1.
Stephen M. Bainbridge
UCLA School of Law
Corporate Social Responsibility
The Policy Debate

2.
 “To qualify as socially responsible
corporate action, a business expenditure
or activity:
1. must be one for which the marginal
returns to the corporation are less
than the returns available from some
alternative expenditure,
2. must be purely voluntary, and
3. must be an actual corporate
expenditure rather than a conduit for
individual largesse.” Henry G. Manne (May 10, 1928 -
January 17, 2015) was an American
lawyer, writer and legal academic,
considered a founder of the law and
economics discipline.
What is corporate social responsibility?

3.
 Corporate directors and officers should
consider not only the interests of the
shareholders, but also recognize
obligations to the community, to their
workers, and to consumers
 Why?
• Society allows corporations to become
legal entities because they serve a
purpose for the community and are
not just a vehicle for financial gain by
the shareholders.
• Social responsibility ultimately benefits
shareholders.
– E.g., employee satisfaction leads to
greater productivity and ultimately
increased profits.
• Public opinion demanded social
responsibility and the law must adapt
to it.
 E. Merrick Dodd (1918-1951) was
successively on the law faculties of
Washington & Lee, Nebraska, Chicago,
and, after 1928, Harvard University. He
wrote numerous and highly regarded law
review articles on corporations and
corporate finance. Dodd and his wife
died in an automobile accident in 1951.
E. Merrick Dodd, Jr., For Whom Are Corporate Managers
Trustees?, 45 Harv. L. Rev. 1145 (1932)
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4.
Can it be true CSR if public opinions demands it?
 Dodd said he “believes that public
opinion, which ultimately makes law, has
made and is today making substantial
strides in the direction of a view of the
business corporation as an economic
institution which has a social service as
well as a profit-making function, that this
view has already had some effect upon
legal theory, and that it is likely to have a
greatly increased effect upon the latter in
the near future.”
 “Recent economic events suggest that
the day may not be far distant when
public opinion will demand a much
greater degree of protection to the
worker.”
 Manne:
• “To qualify as socially responsible
corporate action, a business
expenditure or activity:
2. must be purely voluntary ….”
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5.
 Managers of a corporation should regard
themselves as trustees of the
investments made by the shareholders.
 All powers given directors and officers
therefore are to be used for the benefit of
the shareholders.
 Why?
• Managers who are responsible to
everyone are responsible to no one.
– “The claims upon the assembled
industrial wealth and funneled
industrial income which
managements are then likely to
enforce (they have no need to urge)
are their own.”
• Rights of shareholders as owners:
– “Either you have a system based on
individual ownership of property or
you do not.”
Berle was “a lawyer, educator, author, and
U.S. diplomat. He was the author of The
Modern Corporation and Private Property, a
groundbreaking work on corporate
governance, and an important member of
U.S. President Franklin Roosevelt's ‘Brain
Trust’.”
A. A. Berle, Jr., For Whom Corporate Managers Are Trustees: A
Note, 45 Harv. L. Rev. 1365 (1932)
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6.
Dodd A.P. Smith Mfg. Co. v. Barlow, 98 A.2d 581 (NJ 1953)
 “… public opinion, which ultimately makes law, has
made and is today making substantial strides in the
direction of a view of the business corporation as an
economic institution which has a social service as
well as a profit-making function …”
 “The view that those who manage our business
corporations should concern themselves with the
interests of employees, consumers, and the general
public, as well as of the stockholders, is thus
advanced today by persons whose position in the
business world is such as to give them great power of
influencing both business opinion and public opinion
generally.”
 “The only way to defend capitalism is through
leadership which accepts social responsibility and
meets the sound needs of the great majority of our
people.”
 “Control of economic wealth has passed largely from
individual entrepreneurs to dominating corporations,
and calls upon the corporations for reasonable
philanthropic donations have come to be made with
increased public support.”
 “ … just as the conditions prevailing when
corporations were originally created required that they
serve public as well as private interests, modern
conditions require that corporations acknowledge and
discharge social as well as private responsibilities as
members of the communities within which they
operate …”
 “… corporations … now recognize that we are faced
with other, though nonetheless vicious, threats from
abroad which must be withstood without impairing the
vigor of our democratic institutions at home ….”
Dodd’s Influence
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7.
 “There is one and only one social
responsibility of business–to use its
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”
Milton Friedman (July 31, 1912 –
November 16, 2006) was an American
economist, statistician and writer who
taught at the University of Chicago for more
than three decades. He received the 1976
Nobel Memorial Prize in Economic
Sciences for his research on consumption
analysis, monetary history and theory and
the complexity of stabilization policy.
Milton Friedman, The Social Responsibility of Business is to
Increase its Profits, N.Y. Times Mag., Sept. 13, 1970
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8.
 “In a free-enterprise, private-property sys​tem, a corporate executive is an
employee of the owners of the business.
 “He has direct re​sponsibility to his employers.
 “That responsibility is to conduct the business in accordance with their desires,
which generally will be to make as much money as possible while con​forming
to the basic rules of the society, both those embodied in law and those
embodied in ethical custom.”
Friedman’s core argument
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9.
Social responsibility
spends other
people’s money
Managers are not
elected experts
on social policy
CSR = socialism
Friedman’s case elaborated
 A manager who spends money on socially responsible activities:
• Spends stockholders dividend
• Spends employees wages
• Spends customers money
 “He becomes in effect a public employee, a civil servant, even though he remains in name an
employee of a private enterprise. … If they are to be civil servants, then they must be elected
through a political process.”
 “… 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 re​sources to alternative uses.
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10.
 Friedman says that businesses are obliged to follow laws, rules, and regulations.
• Note: Some of these may incorporate social ends.
 Friedman also says that businesses should adhere to generally accepted social
standards and expectations.
• He points out that if a corporation operates in violation of the moral standards and
expectations that are generally accepted in its society, it runs the risk of losing
business, which, of course, would decrease profit.
 Friedman also recognizes that a short-term focus can undermine long-term gains
• Is there a real difference between corporate social responsibility and sustainable profit
maximization?
– “To qualify as socially responsible corporate action, a business expenditure or
activity:
1. must be one for which the marginal returns to the corporation are less than the
returns available from some alternative expenditure,
Does Friedman recognize any limits on pursuit of profit?

11.
Edward, First Baron Thurlow
(1731-1806):
"Did you ever expect
a corporation to have
a conscience, when it
has no soul to be
damned, and no body
to be kicked?”
Is a manager really the agent of the individuals who own the
corporation?
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12.
Private Property Model Nexus of Contracts Model
Private property and the corporation:
Is the corporation a thing capable of being owned?
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Board of Directors
Share
price
inform
ation
Quarterlyreports
Voting
power
Direct
consultation
Dividends
Corporation
(management and
physical capital)
LendersEmployees
CustomersCustomers
Interest payments
(market rates)
Suppliers
Labour
Inputs
Supervisory power
Board of Directors
Securities markets
SHAREHOLDERS
Voting
power
Direct
consultation
Corporation
(management and
physical capital)
LendersEmployees
CustomersCustomer
Dept capital
Wages
(market rates)
Suppliers
National &
Local
Government
TAXES
PUBLICGOODS
Marketprice
Goods&
Services
M
arket Price
Institutional
Investors
Adapted from: M. Blair, Ownership and Control (1995)
Ownership
Control

13.
Statement Implications
 “A corporation is just a nexus of
contracts, subject to rearrangement
in many ways.”
• Central States, Southeast and Southwest Areas
Pension Fund v. Sherwin-Williams Co., 71 F.3d
1338, 1341 (7th Cir. 1995)
 Nexus of contracts theory visualizes the
firm not as an entity, but as an
aggregate of various inputs acting
together to produce goods or services.
• The firm is seen as simply a legal fiction
representing the complex set of contractual
relationships between these inputs.
• In other words, the firm is treated not as a thing,
but rather as a nexus or web of explicit and
implicit contracts establishing rights and
obligations among the various inputs making up
the firm.
 Nexus of contracts model allows
(requires) us to rethink intra-
corporate relationships
• Ownership not meaningful concept in
contractarian theory
• Hence, control rights do not follow per se from
ownership of equity claims
 Corporate Property Rights are
different from personal property.
• Stockholder of a corporation have limited liability
for actions of their corporations.
• They have no direct rights of access/control.
The nexus of contracts model
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14.
 Green:
• “Eventually, we would expect the
elaboration of a body of law
establishing a slate of varied priorities
for corporate management. Within this
framework, shareholders would be
one stakeholder group among others.
Normally they would be regarded as
primus inter pares in the sense that
they have priority in day-to-day fiscal
decision-making. But their interests
might be explicitly subordinated in
cases in which certain kinds of serious
inconveniences or harms threaten
other stakeholders.”
 Absent shareholder wealth maximization
norm, board lacks a determinate metric
for assessing options
 Berle:
• “you cannot abandon emphasis on
‘the view that business corporations
exist for the sole purpose of making
profits for their stockholders’ until such
time as you are prepared to offer a
clear and reasonably enforceable
scheme of responsibilities to someone
else.”
Is Friedman right anyway?
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15.
Is Friedman right anyway?
 Absent clear standards, directors will be
tempted to pursue their own self-interest
 Berle:
• Managers who are responsible to
everyone are responsible to no one.
– “The claims upon the assembled
industrial wealth and funneled
industrial income which
managements are then likely to
enforce (they have no need to urge)
are their own.”
 Friedman:
• Managers would have no idea what to
do.
– They have only their private beliefs,
which is not at all the same thing as
genuine social purpose.
– Moreover, each manager would
have too small a view to expect his
or her beliefs to be correct.
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16.
 Shareholders more vulnerable to board
misconduct, but interest is less contractible
• Assume a solvent corporation able to
pay its debts and other obligations
(especially employee salaries) as they
come due in the ordinary course of
business.
• Further assume that the corporation has
substantial free cash flow—i.e., cash
flows in excess of the positive net
present value investments available to
the corporation.
• If the directors siphon some portion of
the corporation’s free cash flow into
their own pockets, shareholders are
clearly hurt, because the value of the
residual claim has been impaired.
• Yet, in this case, there is no readily
apparent injury to the value of the fixed
claim of all other corporate constituents.
 All corporate contracts are incomplete,
but shareholder-board contract
especially gappy
• Fiduciary duties fill those gaps
 Most stakeholder interests are relatively
more contractible
• “Arrangements . . . thoroughly
negotiated and massively
documented” (Katz v. Oak Indus.)
 General welfare and special interest
legislation
Is Friedman right anyway?
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17.
1.
2.
3.
Discussion questions
Friedman’s essay implicitly suggests a distinction between corporate
social responsibility and corporate stakeholder theory. Can you
describe that distinction? Why might that distinction matter?
Is Friedman correct that a legal person—what he calls an “artificial”
person—cannot have responsibilities? In other words, do only people
have responsibilities?
Why is appropriate for an individual to act responsibly but not
corporate directors, managers, or shareholders?
• Should managers have to check their ethics at the office door?
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