Do as I say, not as I did

By Clive Crook

When somebody says “Microsoft,” my first thought is unlikely ever to be “good corporate citizen.” I am more likely to think, “world-transforming innovator,” “awesome creator of wealth,” and “ruthless competitor.” (Sorry, Bill, no disrespect.) One wonders what would have become of this company if in its first decade or two its founder had spent significant time and effort—as he urged his audience at Davos—on good works not directly related to his goals for the enterprise. My main reaction to Bill’s speech was that it was a comical instance of “Do as I say, not as I did.” Microsoft’s shareholders and the world at large can thank their lucky stars that Bill did not follow his own advice.

Because he was an old-fashioned uncreative capitalist for so long, he changed the world and accumulated the means to become a staggeringly generous—and notably creative—philanthropist. His and Melinda’s remarkable charitable efforts through the Gates Foundation are not a tax on Microsoft’s financial or intellectual resources. These are outlays from their personal fortune. This is private, not corporate, philanthropy—a crucial distinction that Bill’s speech rather obscures.

John D. Rockefeller’s philosophy was to succeed in business as much as possible and by any means necessary, something he knew how to do, so that during his life and especially at the end of it he would have more to give away to good causes. I’m with Milton Friedman on this: apart from anything else, I prefer the clarity of Rockefeller’s approach. The principle of “corporate social responsibility” which Bill now wants to advance is convoluted and incoherent, in my view, and supposing it actually amounts to something is potentially a debilitating distraction from the search for profit. Let businesses be businesses. Once wealth has been created, and taxes paid, its owners can spend it on good works.

And the point is, even if they choose not to give, the world is still better off. Microsoft’s contribution to global welfare is orders of magnitude larger than the outlays of the Gates Foundation and all the other charitable spending of the firm’s employees and shareholders.

Microsoft is an extreme case, because of its size and success, but nonetheless represents a much wider phenomenon. The world’s most successful enterprises make a habit of concentrating implacably on improving their products, growing their businesses, and destroying their rivals. It is a commonplace to point out, following Adam Smith, that although it may be the last thing on their minds, businessmen who dedicate themselves to this task advance our world’s collective prosperity more than any other members of society. Now Bill tells us, this is not enough. Capitalism also needs to be creative. What can one say to this? “Yes, and compassion needs to be caring.” Capitalism is creative, and nothing else comes close. Depending on just what meaning you append to this redundant expression, “creative capitalism” seems likely in fact to be less creative than the kind we already have.

I’ll come back to that in a moment. First, though, Mike Kinsley assures us that Bill “obviously” did not mean to say that capitalism-as-it-exists is not creative, just that it could be more creative. It was good to have that confirmed. The fact that it needed to be suggests that the term was not well-chosen. But in fact Bill is not just saying that capitalism is great but can do even better, as Mike’s clarification would have it. He appears to be saying that it fails systematically in one surpassingly important respect:

“Why do people benefit in inverse proportion to their need? Market incentives make that happen. In a system of pure capitalism, as people’s wealth rises, the financial incentive to serve them rises. As their wealth falls, the financial incentive to serve them falls – until it becomes zero.”

Under capitalism, people benefit in inverse proportion to their needs? Didn’t Karl Marx say something like that? It happens to be nonsense: capitalism has created mass affluence. As for there being no market incentive to serve the poor, tell it to Sam Walton. Yet this nexus of misconceptions is widely embraced. I would be amazed if Bill did not actually believe that free-enterprise capitalism is the best way to spread prosperity. In his speech, however, he affects to question it. He appeases, rather than confronts, the prejudices of those who not merely question capitalism but are certain that it is fundamentally evil. I think that is a cop-out, and it does the poor and economically excluded of this world no favors at all.

Well, rhetoric aside, what does Bill’s “more creative capitalism” actually involve? Several things, it seems. One is effective philanthropy or, if you will, “creative philanthropy”—a much better label for what the Gates Foundation is about than “creative capitalism.”  The foundation has changed the way philanthropy works not just through scale but also by subjecting its endeavors to rigorous tests of effectiveness and value for money. In other words, it is bringing the discipline of business to charitable works. This seems an obviously good thing, not to mention overdue—but it is really the opposite of what many people took Bill to mean in his speech. This is bringing business ideas to doing philanthropy, not bringing philanthropic ideas to doing business.

Also, if you are talking about ordinary public companies, there is a problem with bringing philanthropic ideas to doing business. Let’s be clear about this. In the case of public companies, corporate philanthropy which is neither directed by shareholders nor intended to serve their interests is the next best thing to theft—as Warren Buffett, back when he was uncreative, used to note. Giving away other people’s money may be charitable, but it is also unethical. In the modern corporation, executives often need reminding that they are employees rather than owners, and that their first duty is to shareholders. A preoccupation with corporate social responsibility helps them to forget.

Of course, “creative capitalism” could indeed refer to philanthropy that does serve shareholders’ interests—for instance, by improving the firm’s image with customers (Motorola RED: budget under “marketing”) or by making it easier (that is, cheaper) to recruit and retain the best employees (“investment in human resources”). Sometimes  social investments turn out to be profitable businesses too: one thinks of micro-finance. Call me a cynic, but there might be some money eventually in Gates' plan to develop “a text-free interface that will enable illiterate or semi-literate people to use a PC instantly, with minimal training or assistance.” (And just so I am not misunderstood, its profit potential does not lead me to oppose the idea.) Initial philanthropic outlays in cases like these are really just another kind of business investment.

To a Friedmanite like myself (on this subject anyway), all this is great. If opportunities of this sort to make money are being missed, bring on creative capitalists to uncover and exploit them. But this is not a new kind of capitalism, some economic “third way” requiring a new way of thinking about business. This is the old way of thinking about business. And I am fine with that: it is Bill who is arguing (I think) that the old way will no longer do.

Let me close for the moment by noting one other thing in the speech that particularly made my spirits sink:

“I hope that the great thinkers here [in Davos] will dedicate some time to finding ways for businesses, governments, NGOs, and the media to create measures of what companies are doing to use their power and intelligence to serve a wider circle of people. This kind of information is an important element of creative capitalism. It can turn good works into recognition, and ensure that recognition brings market-based rewards to businesses that do the most work to serve the most people.”

The “triple bottom line” is one approach to this, and its problems are well-known. Measures imply the ability to make comparisons—to say that some firms are doing better than others, and thus deserve more “recognition”—and this in turn requires valuations of some kind. But these things are apples and oranges. Not even the greatest minds are going to be able to make the incommensurable add up. Moreover the idea seems to envisage collaboration among businesses, governments, NGOs, and the media (!) in coming up with agreed, standardized measures of social enterprise. If you could measure it, you could regulate it. I wonder what the old (I mean young) Bill Gates would have thought of that.

Provoked by the quotation in Bill’s speech, I intend to return shortly with another post on the question: “What would Adam Smith make of all this?” I am also interested in the issue raised by Ed Glaeser, concerning forms of incorporation that explicitly offer owners low profits and good works—something in between ordinary public companies and non-profits. Richard Posner said he could not picture the kind of firm Ed has in mind. Vermont has created a form of incorporation that appears to do what Ed suggests, or something like it—and it so happens my wife, Loretta Michaels, and some partners are looking to adopt it. She has written a note about it, which will be posted here soon. And a fuller version of my own skepticism on corporate social responsibility, if anybody is interested, appeared in The Economist in 2005. A pdf is attached.Download good_company.pdf

Comments

[jonm]

"Microsoft’s contribution to global welfare is orders of magnitude larger than the outlays of the Gates Foundation" : a fine example of the Friedmanite (on this subject anyway) tactic of asserting the core of what's up for debate without supporting evidence.

Against it, the common dollar based calculation purposefully ignores the fact that a dollar spent on a childhood vaccine is orders of magnitude more effective at improving global welfare than a marginal extra dollar of income to the typical Microsoft customer.

[Tony Castaldo]

I agree with Clive in most points here, but what he and Friedman and Buffett and Rockefeller all gloss over are the controls necessary to keep such single-minded corporations from becoming tyrants. I address this in a longer post I have submitted to Conor; but history suggests that when companies focus everything on profits they can lose sight of the law and what any jury might consider fair competition. There are hundreds of examples big and small, but a safe example is Enron, cornering the electricity market in California, creating false shortages to drive up prices, gouging customers, stiffing suppliers, and ultimately screwing their employees and investors.

Inc. Magazine has had articles detailing the ways in which Walmart screws over their suppliers, in ways I personally think amounts to fraud and deceptive practice. We have all heard stories of large corporations abusing the use of lawsuits and violating patents with impunity. We have all heard stories of corporations competing in the halls of Congress instead of the marketplace, helping to write earmarks for contracts only they will be uniquely qualified to win, passing laws that hobble their competition or give them a monopoly or allow them to pollute at will, or just getting taxbreaks with weak justification or no justification whatsoever.

What makes capitalism work is competition that drives efficiency. It is not just competition for customers, but competition for employees and investors as well. The small businessman must square the circle of these competing tensions, and it isn't easy.

What my examples of abuse have in common is they are all designed to thwart competition in some area, and they are successful.

The reason the charity world wants the corporations to grow a conscience is simply because that is where the power is. I absolutely agree that corporations should be single-mindedly pursuing profit, but I also think that government has a role in preventing them from essentially psychopathic and criminal behavior. If corporations were constrained by law to competing in the marketplace for customers with better products, employees with better salaries and benefits, and investors with better returns, the world would be a better place for all of us.

This works pretty well when there are several competitors, and laws in place to protect their employees and consumers from abuse (e.g. OSHA, health laws for restaurants, licensing laws for plumbers, audits for banks). It is when a corporation becomes large enough that it has the resources to corrupt government and start competing outside the marketplace that things go awry. And that is precisely what has happened, and that is why the charities beg corporations to take on the role that rightly belongs to and has been largely abandoned by government.

It is the role of government to tax the corporations, keep them in line, and use the profits for the common good. It is the hallmark of a government program that it has no short term profit potential. If it does so have, it is better addressed by private business. Such programs involve infrastructure, like roads and public buildings and reclamation projects and basic research in universities that pay off in indirect ways or diffusely over decades or just break even, or pay off statistically (9 out of ten research projects may yield nothing of significance, for example).

Undoubtedly relieving world poverty can pay off in future generations; it creates markets and workers and innovators and scientists where there were none. I think it would help in the long term with our geopolitical problems; in my opinion the reason so many are ready to die for their religion is simply that their prospects are pretty dim and they look forward to nothing worth living for; they know they cannot compete for jobs, or spouses, or any leadership positions. They can barely compete for food. Relieving poverty alleviates that hopelessness, but there is no business plan that can make an 11% annual profit on the line item "net hopelessness alleviated".

Investing in public education is a more immediate and accessible example, we can pretty much agree that strong education resulting in real skills pays off for everybody in the long run, but that payoff is diffuse and does not accrue to any one entity.

The answer to the problem is a proper separation of government and industry, not further merging the roles of government and industry as Mr. Gates proposes. Industry should ruthlessly pursue profit, efficient production, maximum employee productivity, and minimum supplier pricing. But industry should not be allowed to run wild; it should be fenced in by government.

If government adopted its proper role, it would restrict the corporations to competition in the market places, tax the corporations fairly, and identify the charitable issues it should address that are not profitable in the short term to increase the overall generational return of its citizens (first) and the world.

Then for maximum leverage, it would use the taxes gathered to employ that ravenous efficiency of competitive industry to address exactly those issues, at a fair profit to the companies doing the work.

The problem is political and may be intractable, it is a tragedy of the commons. The short term interests of industry, charities, and government are in direct opposition to the long term interests of all of us. The best thing the Gate's foundation and other rich philantropists could ever do is spend its money politically to remove the influence of industry on government; but I suspect this is antithetical to their views.

[Tom Buckner]

I am not a fan of Bill. I won't bother with all the reasons. Just making that clear up front.

Let us assume that he gives away all his fortune through his foundations, which is (wild estimate) in the neighborhood of $40 billion. Let us assume that this does X amount of good.

I assert that he would have done 100 X good merely by spending a billion keeping George W. Bush out of the White House in 2000. He could have done that; nobody was stopping him. This would have left $39 billion for his charitable works and the fabulous haircuts he is known for. Am I the only person in the world who has thought of this?

But Microsoft was under fire from the Justice Department for antitrust violations. This problem vanished when Bush raised his hand and told the lie, "I faithfully swear to preserve and defend the Constitution of the United States..."

Let me tell you, if I were sitting on billions in 2000, I would have certainly spent some of it on saving the world from Bush. I repeat: has no one else thought of this?

[The Eclecticist]

I do think Crook leaves out one of the more (forgive me) creative ideas in the Gates speech. Gates proposes that instead of the usual cash donations (which Crook admits can help maximize profits in the long run through reputational benefits, etc.), corporations look for ways to put the creative engine of what they do best to work in an effort to solve social problems:

I hope corporations will consider dedicating a percentage of your top innovators’ time to issues that could help people left out of the global economy. This kind of contribution is much more powerful than simply giving away cash, or offering your employees time off to volunteer. It is a focused use of what your company does best. It is a great form of creative capitalism, because it takes the brainpower that makes life better for the richest, and dedicates it to improving the lives of everyone else.
This is an idea worth exploring. One model is the pro bono work that large law firms do. Admittedly, law firms are not public companies, but they're generally pretty good at pursuing profits. Pro bono work enhances a firm's reputation much the same way a corporate gift to charity does. Through pro bono work, however, a firm puts it's best asset (the brain power of its lawyers) to work for the less fortunate -- something that is arguably far more valuable than the fees that the pro bono hours could otherwise generate.

Sure, this is really just traditional philanthropy in another form, but pushing corporate leaders to be more creative in the ways they give (thereby achieving better reputational benefits and better long-term profits for their shareholders) is a pretty great idea. Check out more on this at my blog: eclecticdialectics.blogspot.com

[The Eclecticist]

I do think Crook leaves out one of the more (forgive me) creative ideas in the Gates speech. Gates proposes that instead of the usual cash donations (which Crook admits can help maximize profits in the long run through reputational benefits, etc.), corporations look for ways to put the creative engine of what they do best to work in an effort to solve social problems:

"I hope corporations will consider dedicating a percentage of your top innovators’ time to issues that could help people left out of the global economy. This kind of contribution is much more powerful than simply giving away cash, or offering your employees time off to volunteer. It is a focused use of what your company does best. It is a great form of creative capitalism, because it takes the brainpower that makes life better for the richest, and dedicates it to improving the lives of everyone else."

This is an idea worth exploring. One model is the pro bono work that large law firms do. Admittedly, law firms are not public companies, but they're generally pretty good at pursuing profits. Pro bono work enhances a firm's reputation much the same way a corporate gift to charity does. Through pro bono work, however, a firm puts it's best asset (the brain power of its lawyers) to work for the less fortunate -- something that is arguably far more valuable than the fees that the pro bono hours could otherwise generate.

Sure, this is really just traditional philanthropy in another form, but pushing corporate leaders to be more creative in the ways they give (thereby achieving better reputational benefits and better long-term profits for their shareholders) is a pretty great idea. Check out more on this at my blog: eclecticdialectics.blogspot.com

[Dorje Mundle (DKM)]

Any approach that is not solidly anchored in long-term profitability will not be sustainable, and will not reach the critical mass needed to have a meaningful impact on the economic development and equity issues that Bill Gates refers to. Therefore philanthropy, while welcome and – as Bill and Melinda have shown – often powerfully beneficial, will always be an adjunct to the solution rather than the solution itself. Aligning the means by which companies earn their money (rather than how they disburse a small percentage of their profits) with improved economic development will be the critical success factor.

I broadly agree with Clive that applying market forces to address the needs of the poor is essentially good old fashioned capitalism. Thousands of such innovations have been made over many decades long before the term CSR was even coined, testament to the creativity of old-school capitalism.

That said, Bill is right that the vast majority of capitalism’s energy, investment and innovation is indeed focused on the needs of the wealthy, and does indeed almost totally neglect the needs of the poorest one to two billion.

The creative aspect then, is the innovative application of old fashioned market forces to help improve, say, economic development while also creating new sources of profitable business. System change, such as it is needed, should not subvert market forces (e.g. by forcing companies to invest in poverty alleviation rather than new products and services), but instead guide them in a manner that results in more win-win outcomes.

There is already considerable corporate focus on such opportunities in the telecoms, FMCG, retail sectors to name just a few (e.g. providing new market information and financial services via mobile phones in African markets). However, while this is growing rapidly, it remains a tiny field which is being pursued by a limited number of companies. Bill’s call for Creative Capitalism will be helpful if it catalyses an acceleration of this trend.

Clive’s post contains a howler regarding CSR. He implies CSR equals philanthropy, then proceeds to link CSR to the worst cases of philanthropy (cf his shrill comments on philanthropy as theft). This is a classic case of setting up a false straw man which can then easily be knocked down by the author. Let’s be clear about two points.

First, philanthropy is just one part of CSR, the larger part being focused on how a company’s money is earned rather than spent. Done badly, philanthropy can indeed be seen as tantamount to theft. Done well, it can support the company’s commercial goals as he concedes.

Second, good practice CSR focuses squarely on the value drivers businesses face, often framed in a broader and longer-term context than is the case in financial planning. It then seeks to inter alia mitigate legal, operational and reputational risks; improve operational efficiency (environmentally and financially); identify new business opportunities; enhance the working environment for employees; and improve the trust and quality of relationships with critical stakeholders such as customers, business partners and governments. Done properly, this enhances long-term profitability rather than distracts from it.

This is characteristic of Clive’s writings on CSR, which judge this field on the performance of its worst proponents rather than its best. While there is undeniably poor practice out there, there is also a great deal of substantive innovation taking place. Clive’s analysis implies that the C-suite executives and middle managers responsible for authorising/implementing their CSR activities don’t understand what’s in the best interests of their shareholders, whereas he does. This is arrogant, not to mention poorly informed. It is telling the Economist’s 2008 survey on CSR (www.economist.com/specialreports/displaystory.cfm?story_id=10491077) strikes a much more positive and balanced tone than Clive’s 2005 survey (or indeed his post here). It would be good to see his fine intellect and engaging writing more constructively engaged on this topic.

[Wendell Murray]

If Mr. Crook is against corporate social responsibility, I agree with him.

Whether for good or bad, private economic entities essentially have one overriding goal: to maximize returns to shareholders. It is not monolithic in the sense that that does not imply gaining from negative externalities (i.e. polluting water and air or killing employee through exposure to coal dust, etc.), but private companies have no responsibility to set up charitable foundations, etc. Nor should they. Let their shareholders as individuals do that.

Also for as incredible the accomplishments of Mr. Gates and his colleagues have been in building Microsoft, I am truly tired of hearing about him, from him, etc. If he wants to allocate his fortune to public good, all the better, but please that he do it silently. Idem former President Clinton and his wife. That is superfluous, I know, but it fits in mind anyway.

[Dorje Mundle (DKM)]

Wendell,

Charitable foundations do not equal CSR. They are just one of a broad range of CSR activities a company can undertake, but they are probably the least important.

Much more important are managing the complex ethical dilemmas global companies face when doing business, whether in relation to corruption, other aspects of business ethics, human rights, environmental impacts and employee welfare. These are necessary activities for business to conduct nowadays, and when executed well, do not stand in the way of corporate success but contribute it.

So, being against foundations and philanthropy does not (necessarily) mean you are against CSR.

[Anthony Castaldo]

Dorje: I am against CSR per se. How is a corporation supposed to know what their "social responsibility" is, and what gives them the right to unilaterally decide that or interpret that?

Social responsibility should be decided by society, meaning government. The only responsibility Corporations should have to society is obeying the law and paying their taxes while making a profit for shareholders. If corporations are acting socially irresponsible, it is because the government is lacking or corrupt or people don't care enough to change government, not because the corporation is lacking.

CSR conflates the role of government with the role of business to the detriment of both citizens and stockholders. The only reason there exists a hue and cry for CSR and Creative Capitalism is because our government has failed in its mission to demand and enforce social responsibility and protect both workers and shareholders and make it legally disadvantageous for corporations to misbehave. We do HAVE a problem with corporate greed and over-reaching, but this is engendered and sustained by an appalling lack of regulation, favoritism, corruption and greed by our government.

[Dorje Mundle (DKM)]

Companies decide what their social responsibility is through many means which I don't have the time to summarise here (plenty of info on this in the public domain). But key methods include:

- Identifying what their positive and negative impacts are, and trying to manage them in relation to laws, public expectations, competitive standards and good operating practices

- Dialogue with their customers, investors, regulators, political stakeholders, employees, neighbours and other interested parties

Done this way, it is not a unilateral decision, but a consultative one. Moreover, it's an iterative process, whereby the decision is regularly revisited as new information, laws, competitive developments, customer expectations etc. emerge.

I understand your point that responsibility should be decided by society, meaning government. In a perfect world this might even happen. But the reality is that:

1) even where they want to act, government legislation trails years behind the issues they aim to regulate. In the meantime, businesses need to manage the issues.
2) When they do regulate, they typically set standards that need to be applicable across the board resulting in lowest common denominator laws. While useful for setting basic standards), they do not give meaningful guidance to companies on a very broad range of issues.
3) for a variety of reasons most governments are not inclined to define standards for CSR.

Businesses have to operate in the real world, not utopia, hence they need to manage these issues in the absence of clear regulatory guidance. Having said that, it's important to acknowledge that some issues are regulated much more effectively than others. Health & safety is an example where corporate responsibilities are principally legally driven in some countries. But others issues like human rights are very poorly regulated.

Another dynamic which has to be managed is the variability in legal standards across geographies. The fact that lax standards may be legal in one country doesn't necessarily mean companies should perform accordingly if most other countries have higher standards.

Finally, CSR for many companies is not just about fulfilling basic legal obligations, but also about going further in expanding the contributions they make to society, and increasingly, seeking business opportunities addressing issues where societal demand exists. This dimension of CSR will never be effectively regulated as the 'answers' vary greatly between sectors and between companies.