Profits are Corporations’ Social Responsibility

The business of business is profit. That’s the whole point in doing business. If a business is following the rules and legally making a profit, it is discharging its social responsibilities. I wrote an opinion piece on corporate social responsibility (CSR) in today’s Mint arguing that corporations are not responsible for solving social problems.

Here’s the text of the article.

Profits are Corporations’ Social Responsibility

My dentist is superb at fixing my teeth, but I suspect that if he ever tried his hand at fixing my computer, he would make a mess of it. And I cannot bear the thought of my computer technician giving me a root canal.

Specialization is the cause of much of the progress that has been made by humans. It takes years of training to become competent in a chosen field. Fortunately, we differ in our preferences and our abilities, and the variety of things to be done are more or less matched by the variety of people who wish to do them.

One finds the benefits of specialization at all levels of aggregation in society, not just at the individual level. Financial institutions don’t muddle around in public health, and automotive companies don’t mess around in hospitality, and so on. By merely sticking to what they are best at, they increase social welfare, even if that is not their intent — a fact that Adam Smith recognized centuries ago.

Companies play an important specialized role in our complex societies: that of creating wealth in terms of the goods and services they produce. That is what they are good at doing, and the market takes care of weeding out those that are unable to meet that goal. They are required to play by the rules that are made by the other very critical institution of our society: the government. There is a natural division of labour between the two. Companies serve the greater good by efficient production, by following the rules.

The role of the government is to set the rules and enforce them, not get into production. Nobel Prize-winning economist Douglass C. North has noted that “economic history is, overwhelmingly, a story of economies that failed to produce a set of economic rules of the game (with enforcement) that induce sustained economic growth.”

When the government fails in the task in which it is expressly required to specialize, it leads to the well-known problems that plague society, such as poverty, inequality, corruption and discrimination.

So, it comes as a bit of a surprise when one finds politicians lecturing companies about their social responsibility. Companies are neither responsible for social problems and nor are they capable of solving them.

Astonishingly, in one speech, Prime Minister Manmohan Singh even asked companies to deal with the problem of inflation, as it affected the common man. One can reasonably expect companies to take on the responsibility of fighting inflation, if one gives them the power to control money supply. So also one can expect companies to address inequality only after giving them the power to tax citizens and then redistribute the revenues — a job normally reserved for governments.

Most successful corporations around the world do have objectives other than just being financially profitable. But profits have to be there for the continued existence of the corporation.

HP, for instance, says on its website that profit is its second objective, after customer loyalty: “To achieve sufficient profit to finance our company growth, create value for our shareholders and provide the resources we need to achieve our other corporate objectives.” Further down the list, its objective of being a “good citizen” is predicated on making profits.

But, even the mere pursuit of profit can indirectly lead to great social benefits. The Silicon Valley in California is responsible for generating trillions of dollars of wealth and commensurate amount of social welfare around the world. All this wealth, and its benefits, can be plausibly traced to the establishment of Stanford University by Leland Stanford from the profits of his companies. The biggest names in high technology today — HP, Sun, Yahoo, and Google — in some sense owe their existence to Stanford.

Too often, the temptation to burden our companies with additional jobs arises out of envy and impatience. The Indian economy is only recently reaping the benefits of a small degree of liberalization. Indian companies are growing up and, given sufficient support in terms of a good set of rules to play by, they too will flourish. The wealth that they will generate and the profits that they make will surely not go to waste. It has happened in the past in India and continues to happen: a case in point is the Tatas.

The social responsibility of corporations is to make a profit while following the rules. They have a comparative advantage in doing that, just as the government has a comparative advantage in making rules and solving social problems. Insisting that companies solve social problems is like expecting the dentist to fix a broken computer. Yes, he can possibly fix the computer if I lean on him hard enough and he spends a lot of time learning hardware maintenance, but that will be at the cost of a lot of untreated toothaches.

It is easy to see why it takes all sorts to make a world. We differ, and therefore have comparative advantage in different areas, which makes division of labour possible and which, in turn, makes us all more effective and efficient. We neglect these simple truths at our own peril.

Author: Atanu Dey

Economist. View all posts by Atanu Dey