What is Corporate Responsibility?

Early in the 1900s, Herbert Dow, Will Kellogg, and Henry Ford took daring risks that resulted in hundreds of thousands of jobs and many new products that made life longer, better and easier. They made Michigan a world class producer of chemicals, corn flakes and cars. By making good products at competitive prices and rewarding shareholders with handsome returns, they were widely regarded as models of corporate responsibility. If they were around today, they might be held to a different measure.

This year's announcement by President Clinton and Labor Secretary Robert Reich of the Ron Brown Corporate Citizenship Award winners spotlighted thirteen companies that in their view had exhibited social responsibility. Their guidelines for "good corporate citizenship" boiled down to five criteria:

* "Family-friendly" policies, such as allowing family leave;
* Good health and pension benefits;
* Safe workplaces;
* Training and advancement opportunities; and
* Policies that avoid layoffs.

Whether or not these are useful measures of responsibility, consider that all of them involve the relationship between companies and their employees. The list makes no mention of consumers or shareholders. A corporation can earn the award whether or not it provides things that consumers want, or returns value to shareholders.

Corporate responsibility does not mean just charitable giving or good employment policies. Profit-seeking corporations have a role in our society that is fundamentally different from that of charities or the government.

The American corporation is a phenomenally successful social institution because its desire for profit motivates it to improve living standards and to invent new products and new ways of doing things which put scarce economic resources to their most productive use.

For example, 90 percent of useful new drugs for curing disease and reducing pain come from the private sector, not government. Private industry funds the majority of medical research. The private sector has invested more that $10 billion during the past decade in biotechnology, bankrolling thousands of new firms working on everything from curing AIDS patients to helping consumers obtain less costly milk through bovine growth hormones.

Medical device manufacturers have also improved our health and comfort, despite being targeted for tough treatment by regulators. Products introduced by U. S. Surgical Corp. have reduced hospital costs by as much as $1,700 per patient and cut hospital stays by up to 7.5 days. The company also makes tools and cameras for laparoscopy, reducing the pain associated with many surgeries and reducing cost for gall bladder surgery alone by more than $1 billion a year.

Michigan's Dow Chemical Company, which receives praise for its "family-friendly" policies, benefits society no less by making products which protect crops from pests, improve automobile safety, and make scores of consumer items more durable, lightweight, and economical.

Workplace safety, health standards, wages, and economic advancement for minorities and women have all been improving for decades regardless of, and often in spite of, government intervention. Even recent "corporate downsizing" has led to a boom in small and home-based businesses, providing higher earnings for most displaced workers over time.

The computer and information technologies pioneered by private start-up firms in the '70s and '80s are revolutionizing business, employment and society in ways that boggle the mind. The idea that Microsoft, for example, can be considered socially responsible only to the extent it gives money to charity or provides generous health benefits ignores the social benefits derived from its popular products and services.

A corporation's chief duty is to its shareholders, but satisfying shareholders confers other benefits on society. As the institutional ownership of corporate equity continues to grow-as mutual funds, pension plans and insurance companies invest in the market to provide financial benefits to average Americans-the corporate focus on shareholders takes on a new meaning. In the future, equity investment in stocks is likely to be the main guarantor of retirement income for most Americans.

The thinking typified by the Ron Brown Corporate Citizenship Award reflects a misunderstanding of the nature of the corporation and its role in our lives. Yes, the corporation employs workers to accomplish its ends, but employment is not one of those ends.

When a firm finds ways to produce the same or even better goods and services at lower labor costs, it has a social responsibility to do so, no matter whether its work force shrinks or its compensation changes in ways that politicians don't like. Otherwise, the company is violating its duty to maximize shareholder value, and thus its larger duty of putting scarce resources to their most productive use.

The notion of corporate responsibility can be easily distorted to fit a political or ideological agenda. If it bypasses shareholders and consumers, it misses the point entirely.