Social Responsibility: Posner's Response to Comments

These were, as usual, very interesting comments. The most common was that corporate CEOs are overpaid, and this is argued to contradict concerns expressed by Becker and me with corporations' conceiving their role as that of charitable, or "socially responsible," enterprises, rather than as pure profit maximizers--if they are really maximizing profits, why are they overpaying their CEOS? I don't know whether CEOs are in general overpaid, but let's assume they are. This would imply that the shareholders, who are the nominal owners of the corporation, are incapable of controlling management--in other words, that there is a problem of what economists call "agency costs." (The term signifies the costs resulting from the principal's inability to constrain his agents to serve his goals exclusively.) If so, we certainly would not want the management to make gifts to charity, because that would exacerbate the problem of agency costs. Managers who are not controlled by shareholders can't be presumed to make charitable gifts that will promote the shareholders' welfare, rather than the managers' own. So, paradoxically, liberals who believe that CEOs are not honest agents of the shareholders should be more critical of corporate "social responsibility" than conservatives! One comment that I am quite sympathetic to is that the social return to profit-maximizing activities may actually be higher than the social return to corporate philanthropy, when "corporate philanthropy" isn't just a fancy name for public relations. As I argued in an earlier post, philanthropy directed at poor countries may actually reduce the welfare of those countries, and the same is probably true to an extent of purely domestic charity. The general effect of charity is to postpone the making of difficult decisions. For example, philanthropic gifts, private or public, to the arts retard serious efforts by artists and artistic organizations to create work for which there is a genuine interest on the part of the public, and philanthropic gifts to universities help to shield them from competitive pressures. Also, the agency costs problem is particularly acute in the charitable arena, as donors to charitable enterprises have even less control over the enterprises than shareholders do over their corporations. This is not to suggest that the net benefit of charitable giving is negative, but only to raise a question whether the net benefit of the expenditures devoted to charity might be greater if directed to commercial or other private ends instead. Let me respond finally to two comments about the issue of criminal liability of corporations. One comment suggested that as long as individual managers are liable for crimes committed by them on the corporation's behalf, there is no reason to impose liability on the corporation as well, and therefore no need to place a duty of law-abidingness on the corporation. But imposing criminal liability on errant managers is insufficient. If their crimes benefit the corporation (though imposing, as I assumed in my original posting, greater costs on society as a whole), then their salaries will be set by a rational corporation at a level that will compensate them for assuming the risk of criminal punishment. The other comment pointed out correctly that corporate criminal liability is not an either-or thing. Often it will be unclear whether a proposed course of action will violate criminal laws applicable to the corporation. There is no reason the corporation should be thought under a duty to avoid all risk of legal liability; that would be paralyzing, and also would discourage socially worthwhile tests through litigation of the outer bounds of liability. Rather, the duty should be to avoid conduct known to carry a very high probability of being deemed criminal. With respect to many civil as distinct from laws, it is unclear whether they should be thought to impose a duty of compliance, or merely to impose a price (in the form of an expected liability cost) for engaging in particular activity. If the law imposes only damages liability for a particular unlawful act, and the damages are fully compensatory, then a corporation that commits the act is not imposing net social costs; it would not engage in the act unless the expected benefits exceeded the exepected costs to any victim of the act, as measured by the damages that the victim would be entitled to recover.

Comments

[Corey]

"For example, philanthropic gifts, private or public, to the arts retard serious efforts by artists and artistic organizations to create work for which there is a genuine interest on the part of the public"

Who decided that popularity was the purpose and overarching goal of art? Did I miss a meeting? The primary rationale for supporting arts with philanththropy is the desire to encourage art that is potentially unpopular but hopefully mind-expanding.

For instance, how much would you pay to look at Bacon's Screaming Pope paintings? Me either. Yet given recent scandals in the Catholic Church, it is perhaps an important (if disturbing and creepy) statement.

[Corey]

http://www.francis-bacon.cx/popes/figurewithmeat.html

See what I mean?

[Palooka]

"Who decided that popularity was the purpose and overarching goal of art? Did I miss a meeting?"

Popularity hasn't stopped liberals yet from forcing their values/agenda/"art" down our throats, so I guess you have a point.

But I think you miss the point a bit. Art can still be supported even though there is only a small minority which enjoy it. But they must be willing and able to pay money for it. Many entreprenuers (including artists) make quite comfortable livings serving niche markets of one sort or another. In short, if there is a market for the NEA art-as-excrement genre, then it will survive, despite its unpopularity.

[Wes]

Managers who are not controlled by shareholders can't be presumed to make charitable gifts that will promote the shareholders' welfare, rather than the managers' own.Managers who are not controlled by shareholders can't be presumed to do anything all that will promote the shareholders' welfare. By definition, however, charitable gifts will not solely benefit the managers.So, paradoxically, liberals who believe that CEOs are not honest agents of the shareholders should be more critical of corporate "social responsibility" than conservatives!If liberal shareholders want a corporation to be socially responsible and the management decides that the corporation should be socially responsible then I don't think liberal shareholders will be particularly critical.

[Corey]

"Popularity hasn't stopped liberals yet from forcing their values/agenda/"art" down our throats, so I guess you have a point."

M - I - C - K - E - Y M - O - U - S - E
Mickey Mouse! Mickey Mouse!...

Yes, popular art is so much more enlightening.

Maybe if people weren't so amiable to facism they wouldn't get so much "forced down their throats." No one on the left thinks that we should have to look at everything the NEA funds.
Much of it is silly, and I would rather watch a Disney film, but some of it is relevant and important AND uncommercial.

Look at the Bacon painting! I command thee!
Stare at it! Absorb its values! The liberals are coming! The liberals are coming!

[David]

Posner did not respond to the point that I raised about CEO pay (and other corporate excesses), which is: WHY ARE POSNER AND BECKER SO HUNG UP ON SO-CALLED "SOCIALLY RESPONSIBLE SPENDING?" If their goal is to maximize shareholder returns, they should be concerned about ALL corporate spending. But that doesn't seem to be the case. Rather, they want to pick something "liberal" on which to harp.

Posner even admitted as much in his response by trying to make this a liberal/conservative issue. I see it as just another matter for corporate management. If the managers of a corporation think it is good business to donate to the opera, society at large should not question that. Ditto if they want to buy "fair trade" coffee. And ditto if they want to buy offices on the 50th floor of a skyscraper or take clients to lunch at fancy restaurants. If shareholders don't like the philosophy of management, they can wage a proxy fight, or sell their shares. But the law and the courts shouldn't care less.

[Dave]

"The general effect of charity is to postpone the making of difficult decisions."

Wow.

On this page, all of society's problems can be solved by the invisible hand, and economic analysis explains all human phenomena. Yet, the truth of these propositions is hardly self evident, and, at least personally, I am far from convinced of their truth.

While economics certainly sets the outer boundaries of what is possible, and is an important force driving human life, I think it is wrong to put all of your eggs in one basket ... especially such a dismal one.

I'd like to offer another potential factor for consideration in the quest for THE THEORY OF ALL THINGS HUMAN -- the vis inertiae.

[Larry]

If "the general effect of charity is to postpone the making of difficult decisions," Posner does not seem to recognize this is also true of venture capital investments that give entrepreneurs the opportunity to take risks. And while charity may be given to nonprofit firms that do not aim at innovating, innovation is the central aim of both artists and universities. Both seek funding (competition between arts organizations and between universities in fundraising is, as Posner should know, extremely fierce) in order to be able to take risks. Taking risks means aiming to create products -- artistic works or ideas for the arts and humanities, innovative products for entrepreneurial enterprises -- that do not respond to an already existing "serious interest". Rather, such products seek to create this interest where it did not exist beforehand.

Is Posner not in favor of innovation, even if there is some wastage? If so, he should have no problem with the charitable funding of non-profit arts organizations and universities, even if many of the products do not crack the market.

[Michael]

I have a few questions: what constitutes a "charitable gift"? If said charitable gift is not in the interests of the shareholders at all, then what is it? A bribe? Bribes could be in the interest of shareholders...

Furthermore, what is "socially responsible"? Are these necessarily in the interests of shareholders?

If we do make the assumption that CEOs are not honest brokers, then it seems that such assumptions as to whether corporations will do anything for the good of society except by accident go out the window...In this case (where CEOs are not honest brokers), would the socially responsible acts (whether committed as a natural consequence of profit maximizing behavior or not) be outweighed by socially IRresponsible acts? Or would this not change?

[Thomas]

We as people in the market create the huge salaries these CEO's make. We buy Donald Trump's books, we watch his tv show, we go to his hotels.

Americans have spent the 20th century transfering their wealth to sports athletes, rock stars, actors, and CEOs. Rightly or wrongly, these are the people our society really values. Sure we put on a show that we admire soldiers and teachers. But seriously who would want to put up with the danger that comes with being a teacher (not likely but possible) and with being a soldier (pretty likely.) And who really aspires to the meager salaries of both these professions.

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