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Thursday, 28 September 2017

Regulation and Corporate Social Responsibility

I probably haven't thought about this topic for several years, not since I was doing Business 101 and 102, but it came flooding back to me when I read an article about Facebook just a few minutes ago.

Basically, Mark Zuckerberg has been criticised by all and sundry for his responses to various criticisms of Facebook. The idea is that the firm needs to recognise that it is a media company as much as it is social media with responsibility for what its algorithms do, but Zuckerberg disagrees. Thus one finds:

Mark Zuckerberg has surely by now realised that he must answer his users' concerns, even when he doesn't share them. His mistake may prove extremely costly - he's boosted those calling for stricter regulation of internet companies.

The idea of Corporate Social Responsibility (CSR) is basically embodied in this quote: firms ought to behave in a "moral" fashion. The theory is pretty sound, if you ask me. A firm can conduct its business in a number of different ways but its behaviour is not neutral. That is, people react to the way the firm behaves. Being a nasty quasi-illegal menace is something a firm can pursue but it basically forces the firm to always shoot the elephant: it has to be ruthless, it has to use force. Putting millions of dollars into revitalising an urban space, on the other hand, gives a firm a lot of social credibility and people will reward them for that. Whether or not CSR really matters is something I'm not clear on. I certainly don't believe it makes firms internalise externalities.

This quote is about CSR for the simple reason that Zuckerberg isn't doing anything illegal. He operates Facebook in a way that is legal without being moral, which is apparently starting to hurt the firm. But the quote is also about regulation. And this raises some fundamental questions about how governments should interact with firms.

If you ask me, what governments need to is take as many nasty moral questions out of the hands of firms as possible. It seems to me that is unfair on managers to make them have to consider things outside of what they're meant to be doing, i.e. pursuing profits. It seems to me more efficient to have the state develop a set of regulations which reflect moral standards rather than rely on dubious mechanisms to achieve the same ends. Not all moral standards, but the biggies. Those ones that would be laws if peoples' concerns translated into policy faster.

Now, that is not to say that firms shouldn't engage in CSR (although my example reeks of gentrification, which is problematic) but that CSR is no alternative to good regulation. When a firm engages in CSR they should be doing it because they want its benefits, not because not doing it causes them to lose customers. If you regulate well with appropriate standards, this is what should happen.

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