Ethicists and management gurus have long struggled to define “Corporate Social Responsibility”, and how it should be practiced by executive management. Milton Friedman famously stated in his 1970 article in the New York Times, that:

“a corporate executive is an employee of the owners of the business. He has direct responsibility to his employers. That responsibility is to conduct the business in accordance with their desires, which generally will be to make as much money as possible while conforming to the basic rules of the society, both those embodied in law and those embodied in ethical custom”

Friedman’s view has gotten plenty of support, and is legally sound. Executives can do what they like with their own private resources, but not with corporate resources. The executive has a fiduciary responsibility to shareholders manage their corporate resources to achieve their objectives.

The Opposing View

Some opponents to Friedman’s view have argued that executive managers also have fiduciary obligations to other stakeholders, even beyond the requirements of the law. In other words, managers are responsible to protect the environment, ensure product safety, avoid exploitation of minors, share benefits with local communities et cetera. While this view seems morally comfortable, its legal basis is questionable. No matter how good the cause, managers do not have the right to promote it with shareholders’ money unless they have shareholders’ approval, or it is compatible with shareholders’ interests.

But Corporate Responsibility is Profitable..

Executive managers have avoided the dilemma on the assumption that doing the right thing is also in the best long term interests of shareholders. Corporate Social Responsibility is firmly established, with varying degrees of sincerity, in most major corporations. Management simply cannot afford to ignore the interests of customers, consumers, key suppliers, employees, local communities and other stakeholders. Still, the question remains. Are managers justified to go beyond shareholder considerations, beyond strategic stakeholder considerations to do what is right even when that creates significant costs with no apparent short term or long term benefits for shareholders? Kenneth Goodpaster (1991) described this as the “Stakeholder Paradox”

“It seems essential, yet in some ways illegitimate, to orient corporate decisions by ethical values that go beyond strategic stakeholder considerations to multifiduciary ones”

Code of Conduct and Ethics Statements

Corporations certainly are not shy about claiming the moral high ground in their various policy documents. General Electric for example, writes in their Code of Conduct document “The Spirit & The Letter”:

“For well over a century, GE employees have worked hard to uphold the highest standards of ethical business conduct. We seek to go beyond simply obeying the law — we embrace the spirit of integrity.”

Does that mean that GE executive management has a mandate from shareholders to do the right thing, even to the potential disadvantage of shareholders? Shareholder objectives, which management is legally obligated to pursue, are defined in the General Electric Charter, or Certificate of Incorporation. In this document we find no mention of ethics at all. Instead we read, under Objectives:

“The purposes of the corporation are as follows:….. (D) To engage in any activity which may promote the interests of the corporation, or enhance the value of its property, to the fullest extent permitted by law, and in furtherance of the foregoing purposes to exercise all powers now or hereafter granted or permitted by law, including the powers specified in the New York Business Corporation Law“

In other words, taking the two documents together, GE works to uphold the highest standards of ethical business conduct, as long as that will promote GE interests or increase its value to the fullest extent permitted by law!

Making Room for Morals

Many shareholders of GE and other leading corporations would, I expect, be willing allow executive management some flexibility when it comes to doing the right thing. Perhaps the time has come for shareholders to consider ethics in the mandate they define for executive management, in fact to not only allow true ethical business conduct, but to require it. For example, the Certificate of Incorporation might be modified to state:

“….to engage in any activity which may promote the interests of the corporation, or enhance the value of its property, to the extent permitted by law and compatible with ethical the principles of honesty and fairness towards those who may be affected by our activities“

In other words, perhaps it is time for shareholders to make room for morals in the Corporate Charter or Certificate of Incorporation.