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Daily RC Article 148

Corporate Executives and Social Responsibility: A Debate on Roles and Conflict of Interests


Paragraph 1

The whole justification for permitting the corporate executive to be selected by the stockholders is that the executive is an agent serving the interests of his principal. This justification disappears when the corporate executive imposes taxes and spends the proceeds for "social" purposes. He becomes in effect a public employee, a civil servant, even though he remains in name an employee of a private enterprise. On grounds of political principle, it is intolerable that such civil servants – insofar as their actions in the name of social responsibility are real and not just window-dressing – should be selected as they are now. If they are to be civil servants, then they must be elected through a political process. If they are to impose taxes and make expenditures to foster "social" objectives, then political machinery must be set up to make the assessment of taxes and to determine through a political process the objectives to be served.

Paragraph 2

This is the basic reason why the doctrine of "social responsibility" involves the acceptance of the socialist view that political mechanisms, not market mechanisms, are the appropriate way to determine the allocation of scarce resources to alternative uses. On the grounds of consequences, can the corporate executive in fact discharge his alleged "social responsibilities"? On the one hand, suppose he could get away with spending the stockholders" or customers" or employees" money. How is he to know how to spend it? How is he to know what action of his will contribute to that end? He is presumably an expert in running his company... But nothing about his selection makes him an expert on inflation or macroeconomics. Will his holding down the price of his product reduce inflationary pressure? Or, by leaving more spending power in the hands of his customers, simply divert it elsewhere? Or, by forcing him to produce less because of the lower price, will it simply contribute to shortages? Even if he could answer these questions, how much cost is he justified in imposing on his stockholders, customers and employees for this social purpose? What is his appropriate share and what is the appropriate share of others?

Paragraph 3

And, whether he wants to or not, can he get away with spending his stockholders", customers" or employees money? Will not the stockholders fire him? His customers and his employees can desert him for other producers and employers less scrupulous in exercising their social responsibilities. This facet of "social responsibility" doctrine is brought into sharp relief when the doctrine is used to justify wage restraint by trade unions. The conflict of interest is naked and clear when union officials are asked to subordinate the interest of their members to some more general purpose. If the union officials try to enforce wage restraint, the consequence is likely to be wildcat strikes, rank-and-file revolts and the emergence of strong competitors for their jobs. We thus have the ironic phenomenon that union leaders – at least in the U.S. – have objected to Government interference with the market far more consistently and courageously than have business leaders.

The argument questions corporate executives' role in pursuing social objectives, suggesting they act as de facto civil servants when imposing social taxes and spending. It challenges their competence in such matters and highlights the conflict between social responsibility and market mechanisms in resource allocation. The summary underscores the conflict of interest faced by executives and union leaders when compelled to prioritize broader social goals over the interests of stakeholders or members.
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