Post-Crunch Corporate Ethics
In 2005, Lehman Brothers won the Corporate Social Responsibility award of the Foreign Policy Association. CSR has penetrated boardrooms for a decade. But it didn’t stop Lehman Brothers from making the risky bets that brought it down and brought down workers and pensioners with it.
The award citation is the clue to why not. Lehman was honoured for ‘its employees’ numerous not-for-profit associations’. Employee charities and sports clubs are a fine thing. But they are far from the major purpose that corporate social responsibility should serve. When a new financial order emerges from this crisis, a new corporate ethics must be at its heart.
Go back to basics for a moment. We license companies to pursue profit because we believe that a free market best serves social welfare. So far, so good. For too long, however, that logic has been bent into a more dubious claim: that whatever companies do within such a market best serves social welfare. That’s just not true. To make an environmental mess until forced to clean it up (if ever) might be allowed by the market, but by no stretch of the imagination does it serve social welfare. Of course, ideally, the state would have stepped in to ban such harms. But states are overstretched. Passing laws takes time, and enforcing them takes resources, making both inevitably imperfect. So while law and regulation are vital, they will never make corporate ethics redundant.
The question now is what shape that ethics should take. So far, CSR and corporate ethics have been blinkered. While companies may play their own game cleanly, they have not accepted any responsibility for the success or purpose of the economic system as a whole. Companies haven’t been made to think outside their own role within the market, to consider the health of the market and of the society which it is supposed to serve.
In a world whose interdependence is proving so instantaneous and breathtaking, we can no longer afford to license indifference to the effects of one’s own patch on others. We need a new ethics of the division of labour, no longer writing off the overall effect of one’s actions as outside one’s concerns, and building an awareness of the whole and the goal into everyday choices. We can no longer afford to think of organisations such as corporations (and indeed NGOs) as adequately serving society simply by the blinkered pursuit of their allotted social role, blind to the broader functioning of the society which those roles are meant to serve. There is a fundamental ethical duty to consider the role that one’s organisation is playing in the broader social context. Playing the game is not enough. One has to play in a way which strengthens the rules, rather than threatening to undermine them.
What would this mean in policy terms? It means that companies be held accountable for acting in terms which broadly help to sustain the viability of the financial, social and ecological system as a whole, in those areas to which their activity is most relevant. This can begin as a matter of required reporting: demonstrating in the annual report that managers and board members have reasoned about the aspects of the broader social system in which the company engages, have identified the areas where their actions have most impact, and are able to detail the range of information and views they took into account in deciding on their actions. This would include product or services’ direct and indirect impact; lobbying and advertising, and financial practices. Of course, this is an open-ended requirement which would need further specification. The NGO sector would play a key role in developing best-practice model reports for each sector, so that reports would increasingly become comparable and standards would quickly emerge.
The requirement to disclose reasoning would have two effects. It would make managers and board members engage in that reasoning in the first place, thus opening their eyes to the wide range of social impact of what they do; and it would provide evidence for external stakeholders to engage the company. The difference from current CSR reporting is that often this is limited to what companies do, as opposed to how they think; and it is focused on particular areas of operation, so that it might trumpet community involvement but neglect to report on lobbying efforts. The new model would require companies to demonstrate that the overall effects of their business model and operation not only contribute social value (including, but not limited to, producing wealth, goods and services), but also do not detract from that social value in their systemic effects so as to yield a net negative result.
One objection to this view of ethics is that it requires controversial judgments. Who is to say what is public benefit, and so how can companies know what it is, or be held accountable for considering it? This is the origin of the view that companies should be answerable to the law and law alone, widely held on both the left and the right. But as we’ve seen, the law is imperfect, slow and incomplete, and it was ever thus. The way forward is to formulate this ethical duty along the lines of European, not American, generally accepted accounting standards: cast in terms of principles, not specific rules.
So long as a company provides a reasonable interpretation of its social role, regulators and courts should accept it (though wider stakeholders may press for more stringent interpretations). The requirement can be interpreted loosely and broadly, as in the formulation of the test of business judgment itself, where courts are typically very deferential to management decisions even where these are relatively poor. Nevertheless, some germane reasoning has to be in evidence, and so it would be on the new model.
This duty is all the more urgent because companies haven’t been completely indifferent to policy and regulation. Instead they’ve engaged with it for their own benefit, not social benefit. They can lobby to tilt the rules in their direction, do aggressive tax planning, do all they can to capture policy or starve governments of resources – and none of that has been covered in CSR codes. The sustainability of the system is not a corporate concern. It’s left to the regulators, and if the regulators are outnumbered, outresourced, or just unable to keep up with the latest manoeuvres, well, that’s the name of the game.
As this shows, it’s not that companies have abstained from addressing the rules of the system. Milton Friedman may have declared that ‘the business of business is business’, but business has always made it its business to try to capture or influence government’s business as well. Trade associations have done much of this work: while companies have proclaimed green policies, the more anonymous trade associations have often lobbied in the opposite direction behind closed doors. The problem is that companies have tried to influence the rules of the system without taking any responsibility for the long-term viability of the economy, let alone the sustainability of the planet.
Sometimes a solution is to ban lobbying altogether. Robert Reich made a powerful case, ignored in Washington, that any Wall Street firm rescued by federal funds should be banned from using their resources to lobby on how they should be run . But there are freedom of speech concerns about banning lobbying altogether, and it is going to happen informally no matter what. This is where ethics can help.
As part of the broad duty of disclosure described above, companies should have a legal duty to disclose the substance of their lobbying, coupled with an ethical duty (to be enforced through the reporting mechanism suggested) to lobby for the greater good rather than against it. Lest this seem pie in the sky, the activities of the The Prince of Wales’s Corporate Leaders Group on Climate Change have done exactly this. (Disclosure: this independent body is staffed by the Cambridge Programme for Industry, now the Cambridge Programme for Sustainability Leadership, on whose board I sat until recently.) They have been calling for more and faster regulation to introduce a carbon price and bring down emissions .
This is business using its convening power for an ethical purpose, taking responsibility for shaping the architecture of the system to good ends, not subverting it for private ends. And this is where economic and ecological sustainability come together. Both require us, including companies, to reorient our everyday licensed actions to take account of a greater good.