Chicken and Egg

November 19th, 2010

When it comes to policy change, what should come first: financial regulation or corporate responsibility?

I have argued for corporate responsibility—morality, in fact—before.  My conclusion was that corporations, like people, do have the duty to act morally.  I argued that there is such a thing as moral behavior when it comes to business and when we, as consumers, should reflect our own brands of morality in our purchasing decisions.

The same thing should be true of investing.  And when it comes to these funds, some firms have already led the way with “socially responsible” investment firms.  Members of such investment firms and associations advance investment practices that consider environmental and social consequences in addition to their bottom lines.

For this reason, the approach has also been called “triple bottom line,” whereby business success is judged not just on economic profits, but also its yield in terms of ecological and social benefits.  Proponents of this idea argue that triple bottom line creates sustainable businesses that will stand a better chance of remaining successful.  As Andrew Savitz, author of The Triple Bottom Line, and a former lead partner of PriceWaterhouseCoopers puts it: “Increasingly businesses are expected to find ways to be part of the solution to the world’s environmental and social problems. The best companies are finding ways to turn this responsibility into opportunity.”

Harrington Investments Inc., a socially responsible investment advisory firm, has taken this approach and applied it to development—specifically in terms of curtailing illicit financial flows in major banks.  On Monday Harrington filled a set of shareholder resolutions calling on key banks, including Citigroup, Bank of America, and JP Morgan Chase, to crack down on “transactions which are the result of government corruption and bribery, tax evasion, money laundering, illegal arms deals and the movement of money by drug cartels.”

Global Financial Integrity has already applauded this move.  And I do, too.

But here’s my thought.  As I have already argued, corporate responsibility is important, just as personal responsibility is important.  Ayn Rand’s arguments on the Virtue of Selfishness aside, we cannot progress as a society if we only act in our own economic self-interest.  That was the root of the housing market bubble—and ultimate collapse.  The problem is compounded when the managers involved are able to seal themselves off from the risk and, ultimately, insulate themselves from the damage they create.

I am a proponent of triple bottom line, just as I am a proponent of corporate responsibility, and just as surely as I am a cheerleader for Harrington’s desire to crack down on illicit financial flows.  So the question is (and I say “so,” not “but”): when it comes to policy change, what should come first: financial regulation or corporate responsibility?

I see arguments for both sides.  To some extent regulators cannot force changes that the business community hasn’t tested first—it is helpful to both pass legislation and enforce it if some players are already taking the action to prove to the others that it can be done.  On the other hand, changes in policy must be uniformly accepted and implemented or they cannot be successful.

I think Harrington Investments has taken an admirable course here.  And I do believe that in the long run their move will pay off for their shareholders.  But it is not enough.  Corporate responsibility should and must go hand in hand with enhanced regulation.  Regardless of the answer to this chicken-and-egg puzzle, the truth is that we need both to survive.

Written by Ann Hollingshead

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