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Summary Corporate Responsibility
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Summary for the course Corporate Responsibility based on the lectures.
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Lecture 1 – Anti-profit beliefsAnti-profit beliefs: the perception that profit-seeking is necessarily in conflict with beneficial
outcomes for consumers and society. A negative relationship between perceived societal value and
perceived profit. People belief that social investments have a negative impact on profits, however, in
reality there is a positive relationship between corporate social performance and corporate financial
performance.
→ Human beings have anti-profit beliefs that do not match with reality.
The origin of the firm
A household member develops an activity that is legally separated from the household. The owner
has limited liability, so the owner cannot lose more than he/she invested in the firm. The owner
benefits from the profits of the firm, but society as a whole loses form the losses of the firm.
A firm is a legal form to which society grants the privilege to limit liability (or to socialize losses) while
privatizing profits. Owners are protected from downside losses to stimulate innovation.
Why has society granted the privilege to privatize profits and socialize losses to firms?
The privilege to privatize profits and socialize losses should stimulate individuals to take risks by
developing innovation (or stimulation entrepreneurship) that generates societal value. The idea is:
developing innovations that increase welfare can better be delegated to firms rather than directly
executed by a government. Originally, firms were created because that allows to exploit human
beings self-interested motives to generate welfare for society.
→ Human beings have anti-profit beliefs that do not match with reality and the origin of the firm
Why do we have anti-profit beliefs?
Our first-hand experiences with market exchanges are zero-sum: the more the firm profits from an
exchange the less value for the consumer. When assessing how firms make profit and keep making
profit, we often assume it is also zero-sum: the more profit a firm makes, the less value for society.
We have anti-profit beliefs because the zero-sum game is easily accessible and we overgeneralize
from zero-sum settings to judge profit-seeking firms while the way profit incentivizes to innovate and
increase welfare is nearly invisible.
Sustainability used to be an agency cost. Firms investing in sustainability used to have a lower market
evaluation. The media strengthens our anti-profit beliefs by mainly covering the negative external
effects firms impose on society. Profit-oriented firms are in a very difficult position nowadays. If they
do not consider sustainability, they will get negative media attention and they are accused for
imposing negative external effects on society. However, if they do consider sustainability, they are
accused of greenwashing and their sustainable efforts are analyzed in a very critical way.
Summary:
→ Human beings have anti-profit beliefs
→ These anti-profit beliefs do not match with reality and the origin of the firm
→ Anti-profit beliefs arise because we often assume that doing business is zero-sum and
sustainability was an agency cost.
→ The media strengthens our anti-profit beliefs and anti-profit beliefs put a lot of firms in a
difficult position.
1
, Lecture 2 – Tension between business and society
The federal solar tax credit, also known as the investment tax credit (ITC), allows you to deduct 30
percent of the cost of installing a solar energy system from your federal taxes. The ITC applies to both
residential and commercial systems, and there is no cap on its value.
How does someone with anti-profit beliefs think about the ITC? The government is just granting the
tax to increase the profits for firms and this will decrease societal value.
Firms were originally created as economic entities designed to exploit the self-interested motives of
individuals in a way that they generate societal value. The profit motives and limited liability were
established as the primary incentives for entrepreneurship. At some point, the idea of the profit
motive got transformed into a notion of maximum profits, and it has been an enduring value ever
since. People with a mathematics background developed formulas to maximize profits. Since the
switch to the maximum profit motive, there has always been a debate about the role of companies in
society and the tension between business and society.
Milton Friedman: firms should make as much money as possible while conforming to the basic rules
of society, both those embodied in the law and those embodied in ethical custom. Thus,
maximization of profit is constrained by law and ethical norms. Every $ that is used to advance
societal goals reduces investor return. The investors and employees can determine how they want to
spend the money, it is not up to the firm to decide whether they spend it on societal benefits.
Why Friedman’s statement is correct
• Assuming full information for societal members about the impact of a firm’s activity on
society, only those firms that comply with the basic rules of society, law, and ethical custom
will survive.
o Radical transparency is based on new software capabilities that facilitate to combine
massive collections of data into a simple read-out. Websites providing radical
transparency about firms allow customers to assess firms on their societal impact.
• The time frame during which Friedman made this statement (the golden sixties)
o Seemingly endless economic growth
o Potentially negative impact of firms on society was not measured or not known
o If you live in a time frame during which the negative societal impact is unknown, the
only way you can contribute to society is by generating more profits for your
shareholders.
Carroll’s CSR pyramid
The total CSR of business entails the simultaneous fulfilment of the firm’s economic, legal, ethical,
and philanthropic responsibilities. The focus should be on the total pyramid as a unified whole and
not only on the bottom of the pyramid. The CSR pyramid makes the societal responsibilities salient.
However, there is no simultaneity between profit and societal benefits.
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