Home
Mission
Previous issues
Subscribe
Contact Us

Summer 2005 cover

National Observer Home > No. 66 - Spring 2005 > Article

 

The Dangers of Weasel Words:
“Corporate Social Responsibility” as a Banner for left-Wing Politics

by T.E. Bostock

National Observer
(Council for the National Interest, Melbourne),
No. 66, Spring 2005,
pages 49–53.

 

For at least a decade and a half, company directors and managers have had to confront a world-wide movement, made up of a curiously various collection of interests — ranging at one end from many of the world’s largest multi-national enterprises, apostles by their actions if not by their words for capitalism, to extreme environmentalists, to whom capitalism is the root of all evil, at the other – all parading, apparently collectively, under the banner of Corporate Social Responsibility (C.S.R.). Not surprisingly, there appears to be no general agreement on what C.S.R. actually means or entails. Yet it is a movement that company directors and managers cannot ignore; but how are they to come to grips with it? What does it mean? What does it imply? As a start, we should, perhaps, first remind ourselves of the essential purpose of the limited company.

 

Why limited companies exist

A limited company exists to pursue a business with the object of generating as high a return as business exigencies permit for its shareholders, who have contributed the capital without which the company would not exist at all. They are encouraged to contribute that capital by the risk-limiting principle of limited liability.

In pursuing that object, the company will also generate wealth for its employees, lenders, suppliers and other parties in meeting the demands of its customers. Ultimate responsibility for the success or otherwise of the company’s business lies with its directors, who can be seen as stewards for the capital-providing shareholders. The extensive fiduciary and other duties imposed on directors under the general law, and increasingly enlarged or supplemented by statute, are in general owed to the company as representing the general body of its shareholders.

It is important to keep in mind that the shareholders, far from being in any position of privilege, are the most at risk should the company fail. In its liquidation, all that they are entitled to is such of the company’s wealth, if any, as remains after the company’s liabilities to its creditors, be they employees, creditors, suppliers or other outside parties have been met. While the company remains in operation, the shareholders’ return depends entirely on the profits earned by the company: no profits, no dividends.

It follows that the company’s business, under the stewardship of its directors, should be directed towards maximizing the return to its shareholders. That is the basis of company law as we know it. In pursuing that objective, the company must comply with its obligations to outside parties whether assumed by contract or imposed by law. That is not to say that the company may not impose upon itself obligations, such as for employee benefits and occupational health and product safety over and above those imposed by law; but in doing so, the law requires its directors to be satisfied that it is in the interests of the company and its shareholders.

The importance of corporate profitability cannot be over-emphasised: on it depends the well-being not only of the outside parties mentioned but also of its shareholders, whose number includes indirectly a vast number of superannuation fund members and life and general insurance policyholders, not to mention the community generally through the generation of tax revenue. The limited liability company is the instrument of converting the savings of a given community into the capital that generates the corporate investment that secures the general well-being of that community as nothing else can.

Corporate Social Responsibility — What does it mean?

The threshold problem with C.S.R. is working out what exactly it means. The difficulty lies with the word social which, as F.A. Hayek memorably observed, “can be used to describe almost any action as publicly desirable and has at the same time the effect of depriving any terms with which it is combined of clear meaning”: the perfect example of a weasel word, sucking out from the word it qualifies any real meaning, just as a weasel sucks out the contents of an egg. The problem would perhaps not matter if all that C.S.R. were intended and understood to mean was that a company’s operations should be conducted in accordance with the requirements of law, and beyond those requirements where it is in the interests of shareholders to do so.

That, however, does not appear to be the intention of the promoters of C.S.R. For example, the World Council for Sustainable Development (W.B.C.S.D.), an influential body whose 175 members include many of the largest multinational enterprises, and a significant proponent of C.S.R., defines C.S.R. as business’ commitment to contribute to sustainable economic development, working with employees, their families, the local community, and society at large to improve their quality of life, an example of defining a meaningless term in meaningless terms, the word sustainable being as much a weasel word as social. And shareholders are notable for their absence of mention.

As W.B.C.S.D. itself acknowledges, “C.S.R. means very different things to different people, depending on a range of local factors, including culture, religion, and governmental or legal conditions. There can be no universal standard.” Seen in that light, C.S.R. is scarcely a sure foundation on which company directors and managers could develop corporate policy or legislators could develop corporate law. Perhaps the essential meaninglessness of C.S.R. is the cement that keeps together the strange coalition of its advocates. If that were all that there were to it, C.S.R. would come quickly to be seen as no more than a passing fad. That, however, is not all that there is to it. Whatever C.S.R. is supposed to mean, we should be alert to what it is seen to imply.

 

Implications of C.S.R.

The principal implication is that company directors and managers should direct their company to operate in the interests of parties other than shareholders beyond the requirements of law, whether or not to do so is in the interests of its shareholders. That implication arises from attaching to those other parties the misleading label of stakeholders: misleading in so far as it suggests that those other parties have as legitimate a claim on the company’s ultimate wealth, after the company’s legal obligations to them have been met, as shareholders.

What flows from that implication is that company directors and managers would face the insoluble dilemma of defining and weighing the interests of the various “stakeholders” and judging whose are to be preferred to others, and how they are to be variously weighed against the interests of shareholders. The touchstone that seems to be emerging to guide them through the dilemma is the notion of “society’s” or “community” expectations. On examination, the notion seems worse than useless: society’s is a cognate of the weasel word social, and community in this context is itself another weasel word, sucking out any real meaning from the word expectations.

The fact is that the application of those weasel words is a matter of politics, not business; and if C.S.R. takes hold, we shall surely find the operations of companies increasingly directed not by the directors and managers as stewards for the capital-contributing shareholders in accordance with their general duties to the company, but by them towards the requirements of the State in its ever-changing assessment of community expectations. Company directors and managers will, inevitably, find themselves beholden in the conduct of their company’s business not to the company and its shareholders, with all the consequent benefits to outside parties and to the community generally, but to the State and its politicians and bureaucrats, just as they became in National Socialist Germany. In the meantime, the countless citizens whose welfare depends on corporate profitability will find their welfare diminishing as the process proceeds.

 

How Has It All Come About?

As noted, prominent among the members of the W.B.C.S.D., and also no doubt other like bodies, are leading multi-national enterprises. For all the great benefits they bring to the world at large, and to the advancement of less developed countries in particular, multi-national enterprises — for all their undoubted contribution to advancement of less-developed countries — have for years laboured under attack from bodies purporting to represent the various interests of labour, women, children, consumers, the environment and other special interests, almost all of which bodies are imbued with what Ludwig von Mises called the anti-capitalist mentality. C.S.R., and at least the pretence of implementing its nostrums, are seen by its corporate proponents as a means of appeasing sectional activists; and by sectional activists as a means of quarrying more and more from the corporate sector. On both sides, the interests of a company’s shareholders are seen as expendable in favour of outside sectional interests.

Corporate advocates of C.S.R., in seeking to appease sectional interest groups, seem not to be aware of, or to be content to ignore, three fairly obvious points. First, the single issue activist body is concerned solely about the supposed interest it purports to represent, and not about the interests of the community at large. Secondly, the wish-list of the single issue activist body can never be satisfied: satisfy one wish, and another bobs up. Thirdly, it has regrettably to be said that leaders in the corporate sector have on the whole been less than whole-hearted in reminding the public generally of how much it owes for its welfare to free market capitalism in general, and to the limited company in particular. Those of their number who seek to live by weasel words run the risk of dying by them.

At the other end of the spectrum of the C.S.R. coalition, for those imbued with the anti-capitalist mentality, at a time when the failure of socialist regimes — particularly Marxist régimes – has become generally recognised, C.S.R. can be seen as a means of knee-capping capitalism, in much the same way – albeit unperceived – as the German National Socialists (the latter half of their label needs emphasis) did, and under slogans like C.S.R.

Conclusion

Were C.S.R. intended to mean no more than that company directors and managers should meet their duties under the law, and do what they reasonably can to ensure that their company does likewise, it could be seen as merely creating the unnecessary confusion that comes from, to borrow from a great English judge, well-meaning sloppiness of thought.

That, however, does not seem to be what proponents of C.S.R. for the most part have in mind. The essential meaninglessness of the expression C.S.R. has proved remarkably successful as a cloak under which to smuggle into the uncritical consciousness of businesspeople, lawyers (academic and practising), politicians, bureaucrats and the public generally, ideas that are potentially at least fundamentally subversive of the institution of the limited company as it has evolved in the English-speaking world over the last 150 years. Once we grasp the essential meaninglessness of C.S.R., we are in a surer position to defend an institution to which, above all others, we owe the highest standard of living in all history.

 

 

ABOUT THE AUTHOR:

T.E. Bostock is a former partner at Mallesons Stephen Jacques and is a consultant with Gadens Lawyers.

 

 

National Observer No. 66 - Spring 2005