Missing Half the Market in the Call for More Corporate Social Responsibility

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According to a 2012 report on Socially Responsible Investments published by the U.S. Social Reasonability Institute, assets under management for firms that follow Economic, Social, and Governance criteria of CSR grew by 486 percent between 1995 and 2012. Also, companies seem to engage more actively in socially responsible behavior like making small business loans and planting trees, often announcing it on their websites and press releases. One of the well-defined principles for “corporate goodness” involves the Environmental, Social, and Governance (ESG) criteria. Using this, stakeholders judge whether firms are adequately responsible, and the criteria includes how a company manages relationships with its employees, suppliers, customers, and the community in which it operates. While perhaps CSR is a socially desirable good, the current discussion focuses too heavily on firms. By analyzing both the supply and demand in the market for corporate social responsibility, we can develop a more nuanced understanding beyond the impression that it’s always a company’s job to have corporate social responsibility.

While most of the attention focuses on supply, studying how companies can adopt CSR policies, the analyses miss the other crucial component in any economic framework: demand. Appalling business practices are not new, so what happened to the demand of corporate social responsibility to incite the media attention now? Information, among other things. There is no doubt that the documentation of heinous business policies featured in the various media outlets has affected the way people perceive companies. The very awareness of this issue turned mere facts into impetus. Sure enough, when customers are informed and demand that companies be more socially responsible, companies tend to do just that. Speak to any well-trained economist and they will agree that if there were negative externalities in production, the socially optimal solution would require some form of intervention. What type of intervention, however, has been a topic of active debate for at least the past 40 years. Regardless of the intervention, the most important thing is for people to realize that the negative externality exists and is costly in the first place. Moreover, customers who really value the moral benefit from initiatives like FairTrade are willing to pay more for it. If enough customers are willing to pay for more social responsibility, the firm’s profit maximizing decision may be to offer these organic or FairTrade products. For any specific product, the increased demand for CSR may generate more incentives for firms to provide CSR to meet that demand, and correspondingly be compensated for providing that good.

In short, even if more CSR is optimal, we should share the burden of corporate social responsibility rather than lamenting executives’ short-term interests as the unfortunate cause of insufficient CSR. A market comprises of both supply and demand, and any good discussion should hear from both components.