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Why tougher laws won't make corporates more responsible

By Dayna Simpson - posted Tuesday, 4 January 2005

We still do not have a well-grounded basis from which to discuss Corporate Social Responsibility (CSR) even though it is 30 years since Milton Friedman first published his seminal article “The Social Responsibility of Business is to Increase its Profits” (1970) in the New York Times. As Friedman said later in Capitalism and Freedom, “There is one and only one social responsibility of business - to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud”.

In his recent article on CSR in On Line Opinion, Kel Dummett resurrected some tired rhetoric in this debate, on the need to legislate to force corporations to be more socially responsible. He quoted the views of notable economists such as John Hewson and Alan Fels in support of extending the compliance culture in CSR. But more onerous legislation will not necessarily produce more responsible actions from corporations.

Compliance is not enough. Economists should be pushing corporations to adopt a pro-active, rather than a compliance, stance where they wait for governments to tell them what they can and cannot do. The pro-compliance stance is based on a narrow view of the sources of prosperity and a very static view of competition.


James Hardie Industries was able to operate in a grossly irresponsible way, and misled the public; yet they complied with every law they were required to. Ultimately it was the intense, very public and impassioned fight by unions and victims that forced them to agree to an estimated total $4.5 billion in compensation. This is one of the few examples where a corporation faced its responsibilities, but only following significant public pressure.

There have been other instances which illustrate the need for CSR to encompass questions beyond merely what is, or is not, legal.

In the “McLibel” case, McDonalds was brought unstuck by a simple leaflet of protest drawing attention to irresponsible activities of McDonalds. The McLibel case was fought by two tireless and penniless campaigners who may have lost financially, but who fundamentally shifted public awareness, reduced McDonald’s market share and ultimately forced them to change their product base.

In the Brent Spar incident, the British Government allowed Shell to legally dump a decommissioned drilling rig out at sea. That is, until the public learnt of their plans through Greenpeace and lobbied Shell to opt for an alternative, expensive and more environmentally sound disposal method instead.

More fundamental to the CSR debate than finding ways to ensure responsible corporate behaviour is the critical question of what actually constitutes a corporation’s social responsibility. How do we define it and why should it be applied to a corporation?

Moral responsibilities and our subsequent actions are framed substantially by the cultural context within which we exist. The corporation’s activities will normally be bounded by the legislative framework within which it operates (a cultural boundary of sorts).


Unlike the individual, however, the corporation has two distinct advantages in relation to its “cultural” boundaries - it is capable of wielding the financial and political power to influence or change these boundaries; and recent trends in global sourcing practice have meant that most corporations now operate within several different cultural contexts, each with very different perspectives on the value of social responsibility. Trading across these boundaries has meant that the corporation is not required to maintain a single consistent view of its own responsibilities but rather shift its “moral” boundaries as required for financial gain.

A pro-active corporate stance engenders a more sustainable and true form of corporate “responsibility”. A proactive stance also provides a more efficient economic outcome. This is effectively what Friedman expected of the corporation - to act only in the interests of maintaining or increasing its profits, but without deception or fraud.

Corporations have been known to change their practices of CSR in response to stakeholder pressure. And the most important stakeholders appear more and more to be important customers, employees and suppliers. Shell, Starbucks, Nike, Gap and McDonalds are some of the more public examples of corporate giants that have responded to pressure from public and private stakeholders to improve their practices in responsible purchasing, labour hire and environmental protection.

That there is a conflict however between environmental protection, sensitive labour management practice and economic competitiveness is one of the more pervasive false dichotomies of the current debate. Corporations with some of the highest levels of environmental performance and social capital have been driven by their business bottom line. They know that pollution represents lost opportunities for profit and that their social and knowledge capital generate important innovations and productivity.

Gunns Limited’s recent move to sue the very interests that have fought to define and bound their social responsibilities is a disturbing backward step. The move by Gunns is a strong-arm response to an image problem that affects a comparatively small proportion of their highly profitable and largely un-challenged operations. Gunns should arguably have taken a less antagonistic and more proactive approach to the problem. The Greens and interest groups have presented legitimate social responsibilities for Gunns Limited to consider. Gunns may end this battle doing more damage to its reputation and market share than the Greens and interest groups could have ever hoped for.

Corporations have the foresight, financial resources and intellectual capital to create goods and services that meet society’s needs without compromising the rights or health of humans and the environment. The corporation is always aware of the social responsibilities required of its operating context, as this is an important part of the act of generating profit. So why do Australian economists keep pushing the barrow for more legislation rather than highlighting the benefits possible from being a proactive corporate citizen? Choosing to ignore its social responsibilities is becoming an unprofitable and risky business strategy for the corporation. As Milton Friedman would say, it’s simply not playing within the rules of the game.

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About the Author

Dayna Simpson is in the final stages of PhD research in the Department of Management at the University of Melbourne. Her research covers environmental management in supply chains and corporate social responsibility.

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