which contain lots wood should be taxed high. Products that don’t biodegrade or which need special processing to re-enter the waste stream should be taxed high. Products that damage our water supply and pollute the air should be taxed high. On the other hand, items that can safely be returned to the earth to decompose should be taxed low. Unprocessed foodstuffs should be taxed low. Bicycles should be taxed low (while they use up resources in manufacturing, they encourage more prudent use of other more damaging resources).

A hypothetical scenario: say you buy a $100 stereo. By the time you check out, you’re in the $120 range. Maybe even higher, like $140 or $150. That’s considerably higher than the state sales tax you’ll pay in the United States. You’ll question whether you really need that stereo. You’ll be forced to think about the environmental and external impact of your purchasing behavior. True, you’ll have to fork over much more once you buy stuff, but you’ll have extra money in your pocket from not paying income tax.

I like this idea for a variety of reasons, but primarily because it ensures that those who consume the most also bear the external costs— a cost that is often left to society as a whole to bear. If proposed on a large scale, my guess is that many people would complain for the following reasons:

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