David R. Henderson  

Dwight Lee on Socially Responsible Corporations

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If a corporation generously gives to charity, is it socially responsible? Most people would say yes. But economist Dwight Lee, in "Socially Responsible Corporations: The Seen and the Unseen," Econlib's Featured Article for February, says "not so fast." Reminding us of Frederic Bastiat's famous distinction between the seen and the unseen, Professor Lee reminds us to look at the unseen. Is the corporation lobbying for and receiving subsidies, special tax breaks, and protection from foreign imports? If so, then its visible charitable contributions are a tiny fraction of the costs the corporation imposes. And that is socially irresponsible.

Professor Lee highlights two corporations. One, ADM, thinks of itself as socially responsible. But Lee probes and finds something quite different. An excerpt:

Of course, to do a cost/benefit analysis, one would need to account for the benefits of government support of ethanol. These benefits are in the form of higher prices for corn. Who gets these benefits? The people who owned farm land when the government's ethanol program began. There are two points to be made, though. First, few advocates of social responsibility would applaud a company for persuading a government to, in essence, tax consumers in order to make wealthy landowners even wealthier. Second, even taking account of the benefits to landowners, the deadweight loss from higher prices is likely to be at least 5 percent of the $6 billon noted above. That would be a loss of $300 million, which still swamps the $15 million in ADM donations.

Lee's second example may surprise you. Although no one now thinks of it as being socially responsible, that wasn't always true. And when people did think it was socially responsible, it really wasn't, as Lee shows.


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COMMENTS (12 to date)
Ken B writes:

When I saw the title I immediately thought of ADM as the perfect counter example. When I was young and foolish I noticed ADM sponsored TV discussions shows and gave money to both parties. I naively thought this showed public spirit. Only later did I realize the ones who give to both sides are the ones most likely to be simply buying influence.

Krishnan writes:

ADM (like many others) are doing what seems to work for them - make lots of money while pretending to "do good" - the fact is that the public seems to reward this type of behavior.

Imagine two rich individuals - one very, very rich (say a billionaire) and the other, comfortably rich (say a few million dollars rich). When the billionaire "gives back" say 1% of his wealth that amounts to say 10 million dollars, he is praised as being "socially responsible rich person who gives back" - and if the comfortably rich person were to give 20% of the wealth and that amounts to say 1 million dollars (but does it quietly, even anonymously)- guess who the public will find praiseworthy - the really rich individual whose "giving back" makes no real dent in his/her wealth. Sure, they can do whatever they want with their money - but the public seems happier with the people who make a big deal of giving and excuses those wealthy of any/all of their other sins.

I soon expect to see Al Gore buy himself good feelings from the public by announcing that he is forming a foundation (with his own money) to eliminate poverty in the world (he will call it the "GoreProject to eliminate Poverty" (GPtoEP) (if you look closely, you may discover that he would have committed all of $100,000 of his $100 million fortune he acquired converting oil into green) (and the public and media will celebrate Al Gore for his generosity and imagine Mitt Romney as a cheapskate)

Doug writes:

"If a corporation generously gives to charity, is it socially responsible? Most people would say yes."

A ridiculous notion. The corporation's money belongs to the shareholders. Management's role is as trustee over the firm to maximize shareholder return. Not to decide causes that the shareholders should find rewarding.

Charity should be done by the shareholders out of dividends or capital gains to the organizations they chose to find meritorious (if any). When management gives to charity with company money it robs the shareholders, while management reaps the social and status benefits from donating to high-profile causes. In all the talk of accountable management its astounding that this hardly ever gets mentioned.

How would most people feel if their checking account was all of a sudden 5% smaller because the bank management decided there was a really important cause and contributed a portion of all their deposits?

Phil writes:

I fail to see the connection between charitable giving and lobbying for special considerations. One cannot infer from one the presence of the other. If the giving is truly charitable, it is benevolent; lobbying is purely self-interested. If the giving is not benevolent, but rather a marketing ploy to garner good will, then it is not charitable.

Tom West writes:

A ridiculous notion. The corporation's money belongs to the shareholders.

Doug, I think you may have a somewhat naive idea of what corporate charitable giving is supposed to accomplish.

It is a combined form of

  • marketing (people more favorably disposed towards the product/company + greater brand awareness)
  • lobbying (makes politicians more favorably disposed towards the company)
  • improved employee moral (for better or worse, most employees enjoy working for (and are thus willing to work harder for) a company that they perceive a socially responsible).

All of these affect the bottom line. The corporation is spending the money on behalf of shareholders in exactly the same way as any other budget line item for the betterment of the business.

Philo writes:

Lee’s case against Enron is weak. He writes: “Enron was giving millions to benefit others, but it was taking billions in aid and subsidies from others, courtesy of the federal government.” But he does not show that these billions in aid and subsidies were, *ex ante*, contrary to the public interest, and so “socially irresponsible.” The government claimed at the time that these subsidies were likely to promote the public interest, in which case Enron’s taking them was not “socially irresponsible.” Maybe Lee can show that this claim was, at the time, unfounded; but in his article he did not even attempt to do so.

David R. Henderson writes:

@Phil,
I fail to see the connection between charitable giving and lobbying for special considerations. One cannot infer from one the presence of the other.
Nor did he so infer.
@Philo,
But he does not show that these billions in aid and subsidies were, *ex ante*, contrary to the public interest, and so “socially irresponsible.” The government claimed at the time that these subsidies were likely to promote the public interest, in which case Enron’s taking them was not “socially irresponsible.” Maybe Lee can show that this claim was, at the time, unfounded; but in his article he did not even attempt to do so.
You're right. He didn't. I gave him a word limit. Others have shown that, though. When government subsidizes a particular kind of energy, there's a prima facie case that it's inefficient, a case that needs to be overcome with a specific argument for that case.

MingoV writes:

I agree with Doug and Phil.

Owning stock in a corporation that gives money to charity is just like hiring an employee who decides that he will do charitable work on your time. Both are stealing from you. Even if the stolen money goes to good causes, it still is theft and therefore is unethical.

The issue of whether a corporation lobbies for favors and special treatment is unrelated to charitable donations.

Mr. Econotarian writes:

Most corporate social responsibility is basically advertising with another name.

Mark writes:

As someone who worked for a large corporation and dealt with self-appointed public interest "stakeholders" concerned about corporate social responsibility (CSR) I can tell you that the inconsistencies pointed out by Prof Lee exist because the theory of CSR is intellectually incoherent. As a practical matter it is whatever issue, or set of issues, a particular "stakeholder" is concerned with at any point in time even if it is in conflict with the priority issues of other CSR stakeholders.

Companies decide whether to engage or not engage on CSR issues based on an assessment of potential negative or positive business impact from doing so just as they would with any customer issue. That's why Tom is correct that most corporate charitable contribution strategies are based on a "business case". CSR is a business, not philosophical, issue for companies.

For that reason it is naive to judge any company based upon external perceptions of these self appointed CSR groups as to whether they are socially responsible or not.

My view is pretty simple. If you provide goods or services people want, obey the law and are honest in your internal and public financial and accounting processes you're pretty socially responsible in my book.

John writes:

I wonder where corporate policies like matching employee contributions to various charitable organizations fits into the analysis?

I actually find it an odd position to be questioning Lee's analysis because I do think much more work in the vein of applying Public Choice type analysis to corporate behavior, for example, distribution of bonus funds seems a prime areas, I'm not sure that all their charity policies are driven by need to distract others attention.

Carl writes:

Their tax breaks are not a "cost" unless you presume that their profits really belong to the U.S government.

What does "socially responsible" mean, anyway? Sounds like political cant to me.

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