This is the last of four articles on corporate social responsibility (CSR). A reassessment of some of the CSR perspectives discussed in the previous three weeks will be made and a few policy implications for Hong Kong will be drawn towards the end.

The view  of CSR as a political creed is predicated upon the core belief that the market economy has failed to address the social and moral needs of society. As a political creed it has gained support in the past few decades with the rising pace of globalization. Many of the ills of society, poverty, inequality, human suffering, environmental impact, erosion of traditional values, cultural imperialism, and moral degradation are all laid at the doorstep of globalization. Many of these social and moral ills are also wrapped up with the demand for political freedom in some parts of the world.

As the influence of such political and social dissent has grown corporations have been called upon to contribute to the alleviation of some of these social and moral ills. However, some of the dissenting voices identify the corporations themselves as the culprits. In some places corporations are voluntarily contributing to their communities  as a pre-emptive measure against the enactment of more draconian regulations that may impact their bottom lines.

Stakeholder and Shareholder Views can be Unified

The most familiar perspective of CSR to businessmen is the Business School perspective. Business education today teaches managers to embrace responsibility for the firm’s actions and encourage a positive impact through its activities on the environment, consumers, employees, communities, stakeholders and all other members of the public sphere.

Some businesses proactively promote public interest by encouraging community growth and development, and voluntarily eliminating practices that harm the public sphere, regardless of legality. CSR is therefore the deliberate inclusion of public interest into corporate decision-making as the core business of the firm.

Proponents argue that corporations make more long-term profits by operating with a CSR perspective. They will develop valuable goodwill with consumers, suppliers, employees, investors, and the local community and this will enhance the firm’s value. On the other hand skeptics argue that CSR is merely window-dressing, or an attempt to pre-empt the role of government as a watchdog over powerful multinational corporations, and that it ultimately detracts from the economic role of corporations. In reality, the proponents and the skeptics are not necessarily at polar opposites. In a business environment, where corporations are under pressure to adopt socially responsible measures,  acting pro-actively is a superior profit maximizing proposition. It frees the corporation from the prospect of paying costly penalties.

Milton Friedman argues that the social responsibility of business is to increase its profits. The Business School perspective claims that the firm’s value is maximized when the interests of stakeholders are taken into consideration. Superficially, Friedman’s perspective appears to  differ from that of the Business School’s. The situation can be compared to the question of whether a glass half filled with water should be described as being either half-empty or half-full. Friedman does not dispute the idea that managers should look after a firm’s  stakeholders in order to build a sustainable business that maximizes long-term profits. Business Schools teach this philosophy too.  So the differences are more rhetorical than actual.

Limiting the Sovereign’s Power

Historically, it was the arbitrary despotic sovereign who posed the greatest threat to the accumulation of riches. This was a man who could confiscate all worldly goods at will, through force. Hiding copious prosperity is not a trivial task. During the Song Dynasty rich Chinese merchants in Soochow built themselves luxurious homes and beautiful gardens only to conceal  them behind tall discreet walls lest the sovereign confiscate them on trumped-up charges. In the Islamic Middle East rich merchants created waqfs, a form of religious charitable trust, described in last week’s column, to protect their wealth. By imparting a religious character to these trusts they inhibited the sovereign from expropriating them at will.

In the two centuries before the Industrial Revolution, several complementary developments occurred in Western Europe which led to the ultimate creation of the global economy. The capitalist economy demands two requirements to thrive. First, an engine must be constructed to drive the accumulation of capital. And second, a vehicle must be developed to protect the owner’s wealth. Without  protection  there would be little incentive to accumulate capital in the first place.

The corporation fulfilled both these requirements. It was an engine to propel capitalist accumulation and a vehicle to protect wealth after its accumulation. The corporation was an institution with an autonomous and perpetual legal status separate from its creator and owner. Its existence was ensured by a system of laws respected by the sovereign. A perpetual existence allowed the corporation to develop long-term incentives to accumulate capital without the uncertainties imposed by the mortality of human life. Again, last week, I discussed in this column the limitations of Islamic partnerships and inheritance laws in this respect and their resulting negative consequences for Islamic development. An autonomous existence empowered the corporation with the flexibility to deploy resources to their best use as the business environment changed. Bound as they were by the wishes of the founder, Islamic waqfs could not exercise such flexibility and over time their perpetual existence became a curse rather than  a blessing.

In the two centuries between 1600 and 1800 classical liberalism triumphed in Western Europe. The sovereigns were relatively weak and accepted a new political doctrine to bide by the rule of law, to limit their own arbitrary and discretionary powers, and to respect the property rights of their subjects and refrain from  exploiting them.. Gradually, a system of limited and representative government replaced the absolute sovereign to allow corporations and free markets to thrive.

The market economy expanded rapidly due to the enormous vitality of these corporations. After stagnating for millennia, living standards rose dramatically for the first time in human history.  People migrated to cities. Certainly the urban living environment was miserable as can be gleaned from the literature of the time, but  it was far better than living as peasants in the countryside. The idea of a peaceful tranquil countryside life is a romantic myth that poets invented in the 19th century out of nostalgia for the past. Over time in the cities infant mortality fell, life expectancy rose, and body heights and weights also grew dramatically with rising prosperity.

The Backward Life is Romanticized

But the urban market economy had many social and moral needs that were not adequately met despite growing prosperity. The urban setting made it obvious and transparent for all to see – rising inequality, human suffering, and moral degradation. This provided a fertile ground for political dissent and social activism; and a romantic nostalgia for the past which they had despised and ridiculed in the previous century.

Before the rise of the market economy the social and moral needs of the community were local matters. They were often resolved through families, churches, and charities established by the rich. The sovereign did not attend to these services in the Middle Ages. After the rise of the market economy these social and moral needs became more complex and were gradually assumed by the sovereign state which had taken the form of a representative government. Families, churches, charities, and corporations (both for-profit and non-profit ones) all became explicitly part of civil society and began to play a diminished role in meeting such needs relative to the state. Representative government became Increasingly more responsive to its constituencies and was soon promulgating laws to meet the social and moral needs of society.

Legislations to protect women, children, the poor, and the weak were enacted in Britain. Germany under Bismarck was the first to introduce a social security system. Education and health care in almost all the European nations became a responsibility of the state. The New Deal under President Roosevelt, and the Great Society Program under President Johnson, represented ambitious US attempts to use the state to meet social and moral needs in the most advanced society.

Unfortunately the track record of government interventions has been very poor in meeting these needs. In my column two weeks ago, I noted Peter Drucker’s observation that there is now no developed country where people still expect government programs to succeed. He gave four reasons why such government programs have failed everywhere.

One reason is that governments are doing too many things to be able to do any one thing successfully. Another reason is that democratically-elected governments are too myopic to deliver successful social programs given the long gestation they require for design, adoption, and implementation. A third reason is that government finds it hard to abandon a failed program once it is underway. The inability to implement policies on a trial basis leads to multiple programs that continue regardless of their impact or cost.  A fourth reason is that these social and moral needs are hard problems to solve. There may be so many constituencies that it is difficult to set specific goals and targets.

The growth of numerous large social programs damaged the fiscal health of these states and made governments part of the problem and not the solution. Social expenditures on pensions and healthcare are the most obvious examples. Most governments in the developed economies today would become insolvent if proper accounting principles were adopted. The economic losses of failed government programs are twofold. First, tax revenues are wasted. Second, by taxing the corporate sector the incentives to accumulate capital are compromised, leading to slower growth. The prospect of resolving the social and moral needs of society is further diminished. As politicians kick the can around, the solution for hard problems with diminished resources quickly vanishes. The temptation for politicians to shift the blame is irresistible; markets and corporations become natural hate victims.

Government Provides Incentives

If the state has not been successful in addressing the social and moral needs of society, how then will these hard problems be resolved?

Drucker puts his faith in non-governmental organizations (NGOs) to address some of them. For him both businesses and non-profit organizations (now called the Third Sector) are just different types of NGOs. It is incorrect to use the term NGOs to refer solely to  non-profit organizations and not to businesses because both are not part of the government. Both types of NGOs direct themselves to a single objective. Businesses focus on accumulating capital essential for funding some of society’s social and moral needs. In areas where businesses have a bigger stake they  are naturally motivated to solve some of those needs. And if they work with other non-profit organizations with a similar interest and skill set then together they can potentially break down hard problems into several easy ones with fewer constituencies, making a feasible solution more likely.

Although Drucker pins his hopes on NGOs rather than the public sector, the government’s role remains indispensible both in providing an enabling legal-regulatory framework and some financial incentives to facilitate their solution. In my view, Drucker’s solution provides the only feasible way forward in dealing with some of these hard problems. The state in the developed economies has failed to do so satisfactorily for many decades and sometimes for over a century. If Drucker is correct the solutions will not  happen quickly as the process of working out issues and sorting out negotiations to achieve any significant results will inevitably be very tedious.

Friedman would readily agree that the state has failed to solve these hard problems and would also favor a reduced public sector role, but he provides no solution for tackling the hard problems faced by many constituencies where both market and state have failed.

I now turn to applying some of these CSR ideas to selected policy areas in Hong Kong.

The Government’s proposed Community Care Fund excludes businesses that have made a contribution from participating in determining who should receive the funds and by what amount. Drucker would not support this approach. He would prefer to have businesses directly work with the non-profit NGOs of their choice and make the government a passive provider of matching funds, perhaps with some essential regulatory role to ensure that the funds are properly utilized. Businesses that donated funds to the Community Care Fund could not engage directly with non-profit NGOs. As a consequence the Community Care Fund fails to incentivize partnerships between businesses to develop CSR initiatives together with relevant non-profit NGOs. The many constituency issues are left untouched. The Community Care Fund is therefore still a public sector project and not a community project.

Escaping from Dead End

In Islamic countries waqfs (religious trusts) tie up somewhere between 25-50% of all real estate. This process took almost ten centuries to accomplish during which time economic development in the Middle East stagnated. Yet our Government during Governor MacLehose’s tenure decided in one fell swoop to lock up an estimated 40% of our land as country parks. Hong Kong today is suffering from the consequences of this policy. Ever since I was a primary school student our textbooks have taught us that Hong Kong is a place with very little land and many people. This makes rent and property prices naturally high. But do we need to unnecessarily exacerbate our plight?

A possible approach out of this impasse is for Government to identify small plots of land in the Country Park and then unilaterally assign the development rights for each plot to a non-profit environmental NGO. The NGOs to be selected can be identified through a lottery or some similar mechanism. To provide an incentive for the identified NGOs to develop the earmarked land site the land premium obtained after a successful auction could be split between the government and the NGO on a shared basis to be determined beforehand. Such an initiative needless to say would need legislative approval. I have no way of knowing whether legislative support can be mustered and these identified plots of land would eventually be successfully developed, but I think a proposal of this nature will begin to focus the community’s attention on the trade-offs between development and conservation; and the price we have to pay for locking away valuable assets in perpetuity.

One of Hong Kong’s time-tested charities is the Jockey Club. I believe lowering the levy on the Club would enhance its capacity to make more charity contributions to worthy community causes. The levy structure could be designed to have minimal impact on betting behavior by returning the same winning odds ratio to the punter. The levy could also be designed so that the entire reduction in levy will be passed onto enhancing charity contributions. Our government is not short of revenue to balance its expenditures. But a reduction in the levy would be passed directly to the community. As a non-profit NGO the Jockey Club is ideally placed to work with businesses and other non-profit NGOs to tackle some of the hard problems with many constituencies; an approach that Drucker would favor.

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