17 May 2004  Research & Ideas

Why We Don’t Study Corporate Responsibility

What can business do to improve social welfare? In fact, we don’t know because too little study has been given the issue, argues HBS professor Joshua Margolis and colleagues.

 

For too long, scholarship in the field of management has looked at economic performance rather than social welfare, argue HBS professor Joshua Margolis and colleagues James P. Walsh, of University of Michigan Business School, and Klaus Weber, Kellogg School of Management, Northwestern University.

"Our message," says Margolis in this interview, "is that as business plays an increasingly important role in society, it is important to correct the drift away from social welfare and devote more research attention to social welfare issues."

The collaborators came to their conclusion after studying research published between 1958 and 2001. Their findings were recorded in their paper "Social Issues and Management: Our Lost Cause Found," published by the Journal of Management, December, 2003.

By studying the interplay of business and society, Margolis says, researchers might be able to address such issues as "how corporate practices contribute to or detract from stable societal institutions or democratic processes, or how might companies advance individual learning and growth, or the capacity of individuals to be conscientious citizens." In addition, this information would help managers better understand their big-picture role and perhaps lead to more ethical conduct in business.

Manda Salls: What did you learn from your look at organizational research, and how has this research changed the way we view organizations?

Joshua Margolis: From analyzing research publications, we have found three basic trends. First, research has increasingly focused on economic performance. Second, research focusing on how organizations affect other dimensions of human welfare, beyond economic performance, has declined. Third, research on organizations has paid very little attention to the impact of organizations on society.

We suggest that the study of organizations could be even stronger if the increasing focus on economic performance were accompanied by comparable attention to the impact organizations have on human welfare and on society. While business organizations are certainly economic instruments, we suggest that organizations have a range of effects and play a number of roles in society. To enrich knowledge about organizations, we argue that organizational research needs to explore the full set of roles organizations play and the range of consequences their practices have.

To help managers become more effective, we suggest that researchers should investigate the challenge that managers face: how organizations can balance their economic effects and their effects on human welfare and society.

Q: Do you think the lack of scholarly attention to social values has played a part in ethical violations we are dealing with today?

A: I'm not sure the lack of scholarly attention has necessarily played a part in ethical violations. However, my co-authors and I do suspect that the disquieting silence in scholarship has curtailed insight into the causes of those violations and potential remedies. Restoring a healthy balance in how scholars conceive of business may provide one component of a remedy.

Scholarly attention to ethics and values does indeed have an impact on business leaders' self-conception and resulting behavior.

Business organizations are certainly economic instruments, but they also have an immense impact on human development and the well-being of society. Sustaining research attention on both the ethical and economic responsibilities of business, and on the tensions between them, shapes the orientation we inculcate to business school students about their role and responsibilities. They are not merely agents of shareholders. They are leaders and trustees of perhaps the most significant institutions in the contemporary era. How managers see themselves and understand their role is an important contributing factor to their ethical conduct. Scholarly attention to ethics and values does indeed have an impact on business leaders' self-conception and resulting behavior.

Q: Corporate social responsibility sounds like something we should all want. Yet history shows there have always been critics who argue that making money is the sole objective of the corporation.

A: Their arguments should be taken quite seriously. In fact, we suggest that recognizing the significance of concerns on both sides of the debate is central for understanding how to weigh and integrate those concerns. At the risk of oversimplifying, we discern four central criticisms of corporate social responsibility.

When companies engage in socially responsible practices, the first concern is that managers will misappropriate corporate resources by diverting them from their rightful claimants, whether those are the firm's owners or, sometimes, employees.

A second concern is misallocation or inefficiency. Engaging in activities deemed "socially responsible," critics argue, entails diverting resources best used for economic purposes to advance purposes for which those resources are poorly suited. From this perspective, managers' social initiatives are akin to using a dishwasher to wash clothes. Corporations can contribute best to society if they do what they do best: employ a workforce to provide goods and services to the marketplace and, in so doing, fulfill people's needs and create wealth. Engaging in socially responsible activities is not what companies do best and, according to critics, is thus a poor allocation of corporate resources.

The third criticism has to do with due process and democratic institutions. Even laudable and noble actions taken by companies on behalf of society need to be taken in accord with procedures that respect rights and afford subsequent accountability. Some critics fear that socially responsible corporate activity encroaches upon the role of government and usurps authority reserved for elected officials and bodies answerable to the public.

Finally, critics worry about the psychological implications of asking managers to focus on dual objectives. Having to advance economic performance and be socially responsible, some argue, destines managers to do neither. Some fear it is a recipe for distraction, frustrating managers' efforts to advance either objective and, worse yet, providing managers with a convenient excuse when they fail to achieve economic objectives. Mismanagement can be attributed to efforts to be "socially responsible."

We elaborate these criticisms and respond to them in another paper we have written, "Misery Loves Companies: Rethinking Social Initiatives by Business" (Administrative Science Quarterly, 48 (2003): 268-305). Just as an example of a response to these criticisms, it may well be true that companies are not the ideal institutions for redressing societal ills. It may also be true that society ought to be careful when enlisting companies to adopt a role considered the province of government. However, to use the analogy above, what if there are no washing machines to clean clothes? If the ideal institutions for redressing societal ills do not exist or if government lacks sufficient resources, it seems essential to consider what other institutions, such as companies, might do. In addition, companies are sometimes more responsive than governments to the populace.

Our aim is to encourage creative theory and research that considers the conditions under which companies might get involved in socially responsible practices. We agree with critics that corporate practices, which have significant consequences for society, risk being formulated beyond the reach of democratic accountability. We also concur that such activity warrants caution and requires accountability. However, these actions are not restricted to those taken in the name of social responsibility. Corporate actions that encroach upon the role of government also include those that fall into the narrower realm of economic endeavors.

Criticisms of corporate social responsibility quite quickly open deeper questions about corporate conduct in general. My co-authors and I seek to open serious research into these questions. We are also trying to move discussion beyond partisan squabbles for and against corporate social responsibility. The challenges societies throughout the world are confronting, the rising expectations laid at companies' doorsteps, and the world that business must navigate all call for a discussion that wrestles with both economic and ethical demands, trying to integrate them rather than trying to minimize one or the other.

Q: What do you see as the purpose of the corporation?

A: Let me start with four observations.

First, it may be more helpful to think about the purposes of the corporation, or at least to ask the question that way—in the plural—even if ultimately one purpose must be deemed preeminent.

Second, corporations are instruments designed to organize people and resources. Even though people assume corporations are primarily economic instruments, the purposes of the corporation actually get defined and worked out differently in different countries and in different historical periods. Inherent in the corporate form itself is not a single purpose. Rather, it is up to members of society to determine the purposes of the corporation. That purpose may well evolve over time.

Third, the question about a corporation's purpose might best be asked not of the abstract idea of a corporation but of each specific corporation. Organizational researchers have consistently identified the power of a vivid purpose to orient a company's activities, lend strategic direction, distinguish the company's activities and position, and infuse meaning and motivation into the efforts and activities of employees.

Fourth, the purpose of the corporation and measuring performance may not perfectly coincide. The purpose of a corporation is what gives meaning and value to the endeavors and investments of all who contribute to the corporation. Performance measurements provide a scorecard of indicators. Those indicators are used to evaluate how well a company is advancing its purpose, but those indicators do not themselves define the purpose. Share price and profitability may provide indicators of how much value the company is creating for shareholders, but share price and profitability themselves are not purposes of the firm.

Our hope is that researchers and business leaders would engage in a robust discussion of the purpose of the corporation.

Our hope is that researchers and business leaders would engage in a robust discussion of the purpose of the corporation. That may be far more important than pinning down a definite conception of the firm's purpose. While we hesitate to offer any single definition, our working definition to get the discussion and debate going would be: The purpose of the corporation is to produce and deliver goods and services in a manner that creates value for members of society.

Q: Your paper quotes William Allen, former Chancellor of the Delaware Court of Chancery, as saying, "One of the marks of a truly dominant intellectual paradigm is the difficulty people have in even imagining an alternative view." Do you think business scholarship has lost sight of social welfare issues?

A: Our data suggest that business scholarship did reduce its attention to social welfare issues. In part this can be attributed to the rising influence of basic social scientific disciplines, which improved the quality of research but also oriented researchers toward making contributions to theory in economics, psychology, and sociology. In part the turn away from social welfare issues can be attributed to the dominant concern of business, namely economic performance. There is no villain or conspiracy here, but that's what makes it all the more important to be cognizant of the turn away from social welfare issues. It happened quietly and unobtrusively and for good reasons. However, that left an important area of research unattended. Our message is that as business plays an increasingly important role in society, it is important to correct the drift away from social welfare and devote more research attention to social welfare issues.

Q: What can business leaders and researchers do to help reverse this shift?

A: In our paper, we try to jump-start a reversal first by calling attention to the dearth of literature and second by suggesting a set of alternative outcome variables that researchers might investigate and companies might attend to. For example, how might corporate practices contribute to or detract from stable societal institutions or democratic processes, or how might companies advance individual learning and growth, or the capacity of individuals to be conscientious citizens?

We also think that one way to reverse the trend is for leaders and researchers alike to move away from a dichotomy between economic and societal outcomes. Companies are being asked to meet high expectations on multiple fronts, so the real question is: How can companies satisfy societal and economic demands? Business leaders and researchers alike can focus on the "and" rather than the "either/or." Indeed, financial demands are unrelenting, but the world is turning to corporations to do more than meet financial demands.

Why? Largely because people see the tremendous capabilities that companies have. How can companies respond effectively? Searching for ways that organizations can deliver value to society along multiple dimensions is the challenge before researchers and business leaders. What we are calling for is a subtle but significant shift in orientation, and we acknowledge it is not easy.

When we think of leaders, we think of individuals and organizations who set themselves apart by committing to difficult challenges, rather than dodging them. Leaders accept additional responsibility and find creative ways to blaze unforeseen paths. That is what is called for here as well: recognizing the rising expectations and looking for ways to be both an effective societal contributor and an economic powerhouse.

Q: What other research are you working on?

A: There are three projects I am quite excited about. My colleagues Rohit Deshpande, Lynn Paine, and I are launching a study of global business assessing (1) the level of consensus among individuals at global companies around standards promulgated in the most prominent international ethical codes and (2) the level of adherence of companies to those standards.

Second, with my colleague Andrew Molinsky, I am in the thick of a project examining how professionals manage "necessary evils," tasks that entail doing harm in order to advance a worthy purpose. These tasks are among the most significant and the most unsettling managers must handle, especially in an era of economic transformation.

Third, I am beginning to investigate leadership in adverse conditions. How do managers respond effectively to acute episodes of intersecting ethical, practical, and psychological adversity—such as financial crises, inhospitable political contexts, or even natural disasters? In the face of extreme constraints, emotional stress, tradeoffs, and performance demands, how do managers effectively operate in adverse conditions?

About the author

Manda Salls is the editor of the Baker Library Web site.