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HENDERSON ROCKFORD CONFRONTS A DILEMMA:
THE NEW REALITIES OF CORPORATE SOCIAL RESPONSIBILITY
by
DAVID P. EASTBURN, PRESIDENT
Federal Reserve Bank of Philadelphia
before the
Joint Meeting
of the
·
and the
NEBRASKA COUNCIL ON ECONOMIC EDUCATION
Seventh Annual Meeting
Sheraton Motor Inn
Lincoln, Nebraska
October 18, 1974
Henderson Roc~ford Confronts a Dilemma:
The New Realities of Corporate Social Responsibility
To
some flesh and blood into what is often just a theoretical
issue, let's
by a look at a day in the life of Henderson Roctford, chief
executive of
Things
Industries, Inc. (CII).
to be piling up.
Someone down the line at the Camden
plant turned the
thousands of gallons of toxic chemicals
into the Delaware River.
first time and reporters were trying
to get hold of Rochford to
ow what CII was going to do about it.
be especially difficult for
on his proposal·to install new f
This would
his board of directors had not decided
The-environmentalists had been pressing
hard but the board
because the plant was running at capac-
ity and the project would reduce out
for several months.
Rochford hoped the
ould hold off until after his meeting
with the securities analysts in
It was going to be tough enough
explaining what had happened to
latest quarter.
negotiations underway looked as though they
would have to pay special
~attention
Moreover, labor
uld ef>calate costs by over 10 per
to the propor ion of minorities laid off.
Having just participated in an economic summit sess"on in Washington, Rochford
also was sensitive about repercussions of the
per cent increase in
prices of CII' s ·products, but he could see no
He would just have
to do the best he could with the analysts, but he
to
the session.
Sometime he would have to find a few minutes to
for the United Fund wind-up dinner that evening.
As this
chairman of
the fund drive he now realized how time-consuming that activity ha4 been.
The
-2-
~rive
was lagging and a million dollars had to be scared up from somewhere
if the goal was to be reached.
Perhaps CII could kick in $20,000 more.
Rochford would be glad when the day was over.
Each of us can be glad we don't have to face dilemmas like this,
but they
~being
faced somewhere in the corporate community every day.
This
evening I'd like to look at these dilemmas in the light, first, of what's been
happening in recent years; second, what economists and others tell us about
principles at issue; and finally what some new realities suggest for the future.
Growth of .the issue.
I
There is nothing new, of course, about the issue of corporate social
responsibility.
What is new in the past decade is its intensity.
In the 1960's
debate over civil rights, poverty, student dissent, urban decay, protection of
the consumer and the environment all erupted in one great outburst of social
concern.
Corporation executives were part of the ferment.
consciences.
They generated much rhetoric.
and with other civic organizations.
They searched their
They acted - individually, in groups
A few t>f i.hf'.m even tried to revise their
accounting system to include social costs which they imposed on others· in the
form of such things as air and water pollution.
:,,:~.1
i
They spent money--no bne knows
·ely how much, but {i.ny data on expenditures.i].
Whcte does the issue now stand?
.·orporate responsibility has come of age.
I think I detect two facts.
First,
It is an economic, political, social
and moral question that must be reckoned with in the remainder of this century.
It will not go away.
phase.
..........,_
Second, however, the issue, I believe, has reached a new
The novelty has warn off.
The intensity of concern is behind us.
As
corporations confront their most difficult economic·problems in decades, they
-3-
see the issue in a new light.
While these problems persist corporate social
responsibility is likely to be moved toward the back however.
--~--------~--------~-------------------------------~~~-new reality.
This is the
Before explaining this reality, let me take time to analyze corporate social responsibility in a little detail.
For how far on the back 'burner
it will be and how long it will stay there depends partly on:the substance of·
the issue.
What do economists and others tell us about it?
Anatomy of the dilemma
.The ·dilemma which Henderson Rochford confronted was actually a thin
cut of a very deep and complex phenomenon.
Let me try to lay open the anatomy
of the dilemma with this table.
Ethics •••••••••••••••••.•••••••.••• Economics
Quality
of life .•••••••••••••••••• Economic growth
Soc:ial o.e t-_i on •...•••••••.•••..••••• Market system
Social welfare .........•...•..•.... Profi.ts
Social costs •••.........•..
r ,, ·>:.,i.e
co:sts
Public goods •••.•.•••••.•.••.•.•••• Private goods
Government action •••••••••••••••••• Voluntary action
Society . ........................... Individual
Pr5uments for corporate involvement in social concerns are represented on the
left; arguments against, on the right.
For.
If you look for people who hold all the values listed on the
left, you are hard pressed to find many economists, let alone Henderson Rochford.
You may run across a few, young, "radical economists, but you are much more likely
to encounter a number of sociologists and philosophers.
Some of the arguments
-4-
they give are economic, but most have a firm base in ethics.
In return for
the special status which society confers on the corporation, they say, the
corporation has an obligation to society.
Irving Kristol has put it tersely:
"business should be profitable because it is honorable, not honorable because
it is profitable."
Life is more than growth in GNP, they say.
Society has become pre-
.occupied with material gain--more gadgets, more indulgence in ·affluence--at
the cost of the quality of life.
J. K. Galbraith put it well:
"The family
which takes its mauve and cerise, air-conditioned, power-steered, and powerbraked automobile out for a tour passes through cities that are badly paved,
made hideous by litter, blighted buildings, billboards, and posts for wires
that should long since have been put underground.
They pass on into a country-
side that has been rendered largely invisible by commercial art •••• They picnic
on exquisitely packaged food from a portable icebox by a
pollut~d
stream and
go on to spend the night at a park which is a menace to public health and
morals.
Just before dozing off on an air mattress, bet\.eat'h a •1jlon tent, amid
the stench of decaying refuse, they may reflect vaguely on the curious unevenness of their blessings.
•
I
Is this, 1ndeed,
the American genius?" 1
Part of
argument, too, is that our economy stresses private goods at the expense of public
goods.
We have too many high-powered cars, electric tooth brushes and. beauty
parlors and not enough parks, clear streams and health care.
These things, the argument goes, are not adequately provided by the
market system.
---
ment.
They require action by society, which, in the end, means
go~rn-
The corporation should be in partnership with government, the corporation
1 The Affluent Society, New York, The New American Library, 1958, pp. 199-200.
)
-5-
providing its know-how to social problems, government providing leadership
and necessary incentives and prohibitions.
The goal of the corporation should be to benefit all society, not
just stockholders.
Corporate management acts independently of stockholders
anyway; stockholders are essentially unconcerned absentee owners.
The cor-
poration actually must be concerned with a multiplicity of groups; in addition
to stockholders are customers, suppliers, employees, community neighbors.
All
of these call for a broader focus of corporate activity, one that goes well
selfish and
beyond the mere making of profits, a/demeaning motivation at best. In short,
proponents say, a purely market system is-too narrowly directed not only to
profits but to welfare of the
individual~
rather than the general welfare of
society.
Moreover, the individual is virtually powerless to accomplish many
of the goals of society.
He can do little by himself to solve
infla~ion;
driving less he does little to conserve energy or reduce air pollution.
by
The
individual investor can do little to force a ·t::orpor&tion to be socially responsible, especially if that corporation is an attractive investment.
Similarly,
the individual corporation often has little to gain by not polluting.
The cost
syAt·er; onder which enterprise operates counts only 1the direct economic cost
ln..;u _,_.j h; ::he corporation in production, not the. indirect social cost incurred
by others who may be affected by production.
So if Conglomerated Industries, Inc.
dumps toxic chemicals into the Delaware, the costs incurred by others, say, in
filtering the chemicals out of drinking water is not counted in the cost of CII's
products.
(In fact, when GNP is added up, the expenditures for cleaning up the
water are counted not as a negative cost but as a positive output!)
Those who
-6-
argue for corporate involvement say that the corporation must assume responsibility for these social costs.
Somehow, usually of necessity through Govern-
ment action,. the corporation must be obliged to include these social costs inflicted on others as part of its production costs.
On this last point, in con-
trast with most of the others, the economist is increasingly vocal.
What he
calls "externalities" are the main basis for his espousal of corporate respon.sibility.
Against.
When it comes to arguments against corporate involvement in
social concerns, you will.find only a few economists who hold all the values in
the right column of the table;
lean toward the right side.
Most economists would be inclined, however, to
(As economists, that is.
I should stress that the
economist is very finicky about differentiating his views as an economist from
those as an invividual.
So you would find him leaning to one side of the table
or the other, depending on which hat he is wearing at the time.)
The most forceful opponent of corporate involvement is Milton Friedman.
Let him make the argument for me.
' to ethical conclusions.
comes
market
system~
He bases his case on econom:i.c grounds, but
He believes almost religiously in the competitive
He bases this belief in the old tenets of Adam Smith in which
the individual il1. pursuing his own interest is
(t~)
•.. vnrplete the famous quotation)
"led by an Jnvisi.bl:e hand to promote an enl'i ;,rb kh was no part of his intention.
Nor is it always the worse for the society that it was no part of it.
By pur-
suing his own interest, he frequently promotes that of the society more effectually
than when he really intends to promote it.
I have never known much good done by
those who affected to trade for the public good."
The
~arket
system is the.mechanism by which individual welfare is
translated into social welfare.
Its essentials are spelled out in every basic
-7-
economics text.
Scarce resourceQ_are allocated_to their most-desirable ends,
and means of production are rewarded in accordance with workings of the price
system.
The driving force is profits.
In a competitive economy the welfare of
society is maximi22d when corporate executives behave as profit maximizers.
Friedman says:
"In a free-enterprise, private-property system, a
corpprate executive is an employee of the owners of the business.
.direct responsibility to his employers.
He has
That responsibility is to conduct
the business in accordance with their desires, which generally will make as
much money as possible while conforming to the basic rules of society; both
those embodied in law and those embodied in ethical custom."
If the Henderson Rochfords behave otherwise, Friedman concludes,
not only will the market
·expected
sys~~m.not brin~~~e
economic and social benefits
but unethical conse uences ensue.
When the corporate executive
acts in some way that is not in the interest of his employers, he is "spending
someone else's money for a general social interest • • • . The stockholders or
the customers or the employees could separately
particular actions if they wished to do so.
distinct 'social responsibility', rather
sto1:~holders
~pend t~eir
own money on the
The :executive is exercising a
th~n
I
serving as an agent of the
or the customers or the employees, only if he spends the money
in a different way than they would have spent it.
But if he does this, he
is in effect imposing taxes, on the one hand, and deciding how the tax proceeds
shall be spent, on the other."
Friedman concludes, therefore, that corporate social responsibility
If·ro.._
'tl,.i*a!l
I
'hlfiU
::r:tP
llll'!llllo
is a big step toward socialism in which political mechanisms rather than market
mechanisms determine the allocation of scarce resources.
Since freedom is a
-8-
value to be held above all others, it is important for ethical reasons not
to violate fundamentals of the free market.
Choosing.
Here·you have a smorgasbord of values from which you can pick and
choose those that best suit your taste.
My own platter looks something like
this:
1.
People do want to improve their material well being.
not the only qriving force in their lives,
an~
This is
probably it is
a diminishing one as they gain more affluence, but it is very
iinportant.
2.
The corporation exists
3.
The drive for profits is an essential aspect of the competitive
prim~~ily
to staisfy this want.
market system which has enabled the corporation to be so tremendously successful in its primary task.
4.
The corporationt however, must look to the long run.
In
servin~
its own ends and the public's needs for goods and_ services,
I
the corporation may well take many actions that are not directly
related to profits in the short run.
Thus it may contribute to
the local United Fund in order to maintain good relations in the
community from which it draws employees.
5.
The corporation has an obligation to include in its costs of
production the external costs it inflicts on others in the form
of such things as air and water pollution.
6.
In most cases it cannot do this alone; it needs help from Government.
The role of Government should be to provide leadership to
the corporation, inducing it to act in ways that qompetition
makes difficult for the corporation to act.
It is entirely
appropriate, for example, for Government to provide safety
standards for the guidance of automobile producers.
7.
Hopefully, Government can exercise this function largely by
providing incentives rather than imposing the dead weight
of bureaucratic restrictions.
My~
columns.
position, in effect, is
some~~re_between
the ri_.!iht
an~- ~eft
It maximizes the advantages of the market system and the role of the
corporation in it, but recognizes
~hat
the corporation legitimately has many.
responsibilities to society that require it to act in ways that go beyond the
quest for short run profits.
And, finally, it gives a vital role to Governk tyt fV/1..1- ..
ment not only in providing incentives to the corporation to act in that way,
but also in meeting many other social needs that are beyond the ability of
the corporation to satisiy.
Wherever
has been
left side of
and I may come out on the issue, it is cleAr that sentiment
y~u
moving~
th~
I
d
particularly in the past decade, from the right toward the
table.
As Daniel Bell puts it, we are moving from an "econ-
omizing"mode to a "sociologizing" mode, from a market price system to a
~~.tlt~:u·al
value system, from concern for the individual to concern for society.
This thrust is basic, will persist, and will carry the corporation along with
it.
But for the immediate period ahead it seems likely to be hung up on some
new economic realities.
The new realities.
The Henderson Rochfords in our corporations are a new breed, as many (such
as the Committee for Economic Development) assert.
They~
I
socially concerned.
I
-10-
Yet they are under tremendous pressure to perform.
Along
wit~
social consciousness in the 60's came the cult of the equity.
the rise of
Economic growth
was a new national objective, increase in the market price of its stock was a
new corporate objective.
Investors and mutual funds served by sharp-pencilled
securities analysts, combed the list for growth stocks, switching from one to
the other as fanqy dictated.
The latter-day Adam Smith caught the mood in his
.book "The Money Game."
So the Henderson Rochfords for some time now have not been able to sit back
and contemplate their social responsibilities philosophically.
has had to be
o~
the·bottom line.
to sharpen that focus.
~XKRKimexpHX±~
Their focus
Today the state of the economy requires them
Corporate executives confront a combination of
economic circumstances that is unprecedented.
~
They are
trying to do business in the most severe inflation of any peacetime period.
At
the same time demand in important parts of the economy is sluggish, in other
parts capacity is insufficient to relieve shortages.
Costs are rising rapidly.
Interests rates are at unprecedented levels.
The stock market has collapsed.
Internal flows of funds are being depleted.
Profits are high:in nominal terms
but after adjusting for
risi~g
I
prices and in relation to GNP are near historical
lows.
This environment has two implications.
exec~~-to tgc~~A ev~n ~~~~-than ~~~~1,
shortens his focus to the near term.
One is that it forces the chief
on profi!s..
The other is that it
Both distract him from matters of social
responsibility.
How long will these conditions persist?
I hope, of course, that the
peculiar combination of inflation and stagnation will disappear soon.
But I
am not at all confident that the corporate executive realistically can expect
-11-
to live in a non-inflationary economy for some time to come.
Looking back,
the 60's, chaotic as they may have seemed then, were much more conducive to
the exercise.of social responsibility than conditions that seem to lie ahead
in the foreseeable future.
If I'm at all correct in this prediction, and I hope I'm not, an important question is how social,problems are to be met.
Right;now, for example,
.there is strong pressure to delay anti-pollution efforts in order to solve the
pressing problems of public utilities and energy shortages.
that- the role of Government will be even more critical.
nudging the Henderson Rochfords to keep looking tQ the
-
It seems to me
It should be one of
~.run:
The rationale
for social responsibility will not disappear, despite short-run problems.
It
will be important for the corporate executive to come to grips with his dilemma
in the uneasy times ahead and not just to live for the moment, for tomorrow will
surely come.
DPE-10/11/74
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