July 25, 2005
Don't just stand there. Buy something.
Posted by Victor Fleischer

Becker and Posner take on whether corporations should act in a way that is "socially responsible" when it conflicts with shareholder value.  No big surprises:  they think the social responsibility of the corporation is to maximize profits.  They both seem more sympathetic to corporate charitable giving than I would have expected.  I like the symphony as much as the next guy, but if I'm a shareholder in DuPont, and DuPont gives money to the Wilmington Symphony, I'm pretty sure that's just another form of camouflaged rent extraction -- more about improving the lives of Mozart-loving executives than anything else.

Recently I have been wondering whether the focus on shareholder vs stakeholder is misguided.  Maybe consumers, not shareholders, are the key.  Even if shareholders are willing to give up some value, and even if we allow managers to promote CSR policies (as we generally do now), CSR-sensitive shareholders face collective action problems in trying to figure out what they really care about and how to demand it from management.  And, as Becker points out, most institutional investors don't care much for social responsibility -- they just want to maximize returns. 

Consumer-driven pressure might be a better strategy.


(A brief aside:  I have mixed feelings about CSR.  I do personally invest in a "socially responsible" mutual fund.
I'm willing to trade off a few basis points of return for a little bit
of pressure on management.  But I recognize that I'm throwing a pretty
small pebble into a very big pond.)

Consumer-driven pressure might be a better strategy for CSR.  Instead
of asking shareholders to make big, clunky, difficult decisions through
financial intermediaries, we should ask consumers to make little,
marginal decisions when they buy products.  They can buy their coffee
at Peet's instead of Starbucks.  They can shop at Whole Foods instead
of Safeway.  They can eat at a local diner
instead of McDonalds.  We should make executives maximize shareholder
value, and make them explicitly justify their CSR in terms of sales.
Social responsibility entrepreneurs can play around in the marketplace,
and consumers can tell companies what matters to them, a few dollars at
a time. 

And this is not just about things like recycling and dolphin-safe tuna.  As I argue in my Google/branding paper, consumers are increasingly savvy about business, and brand image can even affect corporate governance decisions.  To be sure, a consumer-driven CSR movement faces high hurdles, but it still seems more promising to me than the basically hopeless excuse-for-managerial-rent-extraction current state of shareholder-driven CSR.

UPDATE:  Ribstein weighs in here.  His main point is that it doesn't matter since management can do whatever they feel like anyway until we figure out a way of making them accountable.  Larry's point about accountability is a good one, and part of an important paper he is working on, so go take a look.  Plus, he uses "Becker, Posner and Fleischer ... " together to start a sentence.  I like the sound of that. 

If I am pro-CSR, which is how I have been leaning recently after years of skepticism ... am I really the only pro-CSR person who believes in markets?  I do think that of all the methods of holding managers accountable when it comes to CSR, the product market has the most promise. 

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