On the The Economist magazine website several years ago, there was an online debate about Gross Domestic Product as an appropriate measure of human welfare. The essence of the argument against GDP as an indicator was that living standards should include a broader measure of the human condition. The debate is, in a macro way, analogous to the discussion of Corporate Social Responsibility (CSR) and the “ethical company”. To what extent do businesses have an impact beyond their purely economic role of providing goods and services in the marketplace? And to what extent should they address that impact in conducting business?

Let me first say that I am uncomfortable with the term “ethical company.” People who use it seem to imply that a company is “good” as opposed to an ordinary company. If only life were that simple. Ethical questions, it seems to me, aren’t about good and evil – two words that can take on many meanings. I understand ethical problems to be those in which perfectly respectable values come into conflict. For example, I am a doctor. I am a member of a profession that demands that I use all my resources to preserve human life, ease pain, and support the highest quality of existence that I can. A patient comes to me who is dying of a terminal illness, whose life I can extend but only at the cost of the patient suffering almost unimaginable pain. What do my values dictate I should do? My values say I should preserve life, but they also say I should preserve quality of life and ease pain. That’s an ethical dilemma.

So it is in the business world as well. Let’s say I’m the executive in charge of CSR for a multi-national company that operates in a lesser developed country. Our CSR program requires us to respect the social norms of the societies that host our operations. At the same time we have a CSR program that finances education of young people in those same societies. What happens if we have operations in a country where the social norms are such that only males are considered worthy to be educated? What do I do? If I open the educational program to males and females, I’m supporting our educational objectives but dismissing the local society’s norms and saying they aren’t worthy of respect. My company is effectively saying that equal access to education for both sexes is the norm where we come from and what your society prefers doesn’t count. If, instead, the CSR program excludes females, are we being true to the educational values underlying the program? What’s an “ethical company” to do in that situation?

Industry Canada says that while CSR does not have a universal definition, many see it as the private sector’s way of integrating the economic, social, and environmental imperatives of their activities. This statement begs the question. What exactly are the economic, social, and environmental imperatives of the private sector’s activities? Companies that refuse to use suppliers that employ child labour, companies that treat their employees with dignity, and companies that ensure that their operations have minimal environmental impact are praised for practicing Corporate Social Responsibility. However, just like the debate about GDP, we can more easily state the concepts of dignity or human welfare than we can specify them. The key to examining the issue is the term responsibility.

We have to de-construct what a corporate business enterprise is to start to sort through this question. Corporations are legally persons, but in only that one sense. One of my political science teachers took exception to the once-popular expression “good corporate citizen”, an earlier term for the socially responsible corporation. His challenge was simple, “Can corporations vote? No? Well then, they’re not citizens!” An economic definition of a firm is that it is a collection of non-market transactions being carried out by individuals with a conscious sense that they form an organization selling goods and services in the marketplace. However, it’s the individuals within the enterprise who have the consciences, the values, and ultimately the responsibility.

Executives, managers, and employees of corporations have the authority to use other people’s money – shareholders’ money. If they direct those resources to even a noble non-business purpose or incur extra costs to serve what they perceive to be the benefit of society in general then they must choose between a perceived responsibility to society against a legal responsibility to the people who have entrusted them with their wealth. And the caricature of shareholders as exclusively high-income individuals who can easily afford to share the wealth is inappropriate. Shareholders are more likely to be pension or mutual funds whose contributors are not in the 1 percent of society’s income distribution but simply working people who are using these investment vehicles to provide for a dignified retirement.

Proponents of CSR often sidestep this issue by claiming that a business that behaves in a socially responsible way never suffers for it. Doing good is good business, they claim. I think there is evidence to support that. Stakeholders appear continually to up their expectations of business behaviour and are prepared to punish businesses that don’t measure up. Societal expectations of this kind have added another term to the business lexicon, social license. Essentially that means the degree to which a society or community tolerates a business or industry. Social license is a reality of modern business but it is not necessarily a reliable guide to behaviour. For example, communities that already host automobile manufacturers may grant a social license to a new plant whereas a community considering its first facility may not be so eager (unless of course the local unemployment rate is high). All of this implies that the discussion of CSR isn’t so much about ethics as it is a discussion of effective business strategies.

Another point that is often lost in this discussion is that business enterprises make significant social contributions simply by carrying on their basic business. The Economist reported in January 2008 on the results of a study conducted jointly in 2004-2005 by the charity Oxfam and the household products manufacturer Unilever. It examined the economic impacts of Unilever’s operations in Indonesia. The results of the study indicated substantial conventional benefits: 300,000 full-time jobs, total value of US$630 million created, US$130 million per year in Indonesian taxes paid. Perhaps simply doing business is doing good.

There is also another critique of CSR that is sometimes raised and which deserves serious consideration. When businesses support social outcomes, they are in effect choosing which social outcomes are important. They put their resources behind certain causes and not others. It could be helping communities in lesser developed countries provide themselves with clean water. It could be providing support, either financial or in-kind, for educational programs. Some people would say, however, that is not an appropriate role for business. When – in the name of CSR – companies institute certain programs in host societies they are making choices about what initiatives will advance. There is a substantial body of opinion that would argue that no matter how well-intentioned the enterprise believes it is being, it is appropriating to itself decisions that it cannot rightfully take. Political and other local social agencies have the mandate to pursue the public interest, not well resourced businesses.

In any event, for business leaders there are no easy lessons to be drawn from the CSR discussion. As usual, informed judgement is essential. Being aware of and sensitive to the social environment that affects your business is critical. Attempting to build brand equity by highlighting Corporate Social Responsibility is less straightforward. As time goes on a CSR reputation may be less and less a point of differentiation. It will always be critical to respond in a reasoned and careful way to societal pressure without apologizing for the products and services that the business supplies to willing consumers in the marketplace.