Broadening corporate responsibility: is maximizing shareholder value alone a good enough long-term strategy?

• Author: Aaronson, Susan Ariel

Whashington D.C. is drowning in paper. Congress has voted on proposals to promote corporate responsibility. Meanwhile, the President, executives and activists are all scurrying about in search of additional proposals to make executives more accountable for their companies financial reports. The hope is that new reporting requirements and auditing rules will reassure global investors. These efforts are laudable, but they will prove insufficient. Given that capitalism today is global as well as local, the U.S. must work with its allies to write international corporate governance norms. But we need to use this opportunity to think more broadly about how to reassure global economic confidence long term. All of the reform efforts to date focus on a narrow definition of corporate responsibility. As President Bush acknowledged in his July 9th speech, "There is no capitalism without conscience." That is why the ultimate reform would encourage corporations to also act responsibly towards their workers and the environment.

Corporations, after all, have a social and environmental impact, and de facto, a social and environmental role. Business needs the approval of society to make profits and prosper over time. Investors flee from companies that mistreat their workers or the environment, as Nike, Union Carbide and Exxon Mobil have learned. If policymakers, activists, investors, and executives really want to address corporate responsibility, corporate governance reforms must be coupled with policies to promote global corporate social responsibility. Global corporate social responsibility can be defined as business practices based on ethical values and respect for workers, communities and the environment.

Stakeholders can't simply rely on market forces to ensure global corporate social responsibility. Although markets have encouraged more firms to act in a responsible manner in the global economy, market forces have not been sufficient to ensure responsible behavior all of the time. Moreover, markets may penalize responsible firms (those that work harder to ensure that workers or the environment are treated well as they make goods and services). Such responsible firms could have higher costs, which may allow other competitors to gain market share. The right mix of public policies can ensure that responsible firms are not penalized.

The United States has a wide range of policies that are explicitly designed to promote global corporate responsibility...