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Decision Modeling & Corporate Responsibility

April 12, 2010

One theme from my last Decision Modeling class was the question of corporate responsibility.  Our case for the week was on one company’s attempt to organize a volunteer effort within the company to do service in the local communities where the company operated.  It was an unusual case, and the professor knew it.  He clearly wanted us to learn to apply decision analysis tools in situations without an obvious quantitative focus.  But it soon became obvious that he wanted us to be thinking about the role of corporate responsibility in general.

There are, he asserted, generally two schools of thought on this subject.  The first holds that the primary, and only, responsibility of a corporation is to its shareholders.  This school regards anything that detracts from that sole responsibility as detrimental to the shareholders.  Thus, corporate giving and philanthropy are stealing from the shareholders.  The second school believes that corporations are part of communities and affect the communities around them.  Insofar as communities are external stakeholders to the corporation, therefore, the corporation has a responsibility for the wellbeing of the community.  Both of these points of view, the professor believes, are ill-conceived.  The reasoning behind this assertion is that he does not believe that members of either “school” have thoroughly thought out their positions.  He wants us to think and analyze the pros and cons before ascribing ourselves to either school.

So, here’s where I stand on the subject.  It’s all well and good to say that the corporation’s responsibility is to its shareholders.  In a strictly legal sense, that’s true.  But in a market where shareholders have few if any actual rights – in which shareholders do not hire and fire their managers directly, but operate through the proxies of “Boards of Directors” the Chairpersons of which regularly anoint themselves as “CEO” and approve their own irrationally high compensation packages and perks based on the unstudied and unproven justification that these lavish salaries are necessary to “retain top talent” – this is an argument that is at best specious and at worst a crass appeal to corporate greed.  It’s also so narrowly focused on short-term profitability that it ignores the larger, long-term implications of corporate social responsibility.

The fact is, over the long-term, corporate philanthropy and social responsibility can have a positive impact on shareholder wealth.  The degree to which this has been studied (and to which we might be able to site empirical evidence) I do not know, but the logic is sound.  As much as economists and their ilk prefer to believe that human beings (including potential future customers) are purely “rational” beings that make decisions solely based on expected monetary value, this economic view is simply contrary to reality.  One of the recurring themes in our Decision Modeling class is that people value things to which we cannot easily apply a monetary value.  It is for this reason that we learned the concept of “utility”.  In fact, economists, as a general rule, have largely fallen into the trap of using expected monetary value as a shorthand for utility, where utility itself is a convenient but arbitrary measure of an individual’s values. 

In this vein, it should come as no surprise that many (even if not all, I would still assert that a majority) people place a great deal of value in certain non-monetary factors.  In fact, this is the very basis of business strategy: were it not so, the only viable strategy in any situation would be a low-cost, high-volume strategy.  But no; people value the intangibles, and one such intangible is the level of corporate and social responsibility.  Witness, for example, the rise of the green movement.  A large enough portion of the population values the protection of the environment that they are willing to pay more for a product that can be deemed environmentally safe and constitute a viable and exploitable market segment.  Companies are making a profit selling “green” products to these people.

Having thus done away with the myth that corporate or social responsibility somehow drains value away from shareholders, the question then becomes not whether corporations should act in a socially responsible way, but how they should act, and how much should they focus their attentions on this matter.  The answer will vary from corporation to corporation.  There are ways to go about investing in communities and social responsibility that add to shareholder value significantly over the long term; there are ways to do it that are neutral to shareholder wealth; and, yes, there are ways that would decrease shareholder value.   Corporations should be considerate in how they pursue these activities to ensure they are acting in ways that benefit both the community and their shareholders.  For example, a technology company might find that investing in education is the best way for them, because an educated population living in a developed economy are the sorts of people who will make the best employees and provide for a customer base with more needs for the company’s technology solutions.  This is the kind of values-based thinking that the professor of our Decision Modeling class is advocating, I believe.

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2 Comments leave one →
  1. April 12, 2010 2:55 pm

    Did I just get pinged?

    I’m touched… even if it is just a way to drive my site’s traffic to a third party site.

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