When CSR Must Begin with Observing the Rule of Law

By Professor Hamid Bouchikhi, ESSEC Business School

The famous quote by Milton Friedman that states, ‘The social responsibility of businesses is to increase its profits[1]’  is often cited and challenged by proponents of CSR who consider that the first responsibility of a company is to contribute to the common good; profits are an extra benefit.

Friedman’s critics often forget the second part of his thesis in which he points out that the pursuit of profit should be in line with the ‘rules of the game’, as he clearly stated in the last sentence of his famous short essay.

“There is one and only one social responsibility of business–to use it resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.”

As one of the many who do not fully share the radical free market doctrine of Friedman, I have nevertheless to recognize that the second part of his sentence calls for a careful examination of the craze for CSR in many countries where respect for what Milton referred to as ‘the rules of the game’ does not manifest organically; in such countries, the primary responsibility of business leaders must be respect for the law. In the rest of my text, I will use the case of Morocco, my native country, to illustrate why CSR should begin with abiding by the rule of law.

Morocco, like many other emerging and under-developed countries, has in recent years seen increased interest for the concept of corporate social responsibility. Far from being a passing trend, the movement has been accompanied by the organization of conferences, the establishment of certifications, ratings by specialized agencies and the creation of CSR departments in large companies.

Therefore it is important to welcome the integration of ideas surrounding CSR in the discourse and practices of Moroccan leaders. This however does not prevent us from taking a step back and remembering that in a country where respect for laws is not deeply engrained in the day-to-day behavior of people, social responsibility must first and foremost promote legality.

In order to explain this thesis, it is important to reexamine the fundamental question of what is a company’s first responsibility.  As Milton Friedman clearly stated, companies were long designed and managed as systems whose sole purpose was to maximize shareholders’ profits. However, the accumulation of negative social and environmental externalities, the progress of democracy and the development of media have gradually forced a revision of the purpose of business. Creating value for shareholders, although still important in an economy based on free enterprise, is now only considered a legitimate mission if the company also contributes to the common good.

Due to the fact that CSR discourse and practices have emerged in countries where respect for the law is taken for granted, Friedman’s point about ‘stay(ing) within the rules of the game’ went unnoticed. Contributing to the common good in these countries goes beyond mere legal obligations: companies are also expected to demonstrate a sincere desire to contribute to solving collective problems in areas such as poverty, health, education, housing or environmental protection. The phrase ‘corporate citizenship’ was invented to distinguish those who were not content to only comply with the law. In other words, ‘doing CSR’ consists of a company’s positive involvement in areas that are not part of its core business.

Without underestimating the importance of the challenges related to poverty, education, health or the environment in emerging and under-developed countries, the first contribution to the common good in these countries should be compliance with the law. A company that establishes a CSR policy or obtains a CSR certification without first ensuring compliance with the law in all spheres of its activities runs the risk of putting a nice icing on a bad cake.

How credible can the CSR initiatives of a company be if it takes liberties with laws on taxation, labor, consumption, competition or the environment? In a country like Morocco, the first social responsibility of a leader is to ensure that his or her employees are in compliance with the law and not to tolerate any exceptions. Considering that the housing construction industry contributes greatly to the economy, let’s take a closer look at what is actually taking place there. The practice of undeclared cash payments, which often times account for up to a third of the real price, has become such a norm that buyers and sellers forget that they are committing a serious act of tax fraud.  We should certainly salute the industry leaders who proudly display ‘100% declared’ on their billboards, but do they demonstrate the same rigor when it comes to respecting the labor laws on construction sites, the obligations vis-à-vis their subcontractors, especially in regards to payment schedules, or even the quality standards they owe to their customers? The serious charges brought in 2014 against the Compagnie Générale Immobilière (CGI), an industry leader which proudly displayed a progressive CSR policy, suggest the existence of a gap between claimed concern for social responsibility and actual behavior.

By implementing a CSR label and certification procedure, the General Confederation of Moroccan Enterprises (CGEM) has done a very useful work. However, I encourage its leaders to go one step further and set up a ‘corporate citizen’ label based on objective indicators that measure the respect of and compliance with the laws. This new label should then be distributed widely across Moroccan companies, especially among small and medium size firms where a lot remains to be done to promote legal practices. What a pleasure it would be to one day see billboards on Moroccan roadsides displaying “We are a 100% legal company”

Compliance with the laws is a fundamental condition for economic and social development. There is no benefit to the common good of a country and its population when circumventing the law is the rule. That is why I contend that contributing to the common good in a large majority of countries around the world first starts with the legalization of businesses and their practices: higher moral standards will follow. The pace at which such developments will occur depends on the speed of implementation of good governance. The legal behavior of businesses and citizens is acquired in countries with competent administration and justice systems that are equipped with the resources necessary to impartially carry out their missions.

Because institutions like business, administration, and justice are only, more or less normative, frameworks for the actions of individuals and groups, one can hardly imagine virtuous institutions without virtuous people. We recognize here the classic dilemma of the chicken or the egg which implies that work is needed on both: improving the institutional frameworks and educating people in citizenship. Importing CSR practices into a company where the rule of law is not deeply seated amounts to putting the cart before the horse or, worse, can hide questionable practices under a veil of deceptively compassionate philanthropy.

[1] Friedman Milton (1970).  The Social Responsibility of Business is to Increase its Profits. The New York Times Magazine, September 13.

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