Is Capitalism doing enough for Climate Change?
Corporate Social Responsibility and the Investor
by Edward H. Bowman, January 1973
Massachusetts Institute of Technology
Profits as a reflection of efficiency can be thought of as the most major facet of a corporation’s responsibilities, certainly one set of concepts which must be introduced to modify this argument is that of economic externalities. Most of the costs of a corporation’s activities are reflected in its books of accounts, and most of the benefits and values produced by the corporation are captured in its prices and are therefore also reflected in its books of accounts. However, this is not necessarily true of all its social costs and benefits. Such unreflected costs and benefits are referred to as externalities by economists. Pollution would be a useful current example of such social costs or negative externalities. A factory placing some pollution into a stream, even with the costs it has perhaps already incurred to eliminate some of the pollution, will not normally reflect in its books (and therefore profits and perhaps possible dividends) the pollution which does enter the stream. However, “costs” to society, which will almost always mean other individuals in society, may be incurred as far as downstream water users are concerned. This could include fishermen, householders, industrial water users, municipal water supply systems, swimmers, etc.
The Modern Corporation and Private Property noted the passing of control of the corporation out of the hands of the “owner” into the hands of the technostructure. The technostructure has its own needs, values and standards, and being in control, exercises them. It is concerned more with the growth, relative stability, and image of the corporation than “profit maximization”, though it may treat “sufficient” profits as a constraint which it must meet. The desire and goals of the technostructure may be quite sensitive to the concept of corporate social responsibility, and many activities of the modern corporation may be an allocation of the “organizational slack”, explained in A Behavioral Theory of the Firm by Cyert and March, where a corporation makes expenditures beyond an absolute and “economic” level of necessity.
Corporation involvement in social policy is contrary to stockholders’ interest is both misleading and irrelevant. . .once it is recognized that corporations are not usually owned by a group of investors who own shares in only one corporation, but by individuals who as a group typically own shares in a very large number of corporations.
A new class of mutual fund has sprung up. Those “clean funds,” of which there are now half a dozen, will have as part of their prospectus and charter the investment in social benefactors, measured in some way by the fund’s own procedures and organizations, and the fund shareholders will expect this aspect of performance. While the total investments of these institutions may as yet not be large in relation to the total market, over a period of time they may grow and their investment behavior could influence the price and as previously argued the earnings of a corporation, and of course therefore the return to the stockholder.
The Dreyfus Third Century Fund is an example of such a “clean fund” recently established. Its May 7, 1971 Prospectus indicates it is, “seeking capital growth through investment in companies, which . . . not only meet traditional investment standards, but which also in their corporate activities show; leadership in, or have demonstrated their concern for, improving the quality of life in America. . . Activities by portfolio companies in the areas of the protection and improvement of the environment and the proper use of our natural resources, consumer and occupational safety, product purity and its effect on the environment, equal employment opportunity, and the health, education and housing demands of America, will be considered by the Fund in its investment selections.
Some individual investors interviewed have expressed the feeling that they do not wish to buy shares in mutual funds any longer because they “want to know and control what companies their money is invested in.” The reasons given are essentially what is here described as a university orientation, i.e. exclusion of category “A”. As mentioned later in the section entitled “Investor Information and Influence”, one person’s reasons for placing a firm in such a category may be quite different than another person’s.
Investor Information and Influence. Following the moral/ethical interest of the stockholder, the information, influence, and power of the investor should be explored. Currently some of the most visible issues under the rubric of corporate social responsibility are more “political” than economic. They deal with the rights of the stockholder to know and to nominate.
A further change may be an easier mechanism for individual groups of stockholders to nominate director candidates. It is probable that the S.E.C. will permit this modification in standard industrial practice. An additional issue for the S.E.C, which is the major governmental agency concerned with corporate information disclosure, is the possible or probable expenditures that a corporation will have to make for environmental protection or pollution control. The impact that the stockholder might or should have is of course a puzzling question. Different shareholders, especially in the domain of social questions, may have decidedly different priorities and choices. One answer to this is to allow the market place to sort it out. Another which is currently in progress at an East Coast corporation is the design of a lengthy questionnaire for stockholder response dealing with issues of corporate social responsibility.
Perhaps a number of companies are considering this approach. As mentioned earlier, a number of commercial institutional investors have already used it. It will be interesting to see how the technostructures chose to sort out this facet of their constituency negotiations. The “rules” of this negotiation process^ which are in part supplied by government laws, are different from one country to another and also change within one country as both the culture and the law changes. The government, in other words, is often a third party in the negotiations between the company (its technostructure) and another agent such as the stockholder. It was only in 1953 in the United States that corporations were legally recognized as having the right to make charitable contributions (with “stockholder money”).
It is difficult to imagine the Internal Revenue Service challenging the deductibility, as ordinary and necessary business expenses, of corporate social expenditures. Therefore tax policy concerning the deductibility of corporate social expenditures may ultimately come also to control the question of validity under corporate law.” Law, especially corporate law, is often essentially a process of negotiation, sometimes solely with the government and sometimes also with another agent such as the stockholder.
Corporate social responsibility is dependent upon either and solely the noblesse oblige of the manager or the laws of the government, and 2) that corporate social responsibility is in fundamental conflict with the interests of the investor.
Corporate social responsibility, which can be thought of as the concern for the impact of all a corporation’s activities on the total welfare of society, is constrained, elaborated, interpreted, and negotiated by many agents in modern western society. The investor is one, but only one, of these agents, and the technostructure, also one of the agents, essentially conducts the negotiations.
Corporate social responsibility, as an integral element in the corporation’s strategy, is seen by enough investors as an important factor in a corporation’s success, chance for survival, or latent risk, and in fact is such a factor, along with the health of the corporate sector generally, that the two elements of corporate social responsibility and the Investor’s Interest must be seen as closely and positively related. Which end of the spectrum of corporate social responsibility, i.e. high or low, the investor wishes to concern himself or herself with may be an important choice.
Author Mark Dowson’s Own Recommendations
If the Technostructure companies of today are like GIATCOM – the private company based in the future in my story, and have their investment and growth strategy linked to public sector taxes, in becoming part of a consortium of organisations from both the private and public sector sharing the same delivered goals related to CSR and profitability, then the private investor investing in GIATCOM is unable to withdraw their investment from the consortium stock holding for short term gain, as the overall performance of their share involves funding the public sector as well as GIATCOM’s growth. The government’s director of the consortium fund will ultimately direct the influence of GIATCOM’s investment, not the other way around for the private sector company such as GIATCOM’s own personal short term gain or mergers and acquisitions. The strategic focus should be on organic growth in the consortium to achieve CSR not mere profitability. The Technostructure delivering innovation and technological breakthrough should not be biased to being influenced by one private sector organisation such as GIATCOM. Other private company competition should be encouraged and ultimately governed by one public sector organisation. Private investors’ money would be measured on the profitability and CSR being ascertained through the consortium’s performance rather than that of one private sector company such as GIATCOM. Therefore, the private investor’s stock holding is not purchased in GIATCOM but in the consortium which is an investment stake in the government’s public sector investment. Essentially, the modern day Technostructure companies like GIATCOM who are investing in the future of Energy, AI and Aerospace and Transport industries require their investments to mandatorily adhere to CSR investments which help protect the future health of the world’s environment.
Investments in these types of companies no longer become shares for short term gain but as government bonds for longer term gain to allow organic growth, stability and renewal of the investments to achieve good CSR and continued growth. Rather than private investment shares that are geared towards profiteering for the private sector companies’ own wealth through using mergers and acquisitions as a form of capitalism and being non-productive to achieving good CSR and continued growth within each separate enterprise of the Technostructure based company’s investments. The public sector organisation within the consortium can control the investment and prevent profiteering from the private sector company or companies, whilst sourcing the private sector company or companies’ technological innovation to help deliver all investments, whilst ascertaining the required CSR on each separate enterprise investment.