"Doing Well by Doing Good": THE GRAND ILLUSION

The idea that companies can "do well by doing good" has caught the attention of executives, business academics, and public officials. It is based on the claim that firms have a corporate social responsibility to achieve some larger social goals, and can do so without a financial sacrifice. While this appealing proposition has convinced many people, it is fundamentally misleading. If markets are working well, there is no need to appeal to companies to fulfill some vague social responsibility. If there is a market failure, then there is a tradeoff between private profits and public interest; in that case, it is neither desirable nor effective to rely on the goodwill of managers to maximize social welfare. When markets fail, some constraints need to be imposed on them. There are four sources of constraints: corporate social responsibility, industry self-regulation, civil society activism, and government regulation. The importance of the latter is too frequently neglected by advocates of corporate social responsibility.