Articles >

Economist Arthur Laffer says corporate social responsibility programs not beneficial for stockholders

Published by The New York Sun on 2005-01-19

The man widely hailed as the "father of supply side economics," Arthur Laffer, yesterday bitterly denounced what has become a fashionable notion in the business world -- corporate social responsibility, or CSR -- as being detrimental to stockholders' interests and harmful for corporate profitability.

"What corporate social responsibility really means, in my view, is irresponsibility," Dr. Laffer said at a news conference that was organized by the Washington-based Competitive Enterprise Institute at the Marriott Financial Center on West Street in Manhattan. "The modern corporation is meant to be a vehicle to create wealth for its shareholders, and that is what CEOs must always keep in mind."

But he acknowledged that corporate chief executives are under increasing pressure from mainly left-of-center lobbies -- often consisting of well-funded nongovernmental organizations -- to demonstrate that their businesses tended to social and environmental concerns as much as they did to their institutions' bottom line. Such pressure often put corporations on the defensive, Dr. Laffer said, when, in fact, they should be "realizing that corporations are legitimate entities whose prime responsibility is to make profits for those who have invested in them."

Unveiling a study that he undertook with two other economists, Andrew Coors and Wayne Winegarden, Dr. Laffer said that his research into the performance of 28 companies cited by Business Ethics magazine as being among its top 100 "Corporate Citizens" between 2000 and 2004 showed "no significant positive correlation between CSR and business profitability as determined by standard measures."

Indeed, he added, "there are some indications from our study that CSR activities lead to decreased profitability."

The 65-year-old Dr. Laffer, who lives in San Diego, said that a profitability comparison of compound annual net income growth, net profit margin and stock price appreciation showed that "only a minority of the 28 CSR-leading companies in each comparison outperformed their peers."

"Being a CSR-leading company was negatively or not correlated with compound annual net income growth, net profit margin and stock price appreciation," Dr. Laffer said.

His study is intended to generate public discussion of CSR at a time when many top business organizations are under growing pressure to demonstrate more transparency and accountability. Nongovernmental organizations, often taking their cue from Maurice F. Strong -- a left-leaning Canadian businessman and environmentalist -- have tried to force corporations into supporting environmental and social-justice movements as a way of expatiating perceived corporate malfeasance.

This NGO strategy drew fire yesterday the Competitive Enterprise Institute's president, Fred L. Smith Jr.

"Modern businesses have sought to apologize, appease and buy off criticism," he said. "It's what I like to call the Captain Hook theory: You feed a crocodile your leg in the hope that it will become a vegetarian."

Moving on from the metaphor of crocodiles, Mr. Smith said that NGOs "have become modern-day mandarins."

"And like the mandarins of yesteryear, these NGOs would love to see the expansion of their mandarinate."

There are an estimated 500,000 NGOs in the 191 member states of the United Nations, with nearly 2,000 enjoying consultative status in the UN's Economic and Social Council, or Ecosoc. Several informal studies have calculated that Western foundations, mainly American ones, typically give around $10 billion annually in grants to NGOs, ostensibly for grassroots projects. But invariably the money gets routed into large-scale demonstrations and protest movements against Big Business, a bete noire of social activists, especially in the Third World.

Dr. Laffer averred that he simply could not bring himself to share what he characterized as the "deep pessimism" of social activists concerning the motives and ability of contemporary corporations.

Being a realist, he said, he understood that the tussles between corporations and social activists frequently flowed from political exigencies. He said he well understood that politics made for both strange bedfellows and stranger foes.

"Perhaps this social tension is exactly what the doctor ordered," he said, adding, however, that "companies are now better run and better organized than they ever were."

That was why he was dismayed by the relentless assault on corporate integrity by social activists, Dr. Laffer said, stressing that such attacks often overlooked the efforts made by CEOs to genuinely reform internal management in order to avoid the sort of scandals that have plagued the business world in recent years.

"What CSR means, really, is redistribution of wealth," he said. In fact, he suggested, that consumers who placed in the so-called socially responsible funds often found themselves at the short end of profit making.

His research found that "those who invest exclusively in companies deemed to be 'socially responsible' do not appear to receive financial returns that are better than those of conventional investors," Dr. Laffer said.

But he emphasized that his reservations concerning social activism did not mean that he was opposed to protecting the environment and pushing for clean air and water. "No one wants to lose on correct environmental issues," Dr. Laffer said.

Although yesterday's news conference was intended to highlight his study, titled "Does Corporate Social Responsibility Enhance Business Profitability?" -- the answer, of course, was that it doesn't -- Dr. Laffer used the occasion to promote the importance of the tax cuts advocated and instituted by President George W. Bush.

"We are living in absolutely spectacular times," Dr. Laffer said. "This world is fantastic."

Part of his enthusiasm for Mr. Bush's tax cuts seemed predicated on the fact that the president's economic policy is based on trickle-down economics, known as supply-side stimulus. One of Mr. Bush's predecessors, the late President Ronald W. Reagan, was also a subscriber to this economic theory. It holds that the best way to stimulate the economy is to cut taxes on upper-income earners. According to Dr. Laffer, when the tax rates on the wealthy fall, the rich will increase their investments in the economy.

It was in November 1974 that Dr. Laffer, then a young economist, drew a curve on a napkin during a conversation in a Washington bar, linking average tax rates to total tax revenue. That crude drawing soon came to be known as "The Laffer Curve," and it was quickly embraced by right-of-center economists and think tanks -- and by Mr. Reagan. Dr. Laffer has since savored the fact that his "curve" became an icon of supply-side economics, drawing encomiums from sources ranging from The Wall Street Journal in New York to The Indian Express in New Delhi. The Laffer theory fell under the rubric of "supply side economics" because the stimulus, or the tax cut, was applied to the suppliers of goods and services from the business sector.

According to one economic Web site, some economists said that "The Laffer Curve" proved that most governments could raise more revenue by cutting tax rates, an argument that was often cited in the 1980s by the tax-cutting governments of President Reagan and Prime Minister Margaret Thatcher of Britain. But Dr. Laffer also encountered criticism from other economists that most countries were still at a point on the curve at which raising tax rates would increase revenue.

The other main criticism of supply-side economics has been that there's no certainty that taxes on the wealthy are cut, then they will use that money to invest in new businesses. As one unidentified writer on an economic Web site puts it, "since these tax cuts happen in bad economic times, investors might decide that their money is safer if they save it rather than invest it."

Yesterday, however, the "father" of supply side economic dismissed such criticisms.

"Tax cuts work," he said. "The progress we're making is in the right direction."

Pranay Gupte,
Senior Writer and Global-Affairs Columnist


© Copyright 2003 - 2008, Pranaygupte.com - by Fluid Design