Doing Well by Doing Good: The Grand Illusion

Abstract

The idea that companies can 'do well by doing good' has caught the attention of executives, business academics, and public officials. Firms have a corporate social responsibility to achieve some larger social goals, and can do so without a financial sacrifice. This appealing proposition has convinced many people. It is also a fundamentally wrong proposition. 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. Companies have a responsibility to their shareholders to do well; individual people as citizens have a responsibility to do good. When markets fail, some constraints need to be imposed on free markets. There are four sources of constraints: corporate social responsibility, industry self-regulation, civil society activism, and government regulation.