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Corporate Citizenship: A Tax in Disguise
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by Richard Teather

[Posted August 5, 2003]

[img][/img] Corporate
Social Responsibility is the new field that has united a variety of
campaigning groups, including environmentalists, poverty campaigners, third
world charities, and unions in a collective call for business to support their
agenda. More unusual, it even has prominent supporters within the business
community.

<O:P>
</O:P>

Charitable giving by business has a long
history, although in the case of large corporations with a diffuse
shareholding it carries the moral hazard of executives buying social
respectability (in England, even knighthoods) with their shareholders' money.
The morally, and socially, superior position would be for shareholders to
receive their full dividends and themselves support charitable action.

<O:P>
</O:P>

However Corporate Social Responsibility is
said to be about more than this; linked to the concept of"Corporate
Citizenship," it calls for a company's whole actions to be carried out
with an eye to their social impact; on the environment, employees, and"communities"
at home and globally.

<O:P>
</O:P>

"Corporate Citizenship" is of
course a false concept; a company is a legal entity not a natural person, and
cannot have the beliefs or morals to make it a citizen in any meaningful
sense. Instead these reside in real people; the company's shareholders,
employees, customers and, most influentially, senior management. Corporate
Citizenship therefore carries the same moral hazards as corporate charitable
giving; that it is a process by which a company's directors impose their
morals on others.

<O:P>
</O:P>

In contradiction, a new argument has been
raised to support Corporate Social Responsibility, which accounts for much of
its support in the business sector. As companies compete to raise capital,
attract and retain staff, and sell products, those who are seen to support the
beliefs and objectives of investors, workers and consumers will gain a
commercial advantage.

<O:P>
</O:P>

Some of this has been seen already (Ben
& Jerry's in the U.S.A., the Body Shop [a cosmetics chain that marketed
itself as environmentally-friendly] in the U.K.), but the proponents of
Corporate Social Responsibility claim that the increased public awareness of
environmental and social issues will bring this niche practice into the
mainstream.

<O:P>
</O:P>

As a good whig and supporter of
enlightened self-interest, I can support Corporate Social Responsibility on
this basis. I can even accept that there is a role for pressure groups to help
provide the enlightenment (provided company executives do not forget their
obligations to satisfy themselves that the demand really exists).

<O:P>
</O:P>

However, the campaigners, backed by
governments (particularly in Europe), go further than this. If companies are
not seen to act in a sufficiently enlightened manner, then they will be forced
to (what a colleague, the late Bill Maugham, used to call the"co-operate
or else" school of government).

<O:P>
</O:P>

This force may come from"hard"
law (legislation or legally binding regulation) or soft law (such as voluntary
codes of conduct), but even soft law is usually only adopted under the threat
of legislation. The effect is the same; companies are forced to take actions
that they do not believe to be commercially justified.

<O:P>
</O:P>

It is often said by supporters of
Corporate Social Responsibility that it is merely a 21st century
version of opposition to slavery or the pollution of waterways supposedly
beloved of 19th century capitalism. This is incorrect, as all of
these would be (and were) stopped by enlightened self-interest operating
within a basic rule of law with protection for property rights (i.e. within a
free market as properly defined).

<O:P>
</O:P>

The persons and property of others have
been protected fully from harm since at least the middle of the nineteenth
century (in England the case of Rylands v. Fletcher  in 1866
stands out).

<O:P>
</O:P>

Even slavery was denounced by Adam Smith
on rational economic grounds, and (although this may be more of an issue in
the U.S.A.), in England slavery was declared to be invalid in the eighteenth
century because it did not meet the common law conditions for a contract.

<O:P>
</O:P>

The denial of fundamental liberties, or
the causing of provable harm, is therefore prevented by rules that have long
been accepted as underpinning the free market. (The specific issue of
companies operating in countries without a rule of law or protection of
fundamental property rights is a separate issue that I intend to address in a
later article.)

<O:P>
</O:P>

<h1 align="left">Economic inefficiency</h1>
<O:P>
</O:P>

The first problem with enforced Corporate
Social Responsibility is that it is economically inefficient. In a free market,
companies maximize profit by moving resources from a low to a high value;
providing what consumers want. In contrast, if action has to be forced by
regulation then governments mandate that resources be spent on services that
the public does not value, or does not value highly enough to voluntarily pay
the full cost.

<O:P>
</O:P>

Resources are therefore diverted into
lower-value outputs, leading to a reduction in overall welfare. This is done
for the benefit of politicians, bureaucrats or their supporting pressure
groups.

<O:P>
</O:P>

But this is about more than economics;
there is a fundamental democratic principle at stake.

<O:P>
</O:P>

The market is essentially a fully
participatory direct democracy, in the true Athenian sense. Almost all
citizens are involved in the market, and their choices and preferences
influence the products offered. If the public really wants the supposed
benefits offered in the Corporate Social Responsibility agenda, in the sense
of being prepared to pay for them, then the market will, before too long,
provide.

<O:P>
</O:P>

By contrast, modern governments are at
best representative democracies, open to undue influence from special interest
groups, and their participation rates are derisory (in a recent article in the
London Salisbury Review I showed that, in the last UK general
election, abstainers were the largest group in nearly 80% of constituencies).

<O:P>
</O:P>

The choice is therefore between a
market-based approach that provides what the people want, and a government
directive under which the beliefs of a minority are imposed on the general
public. Even worse, many of the issues that surface in the Corporate Social
Responsibility debate, particularly the environmental points, are ones where a
relatively wealthy and influential middle class imposes the high costs of its
agenda on a working class that does not want and cannot afford it.

<O:P>
</O:P>

<h1 align="left">Stealth tax?</h1>
<O:P>
</O:P>

The political landscape has recently been
characterized by a beneficial unwillingness of electorates to accept increases
in taxation. However, politicians obviously still seek to increase their power
and influence, and this needs money, so recent tax raising has been by way of
hidden methods, whether the introduction of new targeted sales taxes or
technical changes to tax law.

<O:P>
</O:P>

The socialist Blair government in the U.K.
has been particularly skilled at this, and its efforts have been attacked by
the conservative opposition as"stealth taxes" (presumably like the
stealth bomber they do not show up on the electorate's"radar").

<O:P>
</O:P>

The danger is that the Corporate Social
Responsibility agenda, if it moves away from the voluntary 'enlightened self
interest' model, becomes another form of tax.

<O:P>
</O:P>

Governments can achieve their objectives
(and satisfy their clients) by raising taxes and paying for the changes that
they desire, or alternatively they can achieve the same result by regulation.
If there is resistance to increased taxation, then politicians are likely to
turn to the latter approach.

<O:P>
</O:P>

This raises further economic arguments as
to the correct, and most efficient, places for this burden to fall, but that
will have to be the subject of a further article.

<O:P>
</O:P>

<h1 align="left">Conclusion</h1>
<O:P>
</O:P>

Business, and the society within which it
operates, faces a choice. It can follow the market principle of enlightened
self-interest within the rule of law, which best ensures that the real objectives
of the populous (i.e. those that they want enough to be prepared to pay for)
are met. Alternatively it can be forced down the regulation route, whereby
politicians and the loudest special interest groups impose their views on
others.

<O:P>
</O:P>

No matter how learned and disinterested
those special interest groups may be, I know which society I would prefer to
live in.


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Richard Teather is Senior Lecturer in Tax Law at
Bournemouth University, U.K., and is currently co-authoring a book on
Corporate Governance for the publisher Pearson. He can be contacted at 
rteather@bournemouth.ac.uk