Yesterday's NYC Economist Debate

It was huge fun, as always. There's nothing quite like taking part in a big public debate in a magnificent Gilded Age bank on Broadway. Of course, it's fun to win. Clive Crook and I, arguing the affirmative, began the debate with something like a 40-60% disadvantage in audience support, but we brought a good portion of of the crowd over to our side and the final voting ended in a dead heat.

Thanks to all of you who left links in the comments to help me prep. I'd not done anything on corporate social responsibility before this debate, so I'm really grateful for the help. Your links were almost sufficient preparation. The paper I found most useful overall was “Corporate Social Responsibility through an Economic Lens” by Reinhardt, Stavins & Vietor, recommended by GU.

Among papers not recommended in the comments, I was pleasantly surprised to find Robert Reich's “The Case Against Corporate Social Responsibility” so congenial. I think he's got the main idea right. We need to get the rules of the game right, and then let the players play. Reich and I have very different ideas about the ideal rules of the game, but I think he's very insightful in seeing the futility, and the danger, of simply asking corporate players to play as though they were in a different game.

It has became clear to me that CSR is driven in large part by frustration with democratic politics. Here's my sense of what's going on. Usually (but not always) left-wing groups find themselves stymied politically. Taxpayer money and government power come to be seen as out of reach for financing and implementing what are thought to be urgent and imperative initiatives. This is frustrating. So what explains the failure of these self-evidently necessary environmental or labor policies to gain sufficient democratic support? Here, it seems, CSR advocates are tempted to reach for just-so stories about how the “right” policy would have been put in place if only organized business constituencies had not been in the way. (It's never that we live in a pluralistic liberal society containing deep substantive moral and intellectual disagreement.) But who other than the state has authority over lots and lots of other people's money and the discretion to implement large-scale projects? Well, corporate executives do! So, then, it may seem only right that the directors of corporations be pressured by NGOs, “socially responsible” investors, and consumer activist to “fill the gap” — to implement a kind of shadow version of the policies that they have themselves prevented from becoming government policy.

My main argument was that the corporate form–as immense and wonderful as the efficiencies it enables are–has an enormous principal-agent problem at its heart. A vast and diffuse set of owners is destined to struggle to keep the incentives of managers aligned with their own interests in investing in a company. Imploring managers to balance the interests of an open-ended set of stakeholders, and to be senstive to a set of sometimes incompatible values, exacerbates the agency problem, and provides potentially dangerous cover for both inefficiency and self-dealing.

Here's a bit I included in my opening statement.

The stakeholder theory requires that the varied and potentially conflicting interests of the all those affected by the business be “balanced” by directors. But executives get to the top of the heap by proving they can fatten the bottom line, not by demonstrating virtuoso moral judgment or skill at analyzing public policy. Boardrooms are not in fact thronging with moral philosophers and social welfare economists. The recent financial collapse vividly illustrates the tricky agency problems inherent in separating ownership from management. As we've seen, corporate bigshots can be incredibly cavalier even in looking after shareholder risk once they've stashed their own diamond-encrusted nuts. So is it really such a great idea to demand that the likes of Dick “The Gorilla” Fuld also set environmental and labor policy from the boardroom? Why are we supposed to think these people are going to be effective stewards of the broader public interest? What do we suppose will motivate them to perform a serious, sometimes self-sacrificing, balancing of stakeholder interests? The surplus of warm compassion and evolved sense of justice for which the wealthy leaders of large capitalist enterprises have become so famous? Are they more likely to really apply themselves to this task, or to become captivated by moral fashion?

My sense is that CSR won't work the way its advocates want it it to unless executives can be won over by moral fashion–unless there is a lack of honest motivation to really balance stakeholder interests. That's why it doesn't matter to CSR folks that executives have no special capacity for assessing what is most welfare-enhancing, or environmentally efficient. The idea is that NGOs, CSR activists, etc. will tell them. The agency problem of corporate governance is why there is CSR. If shareholders were to vote on the humanitarian or environmental uses of their money, you'd find the same problem the CSR advocates found in democracy: there would be too much disagreement about “social responsibility” for CSR-types to succeed in commanding the resources necessary to realize their aims.

Is there any reason to believe that serious and concerted attempts by the directors of thousand of different corporations to actually weigh the interests of their various stakeholders–to fairly balance all the competing values–would lead to the kind of uniformity of emphasis on environmental and labor issues that we tend to see in CSR? Why does it seem so weird when BB&T's John Allison pledges to forgo potential profits from financing projects involving eminent domain?  Because the moral and ideological assumptions behind that decision are so alien to the dominant CSR project. It conforms to the letter of CSR, but not to the motivating ideological spirit. It is out of moral fashion.

That CSR is moral cover for rent-seeking and regulatory capture is also increasingly clear to me. There is a weak positive correlation between CSR activities and profits. But that seems to be largely because the most prosperous companies are most likely to do CSR. They are, for example, in the best position to over-comply with government regulation. The example of a sector-leading company's successful “socially responsible” overcompliance can be used strategically to lobby to bring the mandatory level of regulation up to their self-imposed standard, putting the squeeze on smaller competitors and new entrants. Ka-ching! Relatedly, we are more likely to see CSR in less competitive markets, in which it is easier to pass on the costs of inefficient decisions to consumers.

When I mentioned the case of T. Boone Pickens in this regard during the debate, one of our opponents, Harvard's John Ruggie, said something roughly like, “If CSR gives moral cover to T. Boone Pickens, then God Bless CSR.” This left me mystified. I know of no evidence that a huge infrastructure investment in natural gas-powered cars, for example, would be deliver the best environmental gains for the money. Indeed, it likely would crowd out many potentially more effective initiatives. Suppose, as the Pickens case suggests, that we end up with a regulatory structure that most benefits those energy companies most effective in using environmental propaganda in their lobbying efforts. Is there a single sane reason to believe that that regulatory regime will be superior in either economic or environmental terms over the alternatives? Over the status quo?

The bottom line for me is that there is no reason to believe that CSR does any good, net of the opportunity costs, and plenty of reason to believe that it can do a lot of harm.