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Religion & Liberty: Volume 13, Number 6

Does a business corporation have a responsibility to society?

    In 1946, Congress enacted changes in the tax code that permitted publicly held business corporations to deduct charitable donations in amounts up to five percent of their federal taxable income. Congress, of course, did not require companies to make charitable donations, but it did wish to encourage them to do so. The legislation became one more landmark in a running controversy about corporate social responsibility.

    Simply put, this controversy concerns the question of whether publicly-held business corporations (sole proprietorships and partnerships must be treated somewhat differently) have a duty to the communities in which they operate that goes beyond the duty to obey the law in the conduct of their operations. And if they have such a duty, questions remain about why they have that duty and what exactly it requires them to do.

    The sources that Christians might ordinarily turn to for guidance on moral matters – Scripture and theological traditions – are somewhat ambiguous on the question of corporate social responsibility. On the one hand, both biblical and theological traditions are quite clear that we are our brother’s keepers, that we have a duty to assist those in the community who are in need of help. The God of Israel has a special concern for the poor. Indeed, a clear sign of Israel’s fidelity to the covenant is the care that the community has (or does not have) for the vulnerable, who are represented by the widow, the orphan, and the stranger in the land. Israel is encouraged to see these people as under the special protection of God and exhorted to care for them as God would (see, for example, Deut. 10:17-18; Isa. 10:1-4; Jer. 22:1-5; Zech. 7:9-10).

    Jesus Himself reinforces this obligation powerfully in such passages as Matt. 25:31-46, where He identifies Himself with the hungry, the sick, and the stranger. A similar theme is echoed in the fathers of the church, such as St. Ambrose, St. Basil, and St. John Chrysostom, who regard aid to the poor and vulnerable as a fundamental Christian duty.

    On the other hand, the obligations described in these and many other passages clearly refer either to individuals or to the community as a whole. No passage of which I am aware speaks to the duty of commercial organizations. This should not be surprising, since in biblical times commerce was relatively uncomplicated and ordinarily a personal affair. Scripture might speak of the duties of a merchant but never of the duties of a company. Business corporations as we know them are, after all, a modern invention. In sum, then, if we consult Scripture for guidance, we will learn of a personal obligation to care for those in need but we will find nothing about a corporate obligation.

    A similar pattern can be found in the reflections of theologians up to modern times. They exhort us to seek justice and to engage in works of charity but again, they see these as individual responsibilities and the question of whether voluntary commercial associations might have such responsibilities is never addressed.

    More recently, though, the church has given sustained attention to the special situation of business corporations. Two papal encyclicals of the twentieth century, Quadragesimo Anno (Pius XI, 1931) and Centesimus Annus (John Paul II, 1991), explicitly discuss the role of business organizations in society. Both documents emphasize that it is legitimate for businesses to make a profit, but they also insist that the fundamental rule governing the conduct of businesses is that they serve the common good. Neither document, however, suggests that business corporations have a social responsibility that goes beyond this, even in passages where this could be quite naturally discussed.

    By contrast, the attention given to the study of business ethics over the last several decades has served to reinforce the conviction that business corporations have a social responsibility that requires them to use some of their resources to address needs in their communities. These resources may be cash, or physical property, or even the time and energy of their employees. Ordinarily, the needs addressed are outside the scope of the normal operations of the company. As a result, corporations make significant contributions to the arts or to social service organizations. In doing this, advocates argue, they are merely being good corporate citizens and giving something back to the society. We may call this the strong view of corporate social responsibility.

    Many opponents of this view insist that business corporations have no responsibility to society beyond obeying the law as they go about their operations. Their principal and overriding responsibility is to shareholders and it is a responsibility to conduct the operations of the company in such a way as to maximize the wealth of these shareholders. We may call this the weak view of corporate social responsibility. Perhaps the best known proponent of the weak view is Milton Friedman, the Nobel laureate in economics.

    In 1970, Friedman wrote an article for the New York Times Magazine in which he argued that business corporations best serve their societies when they increase their profitability. Furthermore, he said, executives of business corporations had no warrant to use the assets of the company for charitable purposes. To do so would constitute, in his judgment, an illicit tax on the shareholders, since it would be a use of their money for public purposes that was neither lawfully required nor consensual. This article has probably become the most commonly reprinted essay in the business ethics literature (though it is normally offered as an example of wrongheaded thinking about the nature of business and about corporate social responsibility). Not surprisingly, Friedman has been misunderstood or misinterpreted to say that businesses need not be concerned about ethics in their pursuit of profit.

    Over the last decade or two, as some version of the strong view has become the common opinion in business schools and executive suites, thinking about the nature of the business corporation and its relationship to the community has also changed. Quite often the moral quality of a company has been evaluated in terms of its commitment to social responsibility. In practice, however, this has created at least two kinds of problems, which on occasion have been serious and which, in any event, should provoke us to reconsider the wisdom and soundness of the strong view of corporate social responsibility.

    The first kind of problem is that the specific nature of corporate contributions sometimes becomes an obstacle to the successful conduct of business. For example, several companies have received unwelcome publicity and been the target of customer outrage because of their support for or opposition to Planned Parenthood. Some years ago, the Target Corporation (which famously donates five percent of its taxable income each year to arts and service organizations) came under criticism for its very modest support of a Planned Parenthood program unrelated to abortion services. When it decided to drop its support on the grounds that it was unnecessarily controversial, it then was threatened with boycotts from customers and investors who supported abortion rights. After a few weeks the company reinstated its small grant to Planned Parenthood but then, of course, it was threatened with boycotts by pro-life customers.

    Earlier this year, Berkshire-Hathaway decided to curtail its corporate giving after customers of one of its companies objected to Warren Buffett’s generous support of population control activities. More generally, socially responsible investment funds often screen stocks by examining the company’s corporate giving. As these funds have become larger and more numerous their impact on corporate giving practices is likely to be felt. In many cases, a contribution approved by one fund will cause another fund to reject the investment. In the future we will probably see more companies review, and perhaps reduce, their corporate giving in order to minimize interference with their core business operations and to avoid entanglements that make their stock less attractive to investors.

    A second sort of problem is more subtle but its effects have been brought home to us quite dramatically over the last two years. There can be a dark side to corporate philanthropy, as companies like Enron have demonstrated. Enron conducted a very generous corporate giving program and this, as we have seen in other cases, tended to make some people reluctant to examine the company’s business practices too closely. In Enron’s case, a member of the audit committee of the board was also a faculty member at a university which was a grateful beneficiary of the company’s largesse. In other cases, corporate donations have funded projects directed by the spouses of members of Congress or other officials. And even where there are less egregious conflicts of interest, nonprofit organizations and the people who benefit from their services can bring influence to bear to support their donors over against the community as a whole (as for instance when artificial barriers prevent competitors from entering a marketplace).

    For these reasons, and considering the lack of guidance we can find in Scripture and the church’s teaching, we need to ask whether the strong view of corporate social responsibility is well-grounded in a proper understanding of the nature of a business corporation and whether it is an accurate description of whatever social responsibility they may have.

    The modern, publicly held business corporation is an ingenious invention, and it has never been given the credit it is due for the prosperity enjoyed by the Western and Western-like developed nations of the world. There is no question that corporations can and have abused their power, but without excusing this abuse, the corporate structure, when it has been properly employed, has been a key factor in the unprecedented growth in material prosperity that we have experienced. The corporation as a form of organization makes possible the gathering together of resources for long-term or complicated projects that other forms of business organization cannot stimulate. It endures beyond the career and lifetime of its founders, providing the possibility of more stable employment and customer service; it protects employees and investors from personal liability for the company’s obligations, thereby practically freeing up large amounts of capital; and it discourages preferments based upon family and personal relationships and so rewards merit and hard work.

    However, the very newness of the corporate form has caused us to puzzle about its nature. The law, for example, regards it as if it were a person for some purposes and as if it were an object of ownership for other purposes (while at the same time insisting that “persons” cannot be owned). In still other contexts, the law considers corporations not so much to be things as to be networks of contractual relationships. Nevertheless, in each of these instances the determining principle behind the relevant legal conception of the corporation is rooted, not in some conclusion about the nature of the corporation, but rather in a problem the law wishes to resolve. Treating the corporation as if it were a person or an object of ownership or a network of contracts allows the courts to resolve the problem at hand, but we should not be misled by this into thinking that the law has told us what a corporation truly is.

    Ethicists, economists, and social scientists each similarly grasp an important piece of the whole, relevant to their own disciplines, without necessarily accurately describing the whole. Thus, for ethicists the corporation is (or perhaps is not) a moral agent; for economists it is a set of relationships designed to optimize efficiency; for social scientists it is a social arrangement with its own culture, both like and unlike families and civil societies.

    In truth, we need to think much more deeply – and in ways more open to enrichment from theological sources – about the distinctive character of voluntary associations of all sorts, not merely the special type that concerns us here, the business corporation. In place of this deeper examination, we may say this at least: corporations are specialized voluntary associations which (unlike families and civil societies) aim not at the comprehensive well-being of their members but at specific, limited goals. A bowling club exists to support its members’ interest in bowling. We would not find fault with such a club if it did not also devote careful attention to its members’ overall health or their family relationships. It is simply not the business of a bowling club to intrude into these areas of its members’ lives.

    Like other voluntary associations, such as bowling clubs or gardening societies, corporations are, strictly speaking, indifferent (but not hostile) to the overall happiness of their members and focused instead on one or several elements of this happiness. Corporations should be concerned that their employees have meaningful work for which they are paid fairly, but need not take responsibility for their personal and spiritual lives. Nevertheless, this tight focus does in fact contribute to the well-being of people and enhances the common good of the community, thus conforming in its own way to the requirements of the Christian tradition.

    Business corporations enhance the common good by providing good employment, by producing needed goods and services, and by creating wealth. Their potential to do this is so great, in fact, that the prosperity of a modern society can be directly correlated with the presence in the society of this corporate structure. In principle, therefore, the community permits and protects this form of association, because it makes a particularly important contribution to the common good when it functions properly. And the community retains the right to regulate corporations in order to insure as far as possible that it does function properly and make this contribution.

    Now all this may sound abstract and esoteric but there is a point to take away that is critical to the problem of corporate social responsibility. That point is that business corporations by their nature serve the common good when they function as they should. They are not grudging concessions made by the society to the greed of executives and investors. As a result, the primary social responsibility of a business corporation is, in fact, to make the contribution to the common good that it is uniquely structured to make. It need not justify its existence on the ground that it addresses broad social injustices or performs general works of charity.

    Yet the rationale sometimes offered for the strong view of corporate social responsibility implies that producing economic benefits is not enough; business corporations must do more. Insisting, for example, that businesses must “give something back to the community” suggests both that they are not adequately contributing to the common good through their normal operations (which include paying taxes) and that their operations unfairly take something away from the community. Neither suggestion bears close examination.

    When business corporations are created the community does not give something away. Instead, in order to pursue the economic benefits offered by the corporate structure the community offers something in exchange. It offers to recognize the corporation as a stable, enduring entity and to limit the civil liability of its members (i.e., its employees and investors). Any fair assessment of the impact of the corporate structure on communities would conclude that the communities sacrifice little and gain much. (Indeed, one might also fairly ask whether the exchange a community makes in sacrificing tax revenues in order to support non-profit corporations creates proportional benefits for the common good.)

    Does all this mean that business corporations have no corporate social responsibility beyond conducting their operations within the law? Not quite. Where the strong view of corporate social responsibility demands too much, the weak view (that corporations need only obey the law) requires too little in light of the Christian tradition. Law by its very nature is reactive; laws and regulations are enacted to prevent harms we have experienced in the past from occurring again. They rarely, if ever, anticipate harms we have never experienced and offer advance protection. As a result, the law constitutes a minimal set of requirements for ethically sound behavior for individuals and organizations. (That we sometimes think laws or regulations become too detailed in their prescriptions is a different matter.)

    Corporations, in other words, like morally upright individuals, have responsibilities that are not adequately described by laws and regulations. These genuine corporate social responsibilities concern both what they ought to avoid and what they ought to do.

    For example, business corporations have a responsibility to avoid causing harms to the community (e.g., pollution) even when those harms are not prohibited by law. They have similar duties to avoid exploiting employees or manipulating customers, regardless of whether the specific sorts of exploitation or manipulation are subject to regulation. They also have a duty not to use their economic and political power to secure legislation that is unfairly favorable to them (such as artificial barriers to the entry of competitors to the market).

    On the positive side, corporations have a duty to treat their major constituencies as fairly as they can. That is, they must seek to provide secure, well-compensated, meaningful employment, to produce goods and services that genuinely satisfy human needs, and to create wealth for investors. They should also be ready to address needs in their fields of operation that are not well served and may not be very profitable. For example, grocery wholesalers and retailers could be open to ways in which they could help to insure that no one in the community goes hungry; construction companies could explore ways in which affordable housing could be built; and pharmaceutical companies could propose creative and effective partnerships with government to make medications available more cheaply.

    These examples do not exhaust the possibilities for discharging the responsibilities of business corporations to their communities but they do illustrate the direction in which these responsibilities run. Thoughtful readers will be able to recognize many other possibilities.

    Does this mean that business corporations should not donate money or other assets to the community? Again, not quite. We began with the question of whether corporations had a responsibility to the society that they could only discharge by contributing some of their assets to address social needs. Such contributions, I have argued, are not morally required of corporations and so, in other words, I have rejected the strong view of corporate social responsibility.

    Nevertheless, business corporations are at liberty to make whatever donations they wish to address whatever needs they choose. The key, of course, is the difference between obligation and freedom. What is not required may still be permitted. In the case of business corporations, donations may be made when doing so will not undermine the legitimate operations of the business, when employees and customers will not be harmed, and when shareholders consent.

    Corporate philanthropy has accomplished a great deal of good. No doubt it should continue vigorously but not at the expense of a company’s more fundamental and important corporate social responsibilities: to create wealth, to provide good jobs, and to offer products and services that serve genuine human needs.

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    Robert Kennedy is a professor of Catholic Studies at the University of St. Thomas in Minnesota.