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Title: CSR and Public Goods
Date: 18-May-2010
Category: Opinion Essays
Source/Author: Stephen B. Young, Global Executive Director, Caux Round Table
Description: A month or so ago I suggested that a very helpful way to understand corporate social responsibility within capitalism is to think of it in structural/functional terms as a mediating process for the private business enterprise with its environment. Private enterprise does not have modern society all to itself. There is government and there is, increasingly, civil society. Private enterprise seeks profit within the rules and regulations set down by government and ingests the social capital provided by civil society. The interactions among business, government, and civil society need constant mediation as a function of successful business enterprise. Such mediation, I suggested, is the function of CSR and CSR managers.

A month or so ago I suggested that a very helpful way to understand corporate social responsibility within capitalism is to think of it in structural/functional terms as a mediating process for the private business enterprise with its environment.

Private enterprise does not have modern society all to itself. There is government and there is, increasingly, civil society. Private enterprise seeks profit within the rules and regulations set down by government and ingests the social capital provided by civil society. The interactions among business, government, and civil society need constant mediation as a function of successful business enterprise. Such mediation, I suggested, is the function of CSR and CSR managers.

But what, exactly, does CSR mediate? CSR is not a production function delivering the goods and services of private enterprise, though it influences the substance of such outputs. It is not corporate governance precisely, though it shapes governance policies and procedures. It is not any of the traditional fields of study in business schools: human relations, operations, finance, marketing and sales, strategy and organization; though it intrudes into each of these practical disciplines.

Mediation is a process only. What does CSR have to say about the direction of mediation in any given decisional situation? How domineering should the company be towards government and civil society? How submissive? Be nice to its stakeholders? Care about the environment? Be a good citizen? Where are guidelines for such policies and decisions? Should the company be more forthcoming or less? Raise prices or lower them? Add costs or turn its back on external concerns and keep the cost of its goods and services as low as possible?

Mediation as a function is not a rule of conduct; it is not a set of ten commandments or a noble eightfold way that would apply under all circumstances as the definition of the right thing to do. It is rather a form of discourse ethics where issues have to be spotted, analyzed, and addressed.

So, then, what actually is the subject matter specific to CSR mediation?

I would like to suggest that there is a special character to CSR concerns within its task to mediate for the private enterprise with other social sectors.

Organizational outputs can be, and often are, considered as private goods or public goods.

Private goods are: 
Private goods can be transferred in a market. They can be priced and exchanged. A loaf of bread is a private good; its owner can exclude others from using it, and once it has been consumed, it cannot be used again. Private goods are conveniently the subject of personal ownership; they admit to designation as “mine” or “yours” and come within the reach of having a title that permits an owner to exclude all others from possession, use and enjoyment. With ownership, we can exclude others. Also, with ownership people are in rivalry with one another to get their hands on the good or enjoy the service. For example, if one individual visits a doctor there is one less doctor's visit for everyone else, and it is possible to exclude others from visiting the doctor. This makes doctor visits a rivaled and excludable private good. 

Public goods are:
any outcome that is open to all. Such an outcome is sharable; it is said to be non-rivalrous and non-excludable. It is hard to personally own and exchange public goods even though they can be enjoyed. A traffic light is a public good. One person can benefit in safely crossing a street and so can everyone else who passes by. But none of them owns the pole and light. Usually the government does. Non-rivalry means that consumption of the good by one individual does not reduce availability of the good for consumption by others. Non-excludability means that no one can be effectively excluded from using the good.
Breathing air does not significantly reduce the amount of air available to others, and people cannot be effectively excluded from using the air. This makes air a public good, albeit one that is economically trivial, since air is a free good. 
A standard list of public goods would include: peace, rule of law, a system of property rights and enforcement of contracts, communications and transportation systems, including the internet, the Linux community of software, beauty, knowledge, lighthouses. 
Paul A. Samuelson is usually credited as the first economist to develop the theory of public goods. In his classic 1954 paper The Pure Theory of Public Expenditure, he defined a public good, or as he called it in the paper a "collective consumption good", as follows: ...[goods] which all enjoy in common in the sense that each individual's consumption of such a good leads to no subtractions from any other individual's consumption of that good... 
In the real world, there may be no such thing as an absolutely non-rivaled and non-excludable good; but economists think that some goods approximate the concept closely enough for the analysis to be economically useful. 
One of the most basic of public goods is a state where individuals can enjoy their liberties, including use of property and the pursuit of happiness. This public good is protected by the rule that one person’s freedom stops where it impinges on the equal freedom of others. (Declaration of Rights of Man and Citizen) Drawing the appropriate line between private right (which authorizes private initiatives) and limitations on that right to protect the rights of others is a messy process. 
Where does my freedom to smoke end so that your liberty not to inhale second-hand smoke can be vindicated? Adam Smith in his lectures on jurisprudence called this intersection of private and public goods the problem of “police”. 
The production of public goods can also result in positive externalities which are not remunerated. If private organizations don't reap all the benefits of a public good which they have produced, their incentives to produce it voluntarily might be insufficient. Consumers can take advantage of such positive externalities or public goods without contributing sufficiently to their creation. This is called the free rider problem, or occasionally, the "easy rider problem"

(See Global Public Goods, Inge Kaul, Isabelle Grunberg, Marc A. Stern, editors; Wikipedia at “public goods”)

In the classic theory of the private firm, the business enterprise need not concern itself with public goods. It is to define its success or failure only with respect to the private goods or services it sells. Under this theory, as advocated with skill and passion by Milton Friedman and the Chicago School of economic thinking, if there are negative externalities spawned by the private sector creating a public concern, then it is up to government to step in and provide new, additional public goods in the form of regulation of private activity for the common good.

Thus, even in a theoretical world of purely private goods, there remains a problem along the border where something “public” arises to change the character of the private good into something of greater communal concern. The border must not only be defined, it must be defended on both sides. The private goods side seeks to push the border farther away from its core autonomy and the public goods side seeks to prevent harm from crossing the border and to encourage positive externalities to be produced and shipped out “abroad” for public consumption. Watching over the border and adjusting disputes between the two sides is the function of CSR.

We might note that both the collapse of credit markets in 2008 and the current oil leak in the bed of the Gulf of Mexico are instances of private goods becoming more that than, becoming of great concern to many publics.

But outputs cannot so easily be allocated to just two categories of private and public. Some services that produce a public good, education for example, can be well delivered by private enterprise without government direction or supervision. Consider Oxford University or Harvard College. But say, are financial services similarly suitable for private enterprise production or do they require supervision of their externalities? What are we to do with goods of a mixed character?

It may make more sense to think of a continuum of goods with completely private goods at one extreme and purely public goods at the other extreme. Next to fully private goods would come quasi-private goods and then a set of quasi-public goods before we get to purely public goods.

Quasi-private goods

Quasi-private goods arise when private goods or services throw off positive and negative externalities. The idea is a crossing of the border between a purely private good and something with a more public character. A positive externality occurs when some benefit can be enjoyed beyond the ties of privity attaching one owner to a subsequent owner. Thus, a work of art, though it can be owned and rival others may be excluded from seeing or appreciating it, casts positive benefits of beauty and understanding. Its beauty or social meaning can be more than just a personal possession. Education provided privately is a benefit to more that those who pay tuition to learn new knowledge and skills. It contributes to social capital and to the capacity of a family or a society to advance in politics and economics.

A way of thinking of the difference between absolutely pure private goods and quasi-public goods is that others take an interest in the creation or the effect of quasi-private goods. The concept applicable here is analogous to that of negligence in the common law. Under the tent of negligence, when one’s actions implicate the well-being of others, a duty may arise to use caution in so acting so that others are not harmed. Brett, Master of Rolls and later Lord Esher, put the concept this way in the case of Heaven v. Pender (1883, 11Q.B.D. 503): “Whenever one person is by circumstances placed in such a position with regard to another that every one of ordinary sense who did think would at once recognize that if he did not use ordinary care and skill in his own conduct with regard to those circumstances he would cause danger of injury to the person or property of the other, a duty arises to use ordinary care and skill to avoid such danger.”

Much later, Lord Atkin offered a different version of this principle of responsibility for use of private property in Donoghue v. Stevenson (1932, A.C. 562): The rule that you are to love your neighbor becomes in law, you must not injure your neighbor; and the lawyer’s question Who is my neighbor? receives a restricted reply. You must take reasonable care to avoid acts or omissions which you can reasonably foresee would be likely to injure your neighbor. Who, then in law is my neighbor? The answer seems to be – persons who are so closely and directly affected by my act that I ought reasonably to have them in contemplation as being so affected when I am directing my mind to the acts or omissions which are called into question.”

A rather similar point was also made in the 1789 Declaration of Rights of Man and Citizen as follows in paragraph 4: Liberty consists in the power to do anything the does not injure others; accordingly, the exercise of the rights of each man has no limits except those that secure the enjoyment of these same rights to the other members of society.

Private goods lose some of their privileged autonomy when they assume a character that can or will impact a wider circle of circumstances.

Quasi-private goods and services retain the core features of private goods. They are the subject of rivalry and potential owners and users can be excluded from ownership and use. They can be priced and sold with title changing hands or beneficial enjoyment placed in another’s possession. But unlike pure public goods, they are encumbered with impacts on others outside the connection of buyer and seller. They create externalities. Thus, those others who are impacted by the use of the good or service take an interest in how the good or service is financed, made, sold, delivered, and used.

CSR paradigms thus arise to mediate between the core privacy of the good or service and the legal autonomy of the company that provides it and the interests, claims and expectations of those who fall within the circumference of its externalities. CSR mediation can be analogized to avoiding negligence through prudent foresight.

A negative externality occurs when production and sale of a private good impinges on the enjoyment or well-being of others. Pollution of air and water from manufacturing is perhaps the classic case of a negative externality. As pollutants are discharged from private property into a public stream or river or penetrate into groundwater from which others draw their drinking water they create negative externalities for those who might suffer from such pollution. Littering, or not picking up after your dog on a sidewalk or a public park, are other examples of a negative externality.

The concept of negative externality slides into the distinction of being a “public bad”. If enough people are negatively effected by behavior that undermines public health, the rule of law, public morals and decency, safety and security of persons and property, then it loses its entirely private character and becomes at least a quas-private good, or perhaps even a quasi public good liable to regulation and control. Bad factory working conditions, for example, become quasi private goods and generate advocacy for remediation on the part of unions and socially concerned NGOs.

Banking and financial services are busineses that produce both positive and negative externalities. And so banking and the selling of securities are highly regulated. As are public health, drug manufacture and sale, insurance and agriculture.

Quas-private goods also include those public goods which can be and are rendered private – ownership rights are created to exclude others and make them compete for use. This occurs in intellectual property when creativity, knowledge and technique which are conceptually accessible to all freely without dilution of their potential are placed under patent or copyright to prevent free use and to force pricing of access through a market.

A poem for example can be read by many people without reducing the consumption of that good by others; it is non-rivalrous. However, the individual who wrote the poem may decline to share it with others by not publishing it and keeping it as exclusively “his” or “hers”. Similarly, the information in most patents can be used by any party without reducing consumption of that good by others. Copyrights and patents provide temporary monopolies, or, in the terminology of public goods, providing a legal mechanism to enforce excludability for a limited period of time.

Some quasi-private goods are called “club goods” for their use is restricted to members of a club, like a union or a country club or a co-operative. In this category are attendance at sporting events – football matches – and theaters. These goods are public for some for a price of admission but excludable to others. Sports teams are usually owned privately but emotionally are considered not as private property but as part of a community’s emotional identity. In moments of team crisis, fans think they should have a say in the decisions of owners to, say, fire or hire a coach or to move the team to a different community.

Thus, we might say education or health care is a quasi-private good. Each brings non-excludable and non-rival benefits to a public but can be provided through private contract in a market place where a price is placed on access to the service. Communities are better off with higher educational achievements and higher standards of public health.
A good which is rivalrous but non-excludable is sometimes called a common pool resource. Such goods raise similar issues to public goods: the mirror to the public goods problem for this case is sometimes called the tragedy of the commons. For example, it is so difficult to enforce restrictions on deep sea fishing that the world's fish stocks can be seen as a non-excludable resource, but one which is finite and diminishing. 

Quasi-public goods

Some outcomes are open to competition but no claims of ownership can prevent entry of competitors. Natural resources are such quasi-public goods. Their exploitation gives rise to the tragedy of the commons: each acquirer of the good over-consumes and destroys the underlying asset, which is finite and diminishing. Fish in the oceans and potable water are such diminishing assets that will inflict harm once they are depleted. With such quasi-public goods, pricing for current market consumption does not charge enough to encourage slow use for preservation of stocks and supplies.

With quasi public goods, the priority claim of privacy and autonomy in decision-making around the making and use of the good or service attenuates even more than with quasi private goods. The scope or intensity of the externalities associated with the good or service is wider and deeper. So wide and so deep that something of a public interest can be said to have arisen. More than a few people external to the core production and exchange of the good or service care about its existential application in society, politics, the economy, and the environment.

Another version of quasi-public goods is goods and services produced by businesses “affected with a public interest.” At the Common Law in traditional England, such business as hotels, ferries, common carriers, wharfs were held to higher standards of liability and responsibility because their customers had to rely to their detriment on the probity and caution of the owners. There was a general shared interest in personal safety to be enjoyed by numerous and unknowable future customers.

So, today for similar reasons, utilities, railways and airplanes are regulated by government to insure that the public interest in safety is vindicated by private parties.

Where a business has a monopoly or several businesses establish a cartel, government regulation steps in to prevent abuse of private power. When private capital is knowingly invested in such businesses, the private owners assume a responsibility to be good stewards of a public interest. Where private enterprise assumes the risk of market competition, it does not trespass into this zone of quasi-public goods.

Where private goods are created by intermingling private profit seeking with government powers to exclude rivals, rent seeking replaces market competition as the means of making money. Rent seeking, or crony capitalism, creates less new wealth and more social injustice and markets for private goods only. These private goods therefore actually become “public bads” because of the damage their production and sale does to the rule of law and the abuse of power so engendered. Such rent seeking transcends all justifications that tolerate private ordering through markets and so cannot benefit from the legitimacy of free market values. Such rent seeking merits restriction and elimination on the grounds it has a quasi public character (really a quasi public “bad”) that is harmful to the community at large.

Protected national parks and wilderness areas are quasi-public goods. They are open to full exploitation as public property but are placed in government ownership as a trust so that their use can be moderated and regulation through exclusion of some potential uses and users. One hiker on a trail does not prevent others from coming along to enjoy the same views and experiences. But at some point too many hikers, or drivers of ATV’s, will indeed destroy the enjoyment value of the pristine physical setting.

Airways for radio and television which, if un-regulated would be public goods, are placed under government control for allocation to private businesses for exploitation.

With quas-public goods, we may infer that the mediating function of CSR is more intense than in the case of quasi private goods. Any company confronting production and marketing decisions with respect to quasi public goods needs more than cost accounting and normal accounting controls to guide its decisions, especially at the level of the board of directors. Engagement with government, political actors, and NGOs is quite necessary in this realm where entrepreneurial activity intersects with the public interest.

Thus, the mediating role of CSR is strongest in the middle range of goods – where quasi-private and quasi-public goods are being offered. Here is where strategic CSR thinking and tactical CSR decision-making is of greatest value to a company. The need for CSR mediation is weakest at the extremes.

With fully private goods, we can expect market mechanisms of consumer and producer choice following price signals to rather adequately determine the quantity and quality of goods to be produced and sold. Here classical micro-economics holds intellectual sway.

At the other extreme, where government produced purely public goods, public authority legislates and regulates what will be provided, how it will be provided and at what cost. The function of private enterprise here is compliance with laws and regulations.

CSR enters in first on boundary issues: is this good purely private? Is it purely public so that private enterprise should be precluded from providing it? How large should the sphere of public goods publicly provided become? Should there be limits on what government should do? Is there a public good (usually a public bad) so intensely associated with the good that public concerns should be taken into account by private providers?

But most importantly, CSR comes to fore around issues raised by the production of quasi-private and quasi-public goods.

Production and sale of each kind of good or service – private, quasi-private, quasi-public, public – needs its own business model.

Private goods and services can be produced with the traditional micro-economic, price-setting model where supply and demand curves meet in free market exchanges and no attention need be paid to the costs or benefits of externalities. Here the principal driver of enterprise profits is cost control.

But, standards of internal governance, which do not reflect micro-economic considerations, and consideration for employees are none-the-less mandatory for sustained enterprise success even with respect to the production of only private goods and services. Here the American National Association of Corporate Directors and the OECD have provided guidelines for high standards of corporate governance in publicly traded enterprises.

And, of course, any business that looses sight of customer satisfaction will face increasing difficulties in earning satisfactory returns. So, even in the heart of autonomous ordering of enterprise decisions, concern for non-financial factors associated with certain stakeholder needs is still a necessary condition of business success.

These intangible CSR variables that live in a private firm’s culture arise, in large part, from a concern for human dignity. Human dignity is both a positive and a negative externality of private ordering. How does our behavior affect the dignity of others? This is a standard of ethical consideration and moral right that applies to private persons, even when they engage in commercial and capitalist activities. It is a trump card overriding more self-centered and brutish behaviors and values. CSR considerations, therefore, have a role to play even in the heart of the most private of private enterprises. The autonomy of owners themselves is limited by claims arising from the need to validate human dignity.

The recently advocated oath of good conduct to graduates of MBA programs embraces a commitment to reflection on CSR approaches even in the most autonomous of private enterprises.

For quasi-private goods a more nuanced and complex business model is required. Driving down costs will not optimize firm profits as, in future periods, the costs of remediating negative externalities will more than off set short-term profits and will compromise the firm’s intangible assets supporting its brand equity and goodwill. Seeking quality is the preferred strategy for success in this range of goods and services. Assuming that a company’s goods or services have a quasi-private character will induce the company to enhance customer loyalty and so avoid unexpected market shocks in its cost base or the demand curve for its outputs.

CSR management guides become applicable for these goods and services. Early intentional efforts to engage CSR perspectives in the management of private enterprises included the ISO 9000 standard for better quality and the ISO 14000 standard for reduction of externalities harmful to the environment.

Standards for non-cost based sourcing, production, and distribution are necessary supports for business decision-making. The quality movement’s focus on quality and customer satisfaction is perhaps the best example of a CSR approach to producing this range of goods and services. The SA 8000 standards for factory working conditions is another such example. The Principles for Responsible Investing, associated with the United Nation’s Global Compact, apply to quasi-private goods associated with portfolio investments. Other examples are industry codes such as the Coffee Community Common Code, The Wolfsburg Principles for banks, the Equator Principles for participation in World Bank projects, the ICC Code for Advertising and Marketing, the Electronics Code of Conduct, the code for extractive industries, the Jewelry Industry Code of Conduct, the Kimberley Process for certifying diamonds, etc., are other examples. An important and ongoing compliance component joins the CSR function at this point.

The Global Reporting Initiative, or GRI, provides a set of reportable data that surface points of concern over a firm’s positive and negative externalities. GRI reports thus provide a basis for consideration of more astute CSR strategies on the firm’s part.

With respect to quasi-public goods, adherence to standards, seeking quality, and sensitivity to externalities are necessary but not sufficient. In this environment, dialogue and negotiations with important constituencies and stakeholders may become necessary. Thus, a company needs to track the perceptions and needs of those quasi-publics, and real publics that voice concern or opposition to its business methods. As a matter of course the company too, most likely, will find it wise to maintain dialogue with government agencies and politicians to influence the introduction of laws, rules and regulations design to meet public interests and to moderate the impact on the firm of such regulatory requirements.

Here the CSR function expands to embrace very rigorous compliance and internal audit procedures and the role of legal counsel. The CSR function here is a very active one of express and overt mediation between the firm, government and civil society.

The business model most appropriate here is a hybrid one of market performance and regulatory compliance with cost requirements and imposed quality considerations. The model would be firms engaged in government contract work, say as a supplier of equipment to the military or to a space agency, or as administrator of government welfare programs in health and education. Profit comes from a negotiated margin provided for in a long term contract. A business in this environment takes on some of the characteristics of a regulated utility serving the public interest. It has lost a large degree of control over its costs, its production methods and its pricing to customers.

Governments also may easily contract for and subsidize quasi-public goods and services, such as education and loans for education.

The United Nation’s Global Compact, which draws its principles from international treaties among governments and not from business dynamics, lists in its 10 principles examples of public goods or “bads” arising from important externalities. The point of the Global Compact is to remind companies that they should not degrade the quality of these public goods in their provision of market-based goods and services. By aligning itself with the Global Compact, a company therefore agrees to consider its business as one providing, to some extent, quasi-public goods.

Finally with pure public goods, I question whether a traditional free market business model is at all relevant. Such goods and services – justice, infrastructure, trustworthy currencies, vibrant social capital – are the responsibility first and foremost of public authorities. They are simply to be provided, not bought and sold.

The Constitution of the United States in its preamble provides a noted list of such public goods: justice, domestic tranquility, the common defense, the general welfare, and the blessings of liberty. These are the goods that people seek by entering into allegiance with one another and through submission to a common public authority, a “res publica” of Roman heritage.

However, since some production function is inherent in the delivery of these goods and services, issues of quality and efficiency do arise. CSR plays a role with pure public goods in seeking ways for private firms to produce and deliver them as quasi-public goods under contract with public authority at lower cost or more efficiently than would be the case with publicly owned administrative bureaucracies.

The Caux Round Table Principles for Business provide a framework for CSR management in every environment – private goods, quasi-private goods, quasi-public goods and even with public goods. The CRT Principles set forth seven primary considerations for the impact of business decisions and the guidelines provide a structure for evaluating the interests of key stakeholders. Under the stakeholder constituency of community, intersection of the firm with pure public goods is considered.

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