Milton Friedman, shareholder primacy’s true north, wrote:
In a free-enterprise, private-property system, a corporate executive is an employee of the owners of the business. He has direct responsibility to his employers. That responsibility is to conduct the business in accordance with their desires, which generally will be to make as much money as possible while conforming to their basic rules of the society, both those embodied in law and those embodied in ethical custom.
Much judicial, political, and academic ink has been spilled over the first part of this pronouncement, but the second part has always baffled. What ethics? Whose ethics? How do we identify ethical customs that are not instrumental in generating higher profits (because if they were, there would be no need for the qualification; we would simply recognize that pursuit of profits may include pursuit of community goodwill because in its absence it may be hard to sell one’s product).
The recent tragedies in El Paso and Dayton have raised these questions anew.
She goes on to provide an interesting analysis. Go read it.
But I want to use her comment as a jumping off point to raise an issue about corporate social responsibility that has always bugged me: Who decides what is socially responsible? I understand that many people--including most law professors--would prefer that some social justice warrior or another decide. But--and this will surprise you--I am not a fan of that approach.
The ALI's Principles of Corporate Governance § 2.01 comment h explains that that section "provides that a corporation may take into account ethical considerations that are reasonably regarded as appropriate to the responsible conduct of business." But that just raises (but does not beg) the question of who decides which ethical considerations are "appropriate" and by what metric do we decide if their conclusion is reasonable?
The ALI further explains that:
The ethical considerations reasonably regarded as appropriate to the responsible conduct of business necessarily include ethical responsibilities that may be owed to persons other than shareholders with whom the corporation has a legitimate concern, such as employees, customers, suppliers, and members of the communities within which the corporation operates.
Why are those considerations "necessarily" included in the list of appropriate considerations? other than by fiat?
As far as I'm concerned, what all of this does is to reinforce the case for deference to the board of directors. See generally my article The Business Judgment Rule as Abstention Doctrine, which is available at SSRN: https://ssrn.com/abstract=429260.
In brief, however, corporate social responsibility is usually justified either on highly contestable ethical premises or on the basis of the so-called business case. In the latter, CSR typically is defended on such grounds as that it produces good will and favorable publicity. In effect, CSR is simply another form of advertising and good employee relations. As such, it supposedly results in more business and higher profits. Who knows for sure if that is true? Maybe GM really does sell more luxury sport utility vehicles because it sponsors PBS programs—or maybe not. But that is not the right question. The right question is: who decides? The board of directors or the courts?
Board discretion over issues like cCSR is the inescapable side-effect of separating ownership and control. If there are good reasons for maintaining that separation, and there are, the board’s discretionary authority must be preserved. As we have repeatedly seen, holding directors accountable for their use of that discretionary authority inevitably limits that discretion. Consequently, deference to board decisions is always the appropriate null hypothesis.
There are cases where the board’s abuse of its discretionary authority warrants regulatory or judicial intervention. Breaches of the duty of loyalty spring to mind as the clearest example. Outside the setting of a corporate takeover, it seems doubtful that CSR poses the sort of conflict of interest necessary to justify limiting board discretion. Yet, even if corporate philanthropy involved material sums, deference would still be appropriate. The theory of the second best holds that inefficiencies in one part of the system should be tolerated if “fixing” them would create even greater inefficiencies elsewhere in the system as a whole. Even if we concede arguendo the case against board control over CSR, judicial oversight or regulatory intervention still would be inappropriate if it imposes costs in other parts of the corporate governance system. By restricting the board’s authority in this context, the various academic proposals to “reform” CSR impose just such costs by also restricting the board’s authority with respect to the everyday decisions upon which shareholder wealth principally depends. Slippery slope arguments are usually the last resort of those with no better argument, but one nonetheless must beware eviscerating exceptions that could swallow the general rule of deference. Once regulation of CSR allows the camel’s nose in the tent, it becomes harder to justify resistance to further encroachments on board discretion.
