Socially Responsible Corporations: The Seen and the Unseen

The difficulty in correctly identifying a socially responsible firm is an example of a broader problem in making sound economic judgments: the need to take into consideration all the effects of economic decisions—not just those that are easily seen but also those that typically go unseen. French economist Frederic Bastiat first discussed this problem in his 1850 article “What is Seen and What is Not Seen.”1 Bastiat begins his article with a story of a broken window and the tendency for people to say that, although unfortunate, the broken window is good for the economy because it creates work for glaziers (glass fitters). We still hear such statements after natural disasters. We are usually better off repairing the damage than not doing so, but that doesn’t mean that the disaster itself was good for the economy. Indeed, if disasters were good for the economy, they would probably not be called “disasters.” Bastiat’s point is that the employment created by the broken window is easily seen, but what is unseen is the value sacrificed because the effort and resources needed to fix the window would have been used to produce additional desirable things if the window had not been broken. A similar problem of the seen and the unseen explains why corporations are often mistakenly credited with being socially responsible: they receive credit for things that are easily seen, while their harmful activities, which are often much more extensive, go unmentioned. Of course, some corporations are socially responsible, both in the seen and the unseen. But many are not.

Although a clear definition is hard to come by, it is fair to say that most people think of a socially responsible corporation as one that benefits the wider community beyond its shareholders by donating some if its profits to worthy causes. Not all of this giving is motivated by generosity because, up to some point, corporate giving can more than pay for itself with higher profits from the goodwill created. But there is no reason to doubt that some corporate giving goes beyond what can be explained by the profit motive, with generosity being at least one of the motivating factors. Regardless of the reason for corporate giving, however, it is proudly proclaimed by the donor corporations, much appreciated by recipients, and favorably viewed by the community. According to the June 19, 2012 issue of The Chronicle of Philanthropy, charitable donations by American corporations in 2011 totaled $14. 6 billion.2

Even if this entire amount had been motivated by generosity, many American corporations do not seem completely convinced that it is more blessed to give than to receive. Indeed, the evidence suggests they are far more enthusiastic about receiving than about giving. According to a 2012 Cato Institute study, American businesses were budgeted to receive almost $100 billion dollars of taxpayers’ money from the federal government in fiscal year 2012.3 And this understates the corporate take since it ignores the amount that corporations receive from import restrictions and regulations that protect them against competition. Nor does it account for the special tax breaks corporations receive, for which we all pay through economic distortions and higher marginal tax rates.4

With the exception of the special tax breaks, little is done to hide this corporate taking, and much of it receives broad news coverage. Yet it seems to generate little public response.

A Hypothetical Example

Consider two corporations, both operating within the law, that are equal in terms of the net value they contribute to society by producing and selling their respective products in open markets. Neither donates to worthy causes or lobbies for, or accepts, special privileges from government. Assume, however, that Corporation A begins to donate a large amount each year to worthy causes in the city where its headquarters are located. But, also, in cooperation with other firms in its industry, Corporation A lobbies for, and receives, import restrictions that increase its annual profits by much more than its donations. This results in consumers losing more (through higher prices on the goods they do buy from A, as well as through the deadweight loss on the goods they no longer buy from A because of the higher prices) than A donated.

Assume that Corporation B refuses to make donations to any worthy causes and also refuses to lobby for or accept subsidies, protections against competition, or any other special favors from government. It should be obvious that corporation B is more socially responsible than corporation A, as measured by how much net value both contribute to society.

Most people, however, will see corporation A as socially responsible. Grateful recipients of A’s generosity and A’s own public relations department will tell people about A’s good deeds. And, as word gets out that corporation B consistently refuses to help worthy causes in the community, most people will see B as socially irresponsible.

What will remain unseen is the higher prices and deadweight loss that are spread over a large number of consumers who are buying many products. The cost to the individual consumer is unlikely to be enough to motivate anyone to learn that corporation A’s political lobbying is taking more from the public than it is giving in charitable donations. Of course, the import restriction is reported in the news, but most who hear the news will come away with the belief that it is saving American jobs. Some American jobs are saved, but they are, on average, less-productive jobs than those that are never created because of the import restriction, a loss that goes unseen. Moreover, we haven’t even addressed the added damage to society that the import restrictions impose on foreigners; foreigners, after all, are part of society.

While the costs of corporation A’s political influence are unseen, the benefits of corporation B’s refusal to seek political favors also are unseen. By not lobbying for special treatment from government, corporation B is not increasing the price of its product or imposing a deadweight loss on its customers. These benefits, as noted, are greater than Corporation A’s benefits to society from its charitable contributions.

Two Actual Examples

There are many examples of Corporations like A, as is obvious from the aggregate data presented previously on total corporate welfare and total corporate charitable donations. When considering individual corporations, however, it is easier to find out how much an individual corporation gives to society with its charitable donations (which are direct and well advertised) than how much it takes from society with its political lobbying (which tend to be indirect and not well advertised, and which have costs to society that are greater than the benefits the corporation receives). But some examples are so egregious that the size of the former relative to the latter is not in doubt.

My first example is Archer Daniels Midland (ADM). Although people have criticized ADM for some of its environmental practices and for its successful lobbying for ethanol, in recent years, ADM has presented itself effectively as a socially responsible corporation. According to a 2012 report,5 ADM and its employees have given a little more than $15 million to a variety of causes. These causes include research on improving agricultural technology, improvements in getting food distributed to poor countries, United Way, and natural-disaster aid. Obviously, the recipients are appreciative, but these donations have also paid off in favorable recognition from more-impartial sources. For example, in 2011, ADM was “again named the world’s most admired food company by Fortune Magazine.”6

But the value that ADM has been able to take from American consumers with its political influence is far greater than the value of its charitable contributions. Consider only the costs to consumers from ADM’s political influence on government policy related to ethanol. This ignores the costs to consumers from the higher price of corn that does not go into ethanol production.7 The Geneva-based International Institute for Sustainable Development estimated that in 2006 government support of ethanol cost American consumers between $6.3 and $8.7 billion. Making the assumption that the cost was only $6.0 billion, then, since ADM sold a third of the ethanol in America in 2006, it imposed a cost of $2.0 billion on American consumers.8 So, even if, conservatively, ADM’s ethanol production did not cost American consumers any more in 2012 than it did in 2006, then for each of the 15 million dollars ADM donated to worthy causes in 2012 it imposed a little over $133 in costs on American consumers.

Of course, to do a cost/benefit analysis, one would need to account for the benefits of government support of ethanol. These benefits are in the form of higher prices for corn. Who gets these benefits? The people who owned farm land when the government’s ethanol program began. There are two points to be made, though. First, few advocates of social responsibility would applaud a company for persuading a government to, in essence, tax consumers in order to make wealthy landowners even wealthier. Second, even taking account of the benefits to landowners, the deadweight loss from higher prices is likely to be at least 5 percent of the $6 billon noted above. That would be a loss of $300 million, which still swamps the $15 million in ADM donations.

But doesn’t substituting ethanol for petroleum in gasoline protect the environment? Even if carbon dioxide is the harmful green house gas (GHG) many believe it to be, subsidizing one particular product, ethanol, is not the least-cost way to reduce carbon dioxide. Also, considering the energy required to produce ethanol, Eaves and Eaves concluded that if all the corn grown in America in 2005 (then the second-largest harvest ever) went into ethanol, the net energy produced would reduce only 3.5 percent of petroleum-based gasoline consumption.9 Furthermore, reducing petroleum even a tiny percent with ethanol would release large amounts of carbon dioxide because of trees that would have to be cut down to get the farmland needed to grow the additional corn.10 Many think that increasing the use of natural gas would be the least-cost way to reduce GHGs. But there are advocates of other fuels, such as clean coal or nuclear. Most likely, the least-cost approach would involve using different fuels and approaches depending on the time of day (peak-load considerations) and the purpose being served (transportation, heating), etc. But the way to determine the best combination of fuels and approaches would be for the government to make all emitters of carbon face the true cost of their emissions and see which uses emerge in the market.

The next example is Enron. This may seem like a poor example since virtually no one now sees Enron as a socially responsible corporation. But before 2001, when it collapsed from accounting fraud, Enron was widely seen as socially responsible.11 The problem, however, is that even if its accounting practices had been squeaky clean, Enron should never have been thought of as socially responsible. Enron gave away a lot of money to worthy causes before its bankruptcy, but Enron and its top employees also gave a lot of money to politicians and political parties.12 Any return that Enron got in goodwill from the former gifts was swamped by the return it received in political influence from the latter gifts. Enron was giving millions to benefit others, but it was taking billions in aid and subsidies from others, courtesy of the federal government. Enron received roughly $3.7 billion from such federal agencies as the Export-Import Bank, the United States Maritime Administration, the United States Trade and Development Agency and the Overseas Private Investment Corporation. Much of this money reimbursed Enron for losses on its foreign investments, which, no doubt, helps explain why Enron took imprudent risks that led to large losses and, at least partially, explains its collapse.13

Conclusion

There is nothing wrong with corporations giving to worthy causes. Milton Friedman, in one of his most famous articles, acknowledged this. But he also pointed out that, beyond a limited amount of giving, corporations would do more to promote the public interest by legally maximizing the return to shareholders.14 There is something wrong, however, when people expect to be taken seriously in discussing corporate social responsible without looking beyond the good done by that giving. Admittedly, it is easy to appreciate the social benefits from a corporation’s gifts while overlooking the social harm from its political activities. But when the social benefits from $15 billion in corporate giving are being overwhelmed by the social harm from more than $100 billion in corporate taking, there is no excuse for those who see themselves as informed advocates of corporate social responsibility to continue concentrating on the good that is easily seen while ignoring the harm that easily goes unseen. My main purpose with this article is to help people see that otherwise unseen harm.