Promoting a Comprehensive Approach to Corporate Social Responsibility

Dean Guthrie, George Washington University School of Business
George P. Shultz National Foreign Affairs Training Center
Washington, DC
April 26, 2012

Dean Guthrie: Now to start off my comments today, I wanted to just cite three individuals, some names you know some names you might not, but I think they actually exemplify the range of things we are talking about: Samuel Zemurray, Phil Knight, and Sam Walton. Okay these are all individuals who have done different things at different moments in time that have very much been about the engagement of business and society and about the ways of which a multinational corporation is a critical vehicle in understanding international policies, the role of the United States in the world, and ultimately the way in which the corporation could be a force for good or bad and how society ends up being constructive.

Samuel Zemurray, most people have forgotten his name, during the 40s, 50s, and 60s, he was the entrepreneur, Russian immigrant entrepreneur who actually transformed the banana industry and became a key player in United Fruit and ultimately aligned with many things, there are lots of books and reports out now about his alignment with the CIA and things he was doing in South America. But the key point is that he was individual that was an entrepreneur who thought about big ideas; in terms of the flow of capital, and the flow of goods around the world, and ultimately when we think of the flow of goods, and flow of capital around the world, we have to think about geopolitical boundaries. He became a key player in that space.

Phil Knight, many people don’t realize Nike is one of the great innovators in the world that we live in today. Phil Knight used to sell in the 60s, he used to sell shoes in the back of a Pontiac for Bill Bowerman and he realized he was making no money. So, he went to Stanford Business School and wrote a business plan about how they could make so much money if they outsourced production in some other place, let’s call it Japan. And suddenly we are in this world, which outsourcing is the dominant corporate form and of course Phil Knight’s entirely life changed in 1997 because Nike believed they were immune from any kind of corporate social responsibility types of issues because they didn’t own the factories in which Indonesian workers were employing 14 years old girls. But it turned out in 1997, that when American college students vote with their feet and suddenly say we are not going to buy Nike tennis shoes, his personal net worth took a hit of a billion dollars. So we saw a new chapter, a new moment in the intersection of all of the issues that matter in corporate social responsibility.

And of course – Sam Walton founded Wal-Mart and Wal-Mart became one of the most powerful companies in the world gradually over time. Most people don’t realize, with respect to China specifically, Wal-Mart’s exports from China back to the United States are equal to the exports of Mexico to the United States. This is the single largest exporter from China to the United States of any company in the world. So when we start to think about the influence of a company like Wal-Mart plays, you want to talk about sustainability, get Wal-Mart on board for changing the ways of its supply networks and distribution networks and its commodity chains matter. And so now we have entered into this new world in the last decade that fundamentally thinks about social corporate responsibility in very… very different ways.

And so what I would like to do is talk a little about that but first I’d like to take a step back and historicize a little bit. As a sociologist, I’m fundamentally a historian and someone who thinks about the social and political context of markets before anything less. So I want to talk a little bit about this and race through some things so forgive me if I am moving too quickly but I know our time is short and you guys got to get to lunch.

PART I: A Brief History of Ethics and CRS

So let me give you a very brief history. Often when I start out talking about these issues with students, I ask them, what is the purpose of a corporation? And they’ll say reduce transaction costs, make profits, stakeholders, do for the social good, but they very seldom come upon the one thing that is so important in corporation, in American society in which the corporation is an institution, a veil that protects entrepreneurs and senior managements from liability for blame. This is an amazing phenomenon and very specific to American society, there are some versions of this in Europe, but I can tell you that a propos of the panel that you just saw, one thing is very interesting in terms of corporate social responsibility the entire concept of legal person in Chinese and in the Chinese corporate system it means exactly the opposite that it does in America. In America it means the corporate veil, legal entity that will protect people from liability for blame.

In China, the word “legal person” [translated into in Chinese], means who is going to go to jail if this corporation does a bad thing. I actually have become too aware of this because GW has just set up a wholly owned enterprise in China and I had to decide who was going to be the legal person and I realized it had to be me because I was driving the process and I realized, oh I am going to be the guy going to jail if we do bad things. But it is an interesting thing to know about what American capitalism is about and I don’t decry that. I think this has actually created the greatest source of innovation for our society. But also brings in the dramatic responsibility. We have to train our young people to understand that we have created a system which they can be protected from liability for blame, what that means is they have great responsibility for doing what’s right. It means we have to bring back economics to a normative understanding of social issues and social change.

So of course this story sort of begins with who I think is the most important economist of the 20th Century, some people might say john Maynard Keynes occupies that position but I think it’s Milton Friedman. We live Milton Freidman’s world today regardless of what you think of what the Federal Reserve is doing and the way it’s kind of taken a Keynesian turn, we are living in Milton Friedman’s world and in which we have to deal with the question of what the role of the corporation of society it is and who it serves. Now the one thing that is interesting about Milton Friedman is although he rose to prominence in power in the 1970s, I think Milton Friedman misunderstood the history of corporate social responsibility, so I want to give you a brief snippet of that history and run through it so we can get through other topics. But the key thing is that the history of corporate social responsibility has risen in this current era in the United States as an end-run around regulation and that might be okay but it’s important to understand what it’s really about.

So if we think about corporations among 3 axes which is usually how I typically think about citizenship in general. Do you pay taxes? Are you subject to the law of the land, can you influence the laws that influence those two other issues? It’s an amazing thing today because corporations in our society are much more valued and favored citizens than individuals are today. It wasn’t how it was meant to be when the founders of this country wrote the Constitution. It’s been a subtle process by which that’s occurred but it’s been one that’s actually dramatically come true today and it’s actually one that given the Supreme Court we are moving more and more aggressively in that direction; therefore we need to think more aggressively about the social responsibility of corporations because if we are not going to have the regulation for it we need to think about it normative terms so let me give you a couple of key examples.

It used to be the case that the corporate contributions to the state pretty much tracked with individual contributions and that was pretty much true until 1946; middle of the country, post WWII. But you can see over the course of time, the corporate contributions to the GDP had declined dramatically. Some would argue there is good reason for that because of you provide more resources; tax corporations less, provide more resources; greater incentives for corporations to innovate and change and invest and we hope that’s true. It’s not always true but we hope that it is true. It’s certainly not true with hedge funds for example or most funds moved offshore. This may be true with corporations; we don’t have very good laws with in terms of repatriation of profits but it might be true for removing tax burdens for corporations creates greater investments. So we often hear this thing, like the US is a very onerous place in terms of corporate taxes because of the 35% tax rate, actually it is not true empirically. Empirically there are so many loopholes for corporations that it just doesn’t play out that way.

So the interesting thing is how corporations have created this new kind of regime. And we might also ask the question of whether or not corporations are subject to liability and blame. And we know there have been many cases in which corporations, the corporate veil protects individuals and of course when corporations are fined for malfeasances or practices that extend beyond the standard economic practices; those fines are usually passed on to consumers so it’s a very special position for corporations to operate. Since the founding of OSHA in 1970, the Office of Health and Safety Administration, about 200,000 people have died because of work-related injuries were regarded by the courts as negligence from management. Eleven people have been tried, 6 have done jail time. That’s amazing. That’s an amazing statistic and it’s an amazing kind of protection that comes in this case. We know the famous cases that we’ve heard about Ford and Pinto, and all these things but again the main thing is that corporations are special citizens and therefore, we have to think about them in very special relationships with respect to how responsibility to society play out.

Now the interesting thing about this is I think Milton Friedman got the history fundamentally wrong. Milton Friedman basically argued that there are all these social interests, these advocacy groups who position themselves to argue that corporations contribute to society more. But the reality is that if you read the history closely, the history of the corporation is a very interesting one in American society. As I mentioned it was originally the case that corporations were specifically written out of the Constitution. There is a very clear, and you can track the record on this, it’s a very clearly defined decision by the writers of the Constitution to say that corporations should not be written into this because this country is a country written on individual citizens’ rights. So what do we do with corporations? Well, we’ll leave it to states to figure it out. And frankly, corporations aren’t even people so it doesn’t really matter. Now there was an interesting case in 1819 and it didn’t have anything to do with corporations per se, it had to do with Dartmouth College in which the governor and board of governors in the state wanted to take over the college, and the courts ruled that actually this is a legal person; you can’t do that. This person has rights. And there were a number of other things that happened over the course of the next decades. In 1890, the state of New Jersey realized if we start tweaking the economic laws we can start attracting corporations with having an immense amount of economic power to come into our borders. And thus began the so-called race to the bottom. And then of course the Great Depression happens in 1929, 1932 we see the passage – err 34 – the passage of the Wagner Act. And when the Wagner Act was passed, the Wagner Act created a tremendous amount of curtailing of corporate power.

Then there was a battle that ensued for the next 14 years until the Taft-Hartley Amendment, which brought in the notion of state rights. The right to work was the most fundamental thing that corporations ever won in this country. And my main point about all of this is that there has been a dialogue, a dynamic that has been pushing way, moving away from regulations, and moving away from control or power of labor. And I might sound from all of this that I stand far on the left side of the spectrum. It’s actually not true. I’m a rabid capitalist, I believe in globalization, I believe in free trade, I believe in the ideas that we’ll build economies dramatically, but I also believe that we need historical context in order to understand how corporations have gained so much power and how then to force the idea back on them that social responsibility is an important part of their agenda and it can’t just be an economic calculus that they think about. It has to be something more. It has to be something that actually pays for all the benefits that they get. And I believe in that very clearly.

Now I’ve noticed that my time is actually ticking down very quickly and there are a couple things that I would like to mention that I think are related to what you’re doing so I’m going to skip through a couple of things. There’s a whole bunch of stuff on community engagement that I think is very important for corporations but what I would like to do is mention a couple of things about China. And that was part of the recent panel and I know you guys are going to be talking about energy.

Part III: China, Jobs in America, and the Responsibility of Governments

There’s an interesting situation going on in this country that has to do with where we are on the issue of corporate social responsibility, energy, the role governments and how we thing about labor and human rights. And the key thing for me is we need to think deeply about not the government versus corporations, but how relationships amongst these entities work. We need to think very deeply about the ties between governments and the major corporations of our time in order to reinvigorate this economy but also in order to actually have the right type of relationship with our overseas investments so we can actually create a better world. We talk about doing big things in this country; we talk about putting solar panels on the top of the White House or talk about giving tax credits to companies in the solar field, but what does it actually mean?

Are we actually taking on the big debate about these issues because it’s still the case in places around the world – like China in particular for example – are speeding ahead of us in this space. And why is that true? I think it’s true because we spend our time filing a lot of court cases instead of thinking about an alliance between corporations and governments and thinking about issues like investment, labor and human rights, and social responsibility.

We think about advertising, some of our low end retail brands instead of thinking about propping up our highest-end innovative brands in industries that really matter. I was recently have lunch with a friend of mine named Chad Holliday, who is now the chairman of Bank of America, but before that he was the chairman and CEO of DuPont. We were talking about this kind of issue and I was giving him my pitch about why it is we’re losing in renewable energy, why it is that the social responsibility piece of business seems to be getting lost when it has to do with support of American workers and American industries and he told me a story that was his story about the last photovoltaic plant deal he did when he was at DuPont and he just said “I just couldn’t do it… America wasn’t there. I wanted desperately to build a plant in America, but they weren’t there. I got into a bidding war with Singapore and Guangdong and ultimately we would build our plant in Guangzhou and build the research facility in Hong Kong, but the United States was just absent. They thought tax credits would solve the deal and it just wasn’t close.” And so there are a couple of pieces of that, and one is just the absence of the relationship between government and industry and the lack of industrial policy but another is the close coordination about when you are a firm when going abroad, what are you going do, who are you going to employ, how are your issues around labor and international human rights going to matter. You just hear this kind of thing time and time again when you are close to people in industry.

So what I would exhort you all to do, is you’re thinking about this kinds of issues is to just remember how important this intersection and the healthy relationship between industry and government is; the State Department is such a critical player in all of this but I think in industry we typically think of these in American society as government being over here and industry over here and the reality is that the synergistic relationship between the two is I just think is crucial.

I think we are going to change the world because we are a powerful government and we have a powerful economic system that could decline…We are not in a perfect situation right now. We kind of have our heads in the sand on these but let’s just say we are as powerful as we have been for many years. That kind of relationship I think is the one that’s going to be the healthiest not the kind of relationship that evolved over the course of the 20th Century, the kind of relationship that is very close partnership between industry and government is the only way we are all ultimately going to have the right kind of outcomes that we want in the world.

So I know that you guys are hasty to get to lunch and you have a packed agenda so I am going to stop right here but I just want to say thank you again for having me and thank you again for listening to these important issues.