Do Not Delete
2/25/2014 8:35 PM
The Coasean Dissolution of Corporate Social
Responsibility
Robert T. Miller*
INTRODUCTION
Assertions that corporations should be socially responsible1
commonly elicit either of two quite different reactions.2 On the
one hand, there is an enthusiastic affirmative response, generally
grounded in moral views and often associated with the liberal
end of the political spectrum.3 This response, which is usually
coupled with the idea that big business is malevolent and
dangerous, holds that corporate managers are too often
concerned only with profits and that, unless guided by the values
of corporate social responsibility (CSR), corporations cause great
harm to society. On this view, corporations are generally not
sufficiently socially responsible and ought (in a moral sense of
* Professor of Law and F. Arnold Daum Fellow in Corporate Law, University of
Iowa College of Law. For helpful comments and discussion, I thank Thomas C. Crimmins,
Todd Henderson, Herbert Hovenkamp, Nathan Miller, Mark J. Osiel, Richard E. Redding,
Maya Steinitz, and Joseph Yockey. I thank Whitney Free, Ryan Raffin, and Jessica
Uhlenkamp for their excellent work as my research assistants, and I thank Mary
Sleichter and the librarians at the University of Iowa Law Library for invaluable
assistance in obtaining some of the sources I cite. Most of all, I thank Jennifer L. Miller,
whose assistance and comments on all aspects of this Article were absolutely
indispensable to its completion
1 For recent scholarship, see generally ARCHIE B. CARROLL ET AL., CORPORATE
RESPONSIBILITY: THE AMERICAN EXPERIENCE (Kenneth E. Goodpaster ed., 2012); DANIEL
E. BRENNAN ET AL., CORPORATE SOCIAL RESPONSIBILITY: THE CORPORATE GOVERNANCE
OF THE 21ST CENTURY (Ramon Mullerat ed., 2d ed. 2011); BRYAN HORRIGAN, CORPORATE
SOCIAL RESPONSIBILITY IN THE 21ST CENTURY: DEBATES, MODELS AND PRACTICES ACROSS
GOVERNMENT, LAW AND BUSINESS (2010); Peter Dobers & Delyse Springett, Corporate
Social Responsibility: Discourse, Narratives and Communication, 17 CORP. SOC. RESP.
AND ENVTL. MGMT. 63 (2010).
2 Abagail McWilliams & Donald Siegel, Corporate Social Responsibility: A Theory of
the Firm Perspective, 26 ACAD. OF MGMT. REV. 117, 117 (2001); Abagail McWilliams &
Donald Siegel, Corporate Social Responsibility and Financial Performance: Correlation or
Misspecification?, 21 STRATEGIC MGMT. J. 603, 603 (2000).
3 CARROLL ET AL., supra note 1, at 91; BRENNAN ET AL., supra note 1, at 35;
HORRIGAN, supra note 1, at 73; Dobers & Springett, supra note 1, at 65; KENT
GREENFIELD, THE FAILURE OF CORPORATE LAW 154 (2006). As Herbert Hovenkamp has
pointed out to me, however, some CSR concerns are championed more by persons and
organizations on the political right, such as Evangelical Christians and traditional Roman
Catholics. For example, businesses owned and managed by such groups have resisted the
Health and Human Services (HHS) mandate related to insurance coverage for
abortifacient drugs under the Affordable Care Act. See, e.g., Hobby Lobby Stores, Inc. v.
Sebelius, 723 F.3d 1114 (10th Cir. 2013).
381
Do Not Delete
382
2/25/2014 8:35 PM
Chapman Law Review
[Vol. 17:2
ought) to do more to promote socially desirable ends, regardless
of how this affects the profits of the firm.4 On the other hand,
there is also a negative and hostile response to the assertion that
corporations ought to be socially responsible.5 This view is
generally grounded in economic norms concerning efficiency and
is often associated with the conservative end of the political
spectrum. Usually coupled with the idea that big business has a
generally positive effect on society, this response holds that CSR
activities reduce corporate profits and usually fail to achieve
their intended ends, which implies that corporate managers
ought to eschew such activities and seek only to maximize profits
within the law.6 In this way, businesses benefit society in the
only way they reasonably can, and attempts by corporations to do
more or otherwise generally destroy value and are socially
harmful. Typifying this view is Milton Friedman, who famously
said that the only social responsibility of corporations is to
increase their profits.7
Both of these responses to CSR have some truth in them, but
both are also somewhat confused. In particular, I shall argue in
this Article that, based on conventional views in the economic
analysis of law, we should expect that corporations will engage in
an efficient amount of CSR activities.8 In fact, it turns out that
the conflicts generated by CSR concerns generate a classic
Coasean incompatible use problem, albeit in an especially
complex context. For firms are engaged in operating their
businesses in a manner that maximizes profits, but other people
wish that they would modify their activities in various ways that
would result in the firm’s having lower profits. The question is
therefore how businesses are going to operate. In accordance
4 CARROLL ET AL., supra note 1, at 114; BRENNAN ET AL., supra note 1, at 129;
HORRIGAN, supra note 1, at 5; Dobers & Springett, supra note 1, at 65. Similarly, compare
the differing reactions to Citizens United v. Fed. Election Comm’n, 558 U.S. 310 (2010) of
Ronald Dworkin, The “Devastating” Decision, N.Y. REV. BOOKS, Feb. 25, 2010, available at
http://www.nybooks.com/articles/archives/2010/feb/25/the-devastating-decision/,
and
Richard A. Epstein, Citizens United v. FEC: The Constitutional Right That Big
Corporations Should Have but Do Not Want, 34 HARV. J.L. & PUB. POL’Y 639 (2011).
5 See generally DAVID HENDERSON, MISGUIDED VIRTUE: FALSE NOTIONS OF
CORPORATE SOCIAL RESPONSIBILITY (2001).
6 Id.
7 Milton Friedman, The Social Responsibility of Business Is to Increase Its Profits,
N.Y. TIMES MAG., Sept. 13, 1970, at 33.
8 In connection with a firm’s dealings with its customers, Abagail McWilliams and
Donald Siegel have argued for an identical conclusion based on a neo-classical supply and
demand model of CSR. McWilliams & Siegel, supra note 2, at 125. My conclusions in this
Article are consistent with theirs, to which I am very much indebted. McWilliams and
Siegel, however, do not reach their conclusions and do not understand them in terms of
the Coase theorem, and, more generally, do not consider the problem of CSR in the more
realistic terms of costly markets. It is in exploring the issues in those terms that this
Article seeks to make an original contribution.
Do Not Delete
2014]
2/25/2014 8:35 PM
Coasean Dissolution of Corporate Social Responsibility
383
with the Coase theorem,9 when transaction costs are low, parties
to mutually beneficial exchanges will generally engage in such
exchanges. Since most large firms are already in contractual
relationships with various parties that value certain CSR
activities (and thus have low transaction costs with respect to
those parties), the positive values that these parties place on
CSR activities and the low transaction costs involved create the
possibility for modifications of the contractual terms between the
firm and such parties, such that the firm will engage in the CSR
activities that the parties desire to the extent that the parties are
willing to pay the costs incurred by the firm in doing so. For
example, if the firm’s customers value products made from
recycled materials more than otherwise similar products, we
should expect the firm to sell products made from recycled
materials to the extent that the customers’ willingness to pay for
such products exceeds the incremental cost to the firm of
producing such products, with the price of the products
increasing to reflect this incremental cost. In short, the
preference on the part of persons contracting with the firm for
the firm to engage in CSR activities is no different from any
other preference that a party may bring to a contractual
situation: to the extent that a party’s willingness to pay a
contractual counterparty to do something exceeds the cost to the
counterparty of doing what the party wishes, the agreement
between the parties will generally require the counterparty to
comply with the party’s wishes, the price to the party rising
accordingly and the exchange being efficient.
Part I of this article sets out in detail this Coasean
understanding of CSR and examines how it will generally play
out in a variety of CSR contexts, including in the firm’s
relationships with its customers, employees, suppliers and
manufacturers, and investors, as well as the implications for
situations in which the CSR concerns at issue are not generally
represented by a constituency already in a contractual
relationship with the firm—that is, in situations in which the key
assumptions of Part I, that there is a party willing to pay for the
firm’s CSR activities and that the transaction costs between such
party and the firm are low, fails. Part II considers some moral
concerns that the foregoing analysis raises, including (a) whether
the corporation is really serving the moral ends of CSR if it
9 See Ronald H. Coase, The Problem of Social Cost, 3 J.L. & ECON. 1, 15–16 (1960).
For general overviews of the immense literature on the Coase theorem, see 1 Steven G.
Medema & Richard O. Zerbe, Jr., The Coase Theorem, in ENCYCLOPEDIA OF LAW AND
ECONOMICS 836 (Boudewijn Bouckaert & Gerrit De Geest, eds. 2000); Francesco Parisi,
Coase Theorem and Transaction Cost Economics in the Law, in THE ELGAR COMPANION TO
LAW AND ECONOMICS 7 (Jürgen Backhaus ed., 2005).
Do Not Delete
384
2/25/2014 8:35 PM
Chapman Law Review
[Vol. 17:2
merely takes money to perform CSR activities from people who
wish to pay for them, and (b) whether it is morally defensible
that parties other than the corporation itself pay the costs of CSR
activities, i.e., whether it is morally right that parties other than
the firm have to pay the firm to do what is morally right. Part II
is followed by some concluding remarks.
I. THE COASEAN UNDERSTANDING OF CORPORATE SOCIAL
RESPONSIBILITY
In this Part, I consider transactions between the firm on one
side and its various contractual counterparties on the other,
including customers, employees, suppliers and manufacturers,
and investors.10 The primary assumption, as is standard in the
economic analysis of law, is that human beings are rational
actors who, in general, take actions reasonably calculated to
satisfy their preferences. In Section I.A, I discuss this
assumption in connection with the idea that such actors often
have among their preferences such altruistic or moral
preferences as manifest themselves in CSR concerns. In Section
I.B, I elaborate a Coasean analysis of transactions between the
firm and its counterparties on the assumptions that the parties
involved have incompatible desires in that (1) the firm’s managers
seek to maximize its profits and (2) many of the firm’s
counterparties have preferences related to some standard CSR
concerns to effect which they are willing to pay. The primary
conclusion of this section will be that we should expect firms to
modify the terms of their transactions with such counterparties
to reflect the CSR concerns of such parties to the extent that such
parties are willing to pay to see such concerns addressed, the
incremental costs to the firm being reflected in upwards
adjustments to the price paid by such parties in their
transactions with the firm.11 In the various subsections of Section
I.B, I will apply the general conclusion to the special contexts of
10 I adopt the view common in the law and economics literature that we should view
the relation between a corporation and its shareholders as contractual even though the
relationship is in part defined by statutory law. As used in the text, investors include
corporate shareholders and the equity holders of other kinds of business entities. The
analysis in the text could be extended to include creditors as well, but CSR concerns seem
to arise in the creditor-debtor context only rarely.
11 In referring to the price paid by counterparties animated by CSR concerns, I mean
not just the financial price a party might pay in a transaction but the entire economic
price to the party: that is, the firm may respond to the added cost it bears by addressing
the counterparty’s CSR concern by raising the financial price or by some other adjustment
of the contract terms favorable to it but unfavorable to the counterparty, whatever is more
efficient. In the vast majority of cases, the adjustment would be to the financial price, and
so I shall refer simply to the price in the text unless a particular context requires
otherwise.
Do Not Delete
2014]
2/25/2014 8:35 PM
Coasean Dissolution of Corporate Social Responsibility
385
the firm’s relations with its customers, employees, suppliers and
manufacturers, and investors.
A. Including CSR Preferences in Economic Analysis
The positive economic analysis of law is based on rational
choice theory,12 which in turn begins with the assumption
(usually called the rationality assumption)13 that human beings
have preferences14 and in general take actions reasonably
calculated to satisfy those preferences, subject to whatever
constraints happen to exist.15 Sometimes economists express this
assumption by saying that human beings seek to maximize their
own utility or welfare. Although the intended meaning is the
same, this latter formulation tends to give rise to the most
persistent and pernicious misunderstanding of economic
analysis, namely that it presupposes that human beings are
exclusively self-interested in the most venal and base sense of the
term.16 This is simply a mistake. It is to confuse the assertion
that human beings tend to act rationally to satisfy their
preferences with an assertion about what those preferences tend
to be. The rationality assumption makes no claims of any kind on
this latter issue. On the contrary, to apply the rationality
assumption correctly, we must take the preferences of human
beings as we find them actually to be in the world. Economic
analysis, Gary Becker writes, ―does not assume that individuals
are motivated solely by selfishness or gain. It is a method of
analysis, not an assumption about particular motivations . . . .
The analysis assumes that individuals maximize welfare as they
conceive it, whether they be selfish, altruistic, loyal, spiteful, or
masochistic.‖17
The reason for beginning with a realistic understanding of
human preferences is straightforward. For the whole point of
making the rationality assumption is to predict actual human
behavior by starting with people’s preferences and determining
which actions they are likely to take to satisfy those preferences;
12 On rational choice theory in the economic analysis of law, see generally 1 Thomas
S. Ulen, Rational Choice Theory in Law and Economics, in ENCYCLOPEDIA OF LAW AND
ECONOMICS 790 (Boudewijn Bouckaert & Gerrit De Geest eds., 2000).
13 Id. at 792.
14 More accurately, human beings have transitive preferences, but the question of
transitivity introduces complications not here relevant. See generally id. and sources cited
therein.
15 Such constraints include income, time, imperfect knowledge, imperfect memory
and calculating capacities, and even just the limited nature of the set of opportunities and
actions physically available to the person. Gary S. Becker, Nobel Lecture: The Economic
Way of Looking at Behavior, 101 J. POL. ECON. 385, 386 (1993).
16 E.g., DAN ARIELY, THE (HONEST) TRUTH ABOUT DISHONESTY 3–9 (2012).
17 Becker, supra note 15, at 385–86.
Do Not Delete
386
2/25/2014 8:35 PM
Chapman Law Review
[Vol. 17:2
if we have an unrealistic understanding of people’s preferences,
this method is not likely to yield true predictions.18 Rather,
applying the rationality assumption in a way likely to yield true
predictions requires that we start with a realistic understanding
of the preferences of the group of people whose behavior we are
trying to predict. If people in fact have preferences for certain
moral concerns, we should expect that they will generally take
action to effect those concerns, always subject to whatever
constraints may exist on their ability to act. When, as is usually
the case in the real world, people have preferences both for
material gain and for moral concerns, and in certain situations
these preferences tend to conflict, applying the rationality
assumption becomes more difficult. The solution, however, is not
to ignore one set of preferences entirely. Rather, we need an
understanding of how people engineer compromises among their
competing preferences when satisfying both preferences is
impossible. We can obtain such an understanding in the same
way and to the same extent that we obtain information about all
other preferences that people have: by observing their overt
behavior.19
Now, some people may think that moral preferences,
including those manifested in CSR concerns, are not on a par
with other preferences. For moral purposes, this may perhaps be
correct.20 For economic purposes, however, moral preferences
ought to be treated just like any other preference. The reason is
that it is very hard to see how any good for which people have a
willingness to pay is anything other than an economic good,21 and
certainly many people are willing to pay to realize CSR concerns,
as, for example, when they pay more for fair-trade coffee or for
goods made from recycled materials or even for goods not made
from conflict minerals.22 Given that moral preferences obviously
influence human behavior, and given that such preferences,
when backed by a willingness to pay, can be included on a par
with other preferences for economic goods in positive economic
analysis, there is no reason to exclude such goods from attempts
to predict human behavior based on the rationality assumption.
18 See MILTON FRIEDMAN, The Methodology of Positive Economics, in ESSAYS IN
POSITIVE ECONOMICS 3, 7–41 (1953).
19 See DANIEL M. HAUSMAN & MICHAEL S. MCPHERSON, ECONOMIC ANALYSIS, MORAL
PHILOSOPHY, AND PUBLIC POLICY 44–94 (2d ed. 2006).
20 For the general problem of moral motivation, see Connie S. Rosati, Moral
Motivation, STAN. ENCYCLOPEDIA PHIL., Fall 2008, available at http://plato.stanford.edu/
entries/moral-motivation/.
21 Richard O. Zerbe, Jr., The Legal Foundation of Cost-Benefit Analysis, 2
CHARLESTON L. REV. 93, 127 (2007).
22 See generally Karen E. Woody, Conflicts Minerals Legislation: The SEC‟s New Role
as Diplomatic and Humanitarian Watchdog, 81 FORDHAM L. REV. 1315 (2012).
Do Not Delete
2014]
2/25/2014 8:35 PM
Coasean Dissolution of Corporate Social Responsibility
387
All this also applies to the normative question of whether a
transaction or an outcome is economically efficient. Kaldor-Hicks
efficiency23 (or, better, Pareto Relevance)24 takes the actual
preferences of human beings as given, whatever those
preferences may be.25 Any good for which there is a willingness to
pay counts. Hence, moral preferences for which there is a
willingness to pay count like all other preferences in the
normative calculus of determining which transactions or
outcomes are efficient and which are not. As Zerbe argues,
―Moral sentiments are properly economic goods in so far as there
is a willingness to pay to obtain their realizations and so in
determining efficiency moral claims are properly included
directly.‖26 Assuming, as seems clear, that some people are
willing to pay to realize moral preferences related to CSR
concerns, these preferences should be treated on a par with all
other preferences, not only in applying the rationality
assumption in positive economic analysis but also in calculating
efficiency in normative economic analysis.
B. Coasean CSR Transactions
Suppose that two parties who have low transaction costs27
and who, because they each have many alternative transacting
partners, are unlikely to engage in strategic behavior,28 are
negotiating a commercial transaction, by which I mean one in
which one party (the buyer) will exchange money for the
performance of the other (the seller), which performance would
typically be some obviously economic good or service. Say further
that, in addition to his other preferences related to the good or
service, the buyer has a moral concern, for which he has a
willingness to pay, of a typical CSR type related to the
23 For the original papers, see generally Nicholas Kaldor, Welfare Propositions of
Economics and Interpersonal Comparisons of Utility, 49 ECON. J. 549, 550 (1939); J.R.
Hicks, The Foundations of Welfare Economics, 49 ECON. J. 696, 706, 711 (1939); Nicholas
Kaldor, A Note on Tariffs and the Terms of Trade, 7 ECONOMICA 377, 377–78 (1940); T. De
Scitovszky, A Note on Welfare Propositions in Economics, 9 REV. OF ECON. STUD. 77, 78,
86–88 (1941).
24 See generally Zerbe, supra note 21, at 103–04.
25 For example, in discussing the inefficiency of rape, Posner counts the rapist’s
preferences on a par with the victim’s. RICHARD A. POSNER, ECONOMIC ANALYSIS OF LAW
274 (8th ed. 2011).
26 RICHARD O. ZERBE, JR., ECONOMIC EFFICIENCY IN LAW AND ECONOMICS (2001).
27 Transaction costs are notoriously difficult to define, a problem exacerbated by the
fact that the correctness and practical relevance of the Coase theorem often turn on the
point. See generally Medema & Zerbe, supra note 9, at 855. Coase himself apparently
generally understood transaction costs to include what we today would call search costs,
bargaining costs, and monitoring costs. As Medema and Zerbe point out, however, a better
definition may be any costs arising from uncertainty about the ownership of property
rights. Id. at 856, 875.
28 DOUGLAS G. BAIRD ET AL., GAME THEORY AND THE LAW 269 (1994).
Do Not Delete
388
2/25/2014 8:35 PM
Chapman Law Review
[Vol. 17:2
transaction: for example, for purely moral reasons, he may want
to buy products made from recycled materials, or may wish to
deal only with sellers who maintain certain high standards in
dealing with their employees or suppliers, or may desire to
patronize businesses that contribute to philanthropic or
charitable causes in the buyer’s local community. Crucially, the
right related to the buyer’s concern is one that the law assigns to
the seller: the seller has no legal duty to satisfy the buyer’s
concern.29 We then have a typical Coasean situation: because the
transaction costs between the parties are low (they are already
negotiating a transaction), we should expect that the right
related to the buyer’s CSR concern will be assigned to the party
who values it most highly.30 For the seller, parting with the right,
which amounts to complying with the buyer’s CSR preferences,
generally involves some cost (for instance, using more expensive
recycled materials in its production processes or paying its
employees or suppliers at higher rates). The seller will thus
generally have some minimum willingness to accept a transfer of
the right: that is, a minimum price he will demand to part with
the right. The buyer, by hypothesis, has some positive maximum
willingness to pay: that is, a maximum price he will pay to obtain
the right. If the latter exceeds the former,31 we should expect the
transfer to occur (the right is assigned to its higher-value user),
with the buyer paying the seller for the right, and the overall
result being efficient.32 In other words, the buyer’s CSR
preferences will be realized in the terms of the transaction to the
extent that the buyer is willing to pay to realize them, the price
being appropriately adjusted upwards.
In the subsections below, I explain how this general result
works out in the most common kinds of CSR concerns: that is,
between firms and their (1) customers, (2) suppliers and
manufacturers, (3) employees, and (4) investors.
29 McWilliams & Siegel, supra note 2, at 117 (defining CSR as ―actions that appear
to further some social good, beyond the interests of the firm and that which is required by
law‖ and noting that ―[t]his definition underscores that . . . CSR means going beyond
obeying the law‖).
30 This is the central point of the Coase theorem. Coase, supra note 9, at 9. For
general overviews of the immense literature on the Coase theorem, see MEDEMA & ZERBE,
supra note 9.
31 If the buyer’s willingness to pay is less than the seller’s willingness to accept, no
transaction related to the right will occur, and the right will remain with the buyer, who
in this scenario is the highest-value user of the right, producing an efficient result. The
argument in this section implies that such inefficient CSR transactions do not occur.
32 The conclusion that the result is efficient depends on the assumption that any
negative externalities of the transfer are less than the gains to the parties (or, better, that
any other party affected by the transfer has transaction costs low enough to participate in
the transaction). In most transactions in which CSR concerns are in play, it seems that
this additional assumption would generally be fulfilled.
Do Not Delete
2014]
2/25/2014 8:35 PM
Coasean Dissolution of Corporate Social Responsibility
389
1. Customers
The general explanation above is immediately applicable to
transactions between a firm and its customers in its product
markets: some customers are willing to pay for products that
reflect CSR concerns, either because the product embeds a CSR
attribute (such as being made from recycled materials), or
because it was produced by means of a process reflecting CSR
concerns (such as being made by unionized workers, by workers
in America, or by workers in foreign jurisdictions who are paid
super-market wages),33 or because the firm producing it donates
some of the profits from the sale of the product to a CSR cause. 34
In each case, there is a CSR concern for which customers are
willing to pay, but the right relative to those concerns has been
assigned by law to the firm. The firm, we assume, has no
preference but to maximize its profits35 within the law.36
Therefore, in accordance with the general argument above, to the
extent that customers are willing to pay to see their CSR
concerns realized, the firm will sell them the right and realize
the concern by modifying its products accordingly.
This result should be unsurprising, for it merely replicates in
the moral context exactly what occurs with respect to undeniably
economic terms in contracts between firms selling consumer
goods and their customers. Most obviously, this applies to the
McWilliams & Siegel, supra note 2, at 119.
For example (RED), which was founded in 2006 by Bono and Bobby Shriver,
licenses certain trademarks to famous brands, which then contribute up to fifty percent of
the profits from (RED)-branded goods and services to the Global Fund. The Global Fund,
(RED), THEGLOBALFUND.ORG (Sept. 16, 2013, 9:44 AM), http://www.theglobalfund.org/en/
donors/private/red/. The Global Fund uses the proceeds to finance HIV/AIDS programs in
Africa. Id.; see also Ron Nixon, Bottom Line for (RED): How Much Trickles Down to
Charitable Mission, N.Y. TIMES, Feb. 6, 2008, at C1. See generally M. Todd Henderson &
Anup Malani, Corporate Philanthropy and the Market for Altruism, (John M. Olin L. &
Econ. Working Paper No. 399, 2008), available at http://papers.ssrn.com/sol3/
papers.cfm?abstract_id=1116797.
35 It is also possible that there is a distinct agency problem related to CSR. As
Warren Buffett has argued, some managers may derive private benefits from causing the
firm to engage in CSR activities, whether the benefit is typically materialistic (if the firm
donates enough to the Metropolitan Opera, the chief executive officer and his or her
spouse may be invited to the gala ball with the cast), or merely the satisfaction of the
manager’s moral preferences. See KNIGHTS, RAIDERS & TARGETS: THE IMPACT OF THE
HOSTILE TAKEOVER 14 (John C. Coffee, Jr., Louis Lowenstein & Susan Rose-Ackerman
eds., 1988); see also Hollinger, Inc. v. Hollinger Int’l, Inc., 858 A.2d 342, 383–84 (Del. Ch.
2004) (noting that whoever owns the Telegraph can have dinner with the Queen of
England). In the latter case, policing the agency problem is likely to be extremely difficult,
as the agent by hypothesis believes that the company ought (in a moral sense) to
undertake the CSR activity and so is very unlikely either to realize that he is imposing an
agency cost on the firm’s investors or to respond favorably to attempts by others to
dissuade him from doing so.
36 See In re Massey Energy Co., C.A. No. 5430-VCS, 2011 WL 2176479, at *20 (Del.
Ch. 2011) (stating that directors always violate their fiduciary duties if they cause the
corporation to do something illegal, even if such actions are profit-maximizing).
33
34
Do Not Delete
390
2/25/2014 8:35 PM
Chapman Law Review
[Vol. 17:2
physical features of the firm’s products. For example, if
customers are willing to pay for a product feature like air
conditioning in cars or meals on airplane flights, then sellers will
include these features in their products, adjusting the price to
the buyer accordingly. Similarly, the principle applies to the
non-price terms of a contract designed to confer additional legal
rights on the buyer, such as contractual representations and
warranties, indemnification provisions, or generous return or
cancellation rights. With return rights, for example, at issue is
the right of the buyer to rescind the contract after the purchase
and sale is complete. Initially, the law assigns this right to the
seller; that is, the buyer has no such right under the common law
of contracts or the Uniform Commercial Code.37 But many
sellers, such as large department stores, transfer this right to
their customers by incorporating into the terms of the contract of
sale their return policies, which allow the customer, subject to
certain conditions, to return the product and receive back the
purchase price. Because such sellers value their long-term
relationships with their customers (that is, expect to profit in the
long run by repeat business) and because, for many goods, the
customer cannot effectively evaluate their quality before the
point of sale,38 the customer values the right to return the goods
more than the seller does, and so customers are willing to pay
higher prices to cover the costs to the seller of allowing a certain
percentage of goods to be returned. This is a straightforward
Coasean situation in which, because transaction costs are low,
rights migrate to the party who values them more highly, thus
producing an efficient outcome.
The CSR concerns of buyers differ from these examples only
in that CSR concerns are moral preferences, not the palpably
self-interested, materialistic kinds of preferences that parties
typically bring to commercial transactions. But if, as we saw
above, moral concerns should be treated like any other economic
good to the extent that people who have such concerns are willing
to pay to effect them, then we should expect that such concerns
will be reflected in the terms of commercial transactions just like
any others, and, moreover, the results of such transactions will
be efficient just as they are with the non-moral concerns parties
bring to such transactions.
A nice case intermediate between buyers’ typical
self-interested, materialistic preferences and their CSR
See generally E. ALLAN FARNSWORTH, FARNSWORTH ON CONTRACTS (3d ed. 2004).
Such goods are usually called experience goods, in contrast to search goods, whose
characteristics can be easily ascertained before purchase. Phillip Nelson, Information and
Consumer Behavior, 78 J. POL. ECON. 311, 312 (1970).
37
38
Do Not Delete
2014]
2/25/2014 8:35 PM
Coasean Dissolution of Corporate Social Responsibility
391
preferences relates to the safety features of products. On the one
hand, such features can be understood as being the subject of
customers’ self-interested preferences for their own health and
safety, for which customers are generally willing to pay. Hence,
even a firm not concerned with CSR will tend to incorporate
safety features into its products, increasing the price of the
product to the extent that customers remain willing to pay.
Moreover, if the firm’s products harm its customers, the firm’s
reputation and its profits will likely suffer, and so satisfying the
customers’ preferences related to safety is clearly tied to the
firm’s maximizing its profits. On the other hand, the physical
safety of products can also be understood as the kind of moral
concern reflected in CSR: companies have a moral duty to protect
the health and safety of those who use their products.39 When the
absence of such safety features would expose the firm to legal
liability,40 the feature would not generally be thought of as
relating to CSR.41 But even when it is clear under existing law
that a certain safety feature is not legally required, firms
sometimes incorporate such features into their products. For
instance, before 1998, there was no legal requirement in the
United States that cars be equipped with airbags,42 but General
Motors had introduced airbags on some of its American models in
1973,43 presumably advertising the fact and claiming that its
vehicles were safer for the improvement.44 This is just what we
should expect, however, with safety features that, like airbags,
protect the customers themselves and not third parties.45 For, the
customers are already contracting with the seller and so have low
transactions costs related to transacting for such safety features,
and thus, to the extent that customers are willing to pay for such
safety features, firms can be expected to incorporate them into
their products. Thus, Posner argues that when ―the danger is to
the industry’s customers, the customary level of precautions
taken by sellers is . . . likely to be efficient‖ because customers
CARROLL ET AL., supra note 1, at 350.
W. PAGE KEETON ET AL., PROSSER AND KEETON ON THE LAW OF TORTS 677 (W.
Page Keeton ed., 5th ed. 1984).
41 See McWilliams & Siegel, supra note 2, at 117 (referring to the relation of CSR
and legal obligation).
42 See 49 C.F.R. § 571.208.
43 Lisa Wade McCormick, A Short History of the Airbag, CONSUMERAFFAIRS (Sept.
25, 2006), http://www.consumeraffairs.com/news04/2006/airbags/airbags_invented.html.
44 General Motors, 1974 Air Cushion Restraint System, OLD CAR MANUAL PROJECTS,
http://www.oldcarbrochures.com/static/NA/Oldsmobile/1974_Oldsmobile/1974_Oldsmobile
_Air_Cushion_Folder/dirindex.html (last visited Sept. 21, 2013).
45 To my knowledge, no car company makes cars designed to protect the safety of
pedestrians, though some technological means probably exist for doing this. The reason,
presumably, is that high transaction costs prevent pedestrians from contracting either
with the car companies or with drivers to install such devices. See infra Part I.C.
39
40
Do Not Delete
392
2/25/2014 8:35 PM
Chapman Law Review
[Vol. 17:2
―should be willing to pay a higher price for the industry’s product
or service up to the point that the last dollar spent buys just one
dollar in reduced accident costs.‖46 This is true whether we view
safety features as reflecting the self-interested preferences of
consumers for self-preservation or their moral preferences about
what a car manufacturer owes them. In either case, the firm will
provide such features up to the consumers’ willingness to pay for
them.
2. Suppliers and Manufacturers
For many people, another major CSR concern relates to the
conditions and wages of the workers who produce (or are
otherwise involved in the distribution and sale of) the goods they
buy.47 When these workers are in the United States, the concern
is usually with their wage levels,48 whether they receive health
insurance benefits,49 or whether they are unionized.50 When the
workers are outside the United States and in developing
countries, the concerns are usually about their wage levels,51 the
number of hours they work,52 the health and safety conditions of
the factories in which they work,53 and, in extreme cases,
whether the workers are children, prisoners, or even slaves.54
Dramatic recent examples concerned manufacturers in
Bangladesh that operated factories in extremely dangerous
conditions; in one instance, a fire in such a factory killed 120
workers,55 and in another, a building collapse killed more than
46 POSNER, supra note 25, at 219. Posner is here discussing the famous T.J. Hooper
case. See The T.J. Hooper, 60 F.2d 737 (2d Cir. 1932).
47 CARROLL ET AL., supra note 1, at 362; María Prandi & Josep M. Lozano, Corporate
Social Responsibility and Human Rights, in CORPORATE SOCIAL RESPONSIBILITY: THE
CORPORATE GOVERNANCE OF THE 21ST CENTURY 209, 210 (Ramon Mullerat ed., 2d ed.
2011); HORRIGAN, supra note 1, at 302; Dobers & Springett, supra note 1, at 67.
48 CARROLL ET AL., supra note 1, at 410.
49 Id.
50 Id. at 409.
51 Id. at 396–97 (discussing accusations that Nike products were manufactured in
sweatshops and Nike’s response).
52 See Michael Hopkins & Ivor Hopkins, Labour Standards and Corporate Social
Responsibility: The Need for a Planetary Bargain, in CORPORATE SOCIAL RESPONSIBILITY:
THE CORPORATE GOVERNANCE OF THE 21ST CENTURY 157, 169–70 (Ramon Mullerat ed.,
2d ed. 2011) (detailing the International Labour Organization’s core labor standards,
which establish a maximum number of weekly hours and designated rest days).
53 See HORRIGAN, supra note 1, at 317–18 (detailing the provisions of the Draft
United Nations Norms on Human Rights Responsibilities of Companies, which provide in
part for the right to a safe and healthy workplace).
54 See CARROLL ET AL., supra note 1, at 395–96 (detailing the United Nations Global
Compact’s (UNGC) prohibition of compulsory labor and child labor).
55 Syed Zain Al-Mahmood, Bangladesh Factory Fire Kills 120, WALL ST. J., Nov. 25,
2012, available at http://online.wsj.com/article/SB100014241278873233306045781408711
72985126.html; Vikas Bajaj, Fatal Fire in Bangladesh Highlights the Dangers Facing
Garment Workers, N.Y. TIMES, Nov. 25, 2012, available at http://www.nytimes.com/
2012/11/26/world/asia/bangladesh-fire-kills-more-than-100-and-injures-many.html.
Do Not Delete
2014]
2/25/2014 8:35 PM
Coasean Dissolution of Corporate Social Responsibility
393
1,100 workers.56 Some of the goods manufactured in the factory
that suffered the fire were ultimately sold to consumers in the
United States, including by such leading retailers as Walmart.57
In other cases, the concern has been not about the workers in
foreign factories, but about the pollution emitted by such
factories or the sources of physical inputs processed in such
factories, as when the concern has been to eschew the use of
conflict diamonds or conflict minerals.58
In the usual case, we have a retailer operating in a developed
nation (the retailer) that contracts with another firm based in the
developed nation that specializes in producing certain consumer
goods (a supplier), often under licenses for trademarks owned by
yet other parties. The supplier usually subcontracts the physical
manufacturing of the products to a firm located in the developing
world (the manufacturer).59 For example, in the case of the
Bangladesh fire, Walmart had contracted with a private company
based in the United States to produce clothing under Walmart’s
own Faded Glory label, and that company had contracted with
the Bangladeshi firm to manufacture the goods. The ultimate
consumer, therefore, is at three removes from the firm that
operates the morally obnoxious business: the consumer contracts
with the retailer, who contracts with the supplier in its domestic
market, who contracts with the foreign firm that is directly
responsible for the facts or circumstances that the consumer
concerned with CSR finds morally offensive.
56 Syed Zain Al-Mahmood & Shelly Banjo, Deadly Collapse in Bangladesh, WALL ST.
J., Apr. 24, 2013, available at http://online.wsj.com/article/SB10001424127887324
874204578441912031665482.html; Death Toll in Bangladesh Passes 1,100, N.Y. TIMES,
May 11, 2013, available at http://www.nytimes.com/2013/05/12/world/asia/death-toll-inbangladesh-collapse.html; see also Richard A. Epstein, The Way Forward in Bangladesh,
DEFINING IDEAS (May 7, 2013), http://www.hoover.org/publications/defining-ideas/
article/146431 (advocating increased building code enforcement to improve Bangladeshi
garment industry).
57 Syed Zain Al-Mahmood, Tripti Lahiri & Dana Mattioli, Bangladesh Fire: What
Wal-Mart‟s Supplier Network Missed, WALL ST. J., Dec. 10, 2012, available at
http://online.wsj.com/article/SB10001424127887324024004578169400995615618.html;
Shelly Banjo, Wal-Mart to Brief Shareholders on Bangladesh, WALL ST. J., Aug. 28, 2013,
available at http://online.wsj.com/article/SB100014241278873240093045790409732220
49280.html.
58 Tom Zeller, Jr., Clothes Makers Join to Set „Green Score,‟ N.Y. TIMES, Mar. 1,
2011, available at http://www.nytimes.com/2011/03/01/business/01apparel.html (Chinese
factory pollution); Mireya Navarro, Diamonds Are for Never?, N.Y. TIMES, Dec. 14, 2006,
available at http://www.nytimes.com/2006/12/14/fashion/14diamonds.html; Edward
Wyatt, Use of „Conflict Minerals‟ Gets More Scrutiny from U.S., N.Y. TIMES, Mar. 19,
2012, available at http://www.nytimes.com/2012/03/20/business/use-of-conflict-mineralsgets-more-scrutiny.html.
59 In practice, there are often several levels of subcontracting between the supplier,
who deals directly with the retailer, and the ultimate manufacturer, who operates the
factory. For simplicity, I assume throughout that there is only one level of subcontracting
and the supply chain thus runs from retailer to supplier to manufacturer.
Do Not Delete
394
2/25/2014 8:35 PM
Chapman Law Review
[Vol. 17:2
Nevertheless, every step in this chain is contractual, and so
the transaction costs faced by the parties related to negotiating
additional terms reflecting CSR concerns are relatively low. If
the ultimate consumers are morally concerned with the
conditions of the workers who manufacture goods that they buy,
then we should expect that, all along the supply chain,
contractual terms will be modified to reflect these concerns, and
prices between buyers and sellers should increase accordingly.
There will be Coasean solutions related to these rights first
between consumers and the retailer, then between the retailer
and the supplier, and then between the supplier and the
manufacturer in the developing nation.
And this is exactly what we do in fact find. Large retailers
typically require their suppliers and manufacturers to
contractually agree that neither they nor any of their suppliers
and manufacturers will engage in the kinds of practices that
consumers with the relevant CSR preferences would find morally
objectionable. For example, Walmart, which has for a long time
maintained a whole department for ethical sourcing, requires its
suppliers not only to comply with all relevant laws in the
jurisdictions in which they operate, but also to maintain certain
standards regarding labor hours, hiring and employment
practices, compensation levels, freedom to engage in collective
bargaining, health and safety conditions, and sanitation levels in
workplaces, dormitories, and canteens.60 Other provisions of
Walmart’s standard agreement prohibit suppliers from using
child, slave, or indentured labor, from engaging in human
trafficking, from giving gratuities to Walmart employees, and
from engaging in corrupt practices.61 Yet other provisions require
suppliers to meet certain environmental standards and to keep
accurate business and financial records.62 Under Walmart’s
standard agreement, all of these requirements flow through from
the supplier to the manufacturer: that is, Walmart requires its
suppliers to impose these obligations on their manufacturers.63
From an economic point of view, the most interesting feature
of this situation is how consumers’ moral preferences are so
efficiently transmitted down the supply chain across numerous
contractual relationships. Once again, however, if we remember
to view moral preferences for which there is a willingness to pay
60 Standards for Suppliers Manual, WALMART STORES, INC., 7–16 (Jan. 2012),
available at http://corporate.walmart.com/global-responsibility/ethical-sourcing/stand
ards-for-suppliers.
61 Id. at 5–6, 20.
62 Id. at 16–19, 21.
63 Id. at 22.
Do Not Delete
2014]
2/25/2014 8:35 PM
Coasean Dissolution of Corporate Social Responsibility
395
as being on a par with all other preferences for which there is a
willingness to pay, this result is not at all surprising. That is,
consumers
obviously
have
self-interested,
materialistic
preferences related to the goods they buy (for instance, as to
quality and durability), and no one is surprised that these
preferences are reliably transmitted from consumer to retailer to
supplier to manufacturer, in each case through contractual
relationships. The reason for this, of course, is that consumers
are willing to pay to see these preferences realized, and so their
direct and indirect contractual counterparties respond
appropriately, charging the consumers accordingly. Exactly the
same thing happens, and for exactly the same Coasean reasons,
when the consumers’ preferences are moral ones reflecting CSR
concerns.
3. Employees
Firms also encounter contractual counterparties with CSR
concerns in dealing with their employees. Some people prefer to
work for firms they believe are morally responsible. This seems
to be especially true of better-educated and higher-earning
employees,64 who are, of course, the employees with the highest
marginal productivity and so are of the greatest value to the
firm. To respond to the preferences of such employees, firms
adjust their policies and practices. Google, for example, tries to
maintain a corporate culture typified by its slogan, ―Don’t be
evil,‖65 and many of Google’s employees have, among their
reasons for working for Google, a desire to participate in a
business that has such a corporate culture.66 Similarly, other
firms provide matching financial donations to charitable
organizations that their employees support,67 organize
community service events in which their employees volunteer
their time,68 and donate their goods or services to needy
64 See Heather Schmidt Albinger & Sarah J. Freeman, Corporate Social Performance
and Attractiveness as an Employer to Different Job Seeking Populations, 28 J. BUS.
ETHICS 243, 245–52 (2000), available at http://link.springer.com/article/10.1023/
A:1006289817941 (finding that companies with high levels of corporate social
performance (CSP) are better able to attract employees with high levels of job choice—
that is, better educated, more competitive candidates).
65 Code
of Conduct, GOOGLE INVESTOR RELATIONS (2012), available at
http://investor.google.com/corporate/code-of-conduct.html.
66 Id.
67 See, e.g., Microsoft Corporate Citizenship: Serving Communities: Employee Giving,
MICROSOFT, http://www.microsoft.com/about/corporatecitizenship/en-us/serving-communi
ties/employee-giving/ (last visited Sept. 15, 2013) (―Microsoft matches employee nonprofit
donations and volunteering year round up to $12,000.00 per employee.‖).
68 See, e.g., GoogleServe 2013: Giving Back on a Global Scale, GOOGLE OFFICIAL
BLOG (June 28, 2013), http://googleblog.blogspot.com/2013/06/googleserve-2013-givingback-on-global.html (describing GoogleServe 2013, in which ―more than 8,500 Googlers
from 75+ offices participated in 500 projects‖).
Do Not Delete
396
2/25/2014 8:35 PM
Chapman Law Review
[Vol. 17:2
individuals.69 Often, the CSR concerns that arise primarily from
the firm’s customers concerning the attributes of products or
processes by which products are made are shared by employees
as well: for moral reasons, some employees want to be associated
with certain products, such as ones produced by fair trade
arrangements, and do not want to be associated with others, such
as products manufactured under conditions unsafe for the
workers involved or that incorporate conflict minerals.
Now, many employees with such CSR concerns are also
willing to pay to realize such concerns. In such cases, in
accordance with the general argument given above, since the
employees are already negotiating terms with the employer, the
parties face low transaction costs, and so we should expect that
the relevant rights will be transferred to the highest value user.
Of course, the law initially assigns the right to the firm: absent
some contractual obligation, the firm has no legal duty to provide
such CSR benefits to its employees. We should thus expect the
firm to transfer the right to employees willing to pay for it in
exchange for an appropriate payment. Here, however, two
complications arise. The first and simpler is that, because of the
nature of the employer-employee relationship, the employee is
selling services to the employer in exchange primarily for cash: in
other words, the employer is the buyer, not the seller. The result,
therefore, is not that the employee pays the employer for the CSR
benefit as we see with customers, but that the employer pays the
employee with a combination of cash, traditional fringe benefits,
and CSR benefits, with the cash component of the package being
reduced by the cost to the firm of providing the CSR benefit.70 In
69 See, e.g., PPA Celebrates Fourth Anniversary Has Helped More Than 5.7 Million
Uninsured Patients, PHRMA (Apr. 6, 2009), http://www.phrma.org/media/releases/ppacelebrates-fourth-anniversary-has-helped-more-57-million-uninsured-patients (describing
how the pharmaceutical industry sponsors the Partnership for Prescription Assistance,
which provides prescription drugs either for free or at reduced prices to millions of
patients); see also Michael Barbaro & Justin Gillis, Wal-Mart at Forefront of Hurricane
Relief, WASH. POST (Sept. 6, 2005), http://www.washingtonpost.com/wp-dyn/content/
article/2005/09/05/AR2005090501598.html (discussing Wal-Mart’s donations of large
quantities of goods to Hurricane Katrina victims).
70 CSR benefits provided to employees thus depress cash wages, and the more
thoroughly companies adopt CSR policies, the lower cash wages will be—a result that
CSR advocates would no doubt find very inconvenient. Compare Posner’s point that
bribery reduces the cost to the government of hiring employees. See generally Richard
Posner, Economics of Corruption, THE BECKER-POSNER BLOG (Aug. 28, 2005),
http://www.becker-posner-blog.com/2005/08/economics-of-corruption--posner.html
(―In
effect, bribes shift the financing of public services from taxes to a combination of taxes
and fees for service. By injecting a market element into public services, bribes can
actually improve efficiency when used to get around rigid or inefficient rules.‖). Of course,
the lower wages do not represent any economic loss to the employees: the firm provides
CSR benefits only to the extent that the employees are willing to pay for them, and so the
employees are benefited, not harmed, by CSR benefits, given the employees preferences
and their willingness to pay for them.
Do Not Delete
2014]
2/25/2014 8:35 PM
Coasean Dissolution of Corporate Social Responsibility
397
other words, employees pay for CSR benefits in the form of
reduced traditional forms of compensation.
The second complication is more serious. For, firms generally
do not enter into written employment agreements except with
their most senior and most highly compensated employees. For
the vast majority of employees, the terms are agreed upon orally
and are governed by default rules deriving from the common law
of contracts, as modified by the few relevant statutes, including
most importantly the antidiscrimination laws,71 certain
health-and-safety laws and regulations,72 ERISA,73 and a few
others, none of which deal with the CSR concerns of employees.
Even when a firm does enter into an elaborate written
employment agreement with an employee, the terms rarely
require the company to engage in any particular CSR activities
that the employee may support. Hence, the right to engage in
CSR activities is not in general transferred from the firm to its
employees as the general argument above would suggest;
although the company may consistently and energetically
respond to the CSR concerns of its employees (and indeed have
explicit policies of doing so), the employees do not generally
obtain a right against the company related to such concerns.
Given the general argument above, why should this be?74
Assuming the correctness of the Coase theorem, the answer
has to be that, despite the willingness of the employees to pay to
realize their CSR concerns, the firm nevertheless values the right
more highly than do the employees. Here, a comparison between
a firm’s relationship with its customers and its relationship with
its employees is instructive. The customers buy from time to
time; they do not have long-term contractual relationships with
the firm, even when the firm hopes to obtain their repeat
business. Provided that the product that the customer purchases
embeds the CSR attribute or was produced in accordance with
71 E.g., Age Discrimination in Employment Act of 1967, 29 U.S.C. §§ 621–634
(prohibiting employment discrimination against individuals forty years of age or older);
Rehabilitation Act of 1973, 29 U.S.C. §§ 701–796l (2012) (prohibiting discrimination on
the basis of disability).
72 E.g., Occupational Safety and Health Act of 1970, 29 U.S.C. §§ 651–678 (2012)
(ensuring employers provide safe and healthful working conditions for its employees).
73 Employee Retirement Income Security Act, 29 U.S.C. §§ 1001–1461 (2012).
74 Since employees without employment agreements are at-will, meaning that either
the employer or the employee may terminate the relationship at any time, employees
have no continuing right to any form of compensation they receive from the employer,
whether it be cash, traditional fringe benefits, or anything else. Hence, any CSR benefits
that the employer supplies are being treated exactly like all other forms of
compensation—and presumably for exactly the same reason, which is basically that the
employer values the right to terminate the relationship more than the employee values
job security. See generally POSNER, supra note 25, at 436–38 (discussing the economics of
at-will employment). The argument in the text is really just an elaboration of this point.
Do Not Delete
398
2/25/2014 8:35 PM
Chapman Law Review
[Vol. 17:2
the CSR processes that the customer values, the firm’s CSR
obligations to the customer are complete at the time of sale; the
firm has no ongoing CSR obligations, the future costs of which
could be difficult to ascertain in the present. With employees, the
matter is quite different. Employees are hired for the medium to
long term, and if a right to CSR benefits were transferred to the
employee in the employment agreement, the company would
remain legally bound to provide the benefit as long as the
relationship continued (or at least until the agreement was
renegotiated). Even if the company’s current costs of providing
CSR benefits are below the employee’s willingness to pay for
them, there is no guarantee that this will remain the case for the
term of the employment relationship. Hence, besides the right to
CSR benefits, there is in this contractual relationship between
the firm and the employee a risk to be allocated—the risk that
the cost of the relevant CSR benefits will rise in the future above
the employee’s willingness to pay. If the employee received a
legal right to these CSR benefits, this risk would rest with the
company; if the employee does not receive such a right, even if
the company provides CSR benefits in the present and intends to
continue to do so in the future, the risk rests with the employee.
So the question as to why the company values the right related to
providing CSR benefits more than does the employee reduces to
the question as to why the employee is the superior risk bearer of
this risk.75
In general, a party is a superior risk bearer if that party can
either (a) evaluate the expected cost of the risk more accurately
than can other parties, generally because the party has superior
factual information or expertise, or (b) the party can pool the risk
with other risks, achieving a reduction in uncertainty through
diversification or the application of the law of large numbers.76 In
this instance, since it is clear that the employee cannot pool and
75 In some contractual situations, a risk is allocated to a party because the party is
the cheapest cost avoider related to the risk. See Robert T. Miller, The Economics of Deal
Risk: Allocating Risk Through MAC Clauses in Business Combination Agreements, 50
WM. & MARY L. REV. 2007, 2008 (2008). That is, the party can take action, albeit at a cost,
to prevent the risk from materializing, and the cost of prevention is less than the expected
cost of the risk, making prevention efficient (of course, if both parties can prevent the risk
from materializing at a cost less than the expected cost of the risk, then the risk is
allocated to the party whose costs of preventing it are least). See id. In the case discussed
in the text, however, no party is likely to be a cheaper cost avoider: if the cost of providing
CSR benefits to employees rises, this is likely beyond the control of both the firm and the
employees. The question, therefore, concerns not cheaper cost avoiders but superior risk
bearers.
76 See Richard Posner & Steven Rosenfield, Impossibility and Related Doctrines in
Contract Law: An Economic Analysis, 6 J. LEGAL STUD. 83, 90–91 (1977). Sometimes,
there are yet other reasons why one party to an agreement will be the superior risk
bearer. See Miller, supra note 75, at 2008–09.
Do Not Delete
2014]
2/25/2014 8:35 PM
Coasean Dissolution of Corporate Social Responsibility
399
diversify risks (indeed, if this is possible at all, it would be the
firm that could do so), the driving rationale must be related to
the evaluation of the risk: that is, the employee knows better
than the firm (indeed, better than anyone else) his or her
willingness to pay for CSR benefits. Moreover, this amount no
doubt varies widely from employee to employee. Hence, the
employee, not the firm, is the superior bearer of the risk that, in
the future, the cost of CSR benefits provided by the firm could
rise above the employee’s willingness to pay for such benefits in
the form of reduced cash compensation. Relatedly, if the costs of
providing CSR benefits rise above the willingness of the
employee to pay for them, it will likely be cheaper for the
employee to change jobs (or simply accept alternative forms of
compensation in lieu of the CSR benefit) than it would be for the
company to continue to provide the benefit.
Once again, this is not a surprising result if we compare CSR
benefits to other forms of employment benefits for which
employees have preferences. For example, employees generally
prefer, and are willing to pay for, health insurance, disability
insurance, and vacation benefits, as well as such terms of
employment as titles, reporting responsibilities, expense
accounts, commodious office space, and similar perquisites. But
aside from the few employees senior enough to receive written
employment agreements, employees who receive such perquisites
generally do not have a contractual right to such benefits under
their agreements with the employer. The employer retains the
freedom to modify or abolish such benefits as it sees fit. As with
CSR benefits, the Coasean question in such cases is which party
values the right in question more highly—or, more accurately in
this case, which party is the superior bearer of the risk that the
costs of providing such benefits will come to exceed the
employee’s willingness to pay for them in the form of reduced
cash compensation. For the reasons given above, the employee is
the superior risk bearer, and so the risk is allocated to the
employee, the right to the employer. Once again, the key point is
to see that preferences for CSR benefits for which there is a
willingness to pay are economically indistinguishable from all
other preferences for which there is a willingness to pay.
4. Investors
Some investors want to invest only in firms that reflect the
investors’ CSR preferences.77 For example, some investors
77 See CARROLL ET AL., supra note 1, at 394; see also CLAES CRONSTEDT, Some Legal
Dimensions of Corporate Codes of Conduct, in CORPORATE SOCIAL RESPONSIBILITY: THE
CORPORATE GOVERNANCE OF THE 21ST CENTURY 454 (Ramon Mullerat ed., 2d ed. 2011);
Do Not Delete
400
2/25/2014 8:35 PM
Chapman Law Review
[Vol. 17:2
eschew investments in defense contractors, gun manufacturers,
or firms that derive revenues from nuclear power, alcohol or
tobacco products, or pornography.78 Like some consumers, other
investors want to invest only in firms that make products that
embed CSR attributes or are made using CSR processes, or that
treat their employees or suppliers and manufacturers according
to certain high standards.79 Of course, determining which firms
meet an investor’s CSR preferences is difficult and costly, and so,
not surprisingly, there are firms that specialize in this task and
intermediate between investors and the firms in which they can
invest: the socially-responsible mutual fund.80 Such funds have
stated policies of investing only in companies that meet the
fund’s CSR criteria.81 Investors who share these criteria can
invest in the firms they prefer for moral reasons by investing in
the socially responsible mutual fund, thus indirectly investing in
only those firms that meet their CSR preferences.
The situation here is in some ways similar and in some ways
different from those that we have analyzed in connection with
the CSR preferences of customers, suppliers and manufacturers,
and employees. Here, we assume again that the investor is
willing to pay to effect his CSR preferences, but here the
payment is made by the investors being willing to accept a lower
return on his or her investment. Indeed, to the extent that
investors are willing to pay to effect their CSR preferences in
investments and assuming that capital markets are reasonably
efficient, this result is inevitable: investors willing to pay to effect
their CSR preferences will buy certain stocks and sell others in
part on the basis of their CSR preferences (and not just on the
basis of their views about the fundamental value of the securities
at issue), and this will cause the stock prices of CSR-friendly
companies to rise and the prices of CSR-unfriendly companies to
fall, meaning that the return on the former will be lower and
return on the latter higher.82
HORRIGAN, supra note 1, at 187. See generally Dobers & Springett, supra note 1.
78 James Roselle, The Triple Bottom Line: Building Shareholder Value, in
CORPORATE SOCIAL RESPONSIBILITY: THE CORPORATE GOVERNANCE OF THE 21ST CENTURY
129, 136 (Ramon Mullerat ed., 2d. ed. 2011).
79 Id. at 136–37.
80 CARROLL ET AL., supra note 1, at 394.
81 Id.
82 Thus, just as a company’s responding to employees’ CSR preferences lowers
wages, so its responding to investors’ CSR preferences lowers the return on its stock.
Again, we have a seemingly inconvenient result for CSR advocates, but again the
inconvenience is not really troubling: when the investor’s total return is computed,
including the financial return and the satisfaction of his CSR preferences, the return will
equal the market return on a risk-adjusted basis (assuming the efficiency of capital
markets and a diversified investment portfolio).
Do Not Delete
2014]
2/25/2014 8:35 PM
Coasean Dissolution of Corporate Social Responsibility
401
But, although investors may be able to negotiate about CSR
concerns when purchasing securities from a firm in a primary
offering,83 in general, CSR-conscious investors, like most
investors, purchase securities on the secondary market and not
directly from the issuer. Indeed, if investors in the secondary
market attempted to negotiate with the issuer concerning CSR
issues, the transaction costs involved would be very high, mostly
because the number of investors is very great and because these
investors likely have quite different levels of willingness to pay
for CSR concerns. All that said, however, the relationship
between a shareholder and the company is still contractual, and
because shareholders can always sell their shares into the
market, thus depressing the share price, companies will care
about the CSR concerns of their shareholder base. Thus,
following the factory fire in Bangladesh, Walmart has moved
repeatedly to reassure not only its customers about its sourcing
practices but also its investors.84 Of course, shareholders who
have no CSR concerns of their own will care about the financial
effect on the firm in which they are invested if the customers of
that firm have CSR concerns and the firm is publicly perceived as
not meeting them. At this point, the CSR concerns of the
investors and their self-interested financial concerns tend to
merge.
But, although the firm will generally respond to the CSR
concerns of its investors to the extent that the investors are
willing to pay to realize them, nevertheless, just as in the
relationship of the firm with its employees, the firm will not
transfer to the counterparty the right to change or discontinue
CSR policies in the future. It would, of course, be legally possible
for the firm to do so: the firm’s obligation to address CSR
concerns could be included in its certificate of incorporation with
whatever degree of particularity the parties happened to desire.85
The firm does not do this for the same reason that it does not
83 Even this is highly unusual in the initial public offering context: the shares are
sold by the issuer or its existing shareholders to one or more underwriters, who in turn
sell them to a large number of investors in the market. Genuine negotiations occur only
between the sellers and underwriters, who presumably do not generally reflect the
heightened CSR concerns of particularly socially-conscious investors.
84 Shelly Banjo, Wal-Mart to Brief Investors on Bangladesh, WALL ST. J., Aug. 29,
2013, at B2.
85 Title 8, section 102(b) of the Delaware Code provides that a Delaware
corporation’s certification of incorporation ―may . . . contain . . . any provision for the
management of the business and for the conduct of the affairs of the corporation, and any
provision creating, defining, limiting and regulating the powers of the corporation, the
directors, and the stockholders, or any class of the stockholders . . . if such provisions are
not contrary to the laws of this State.‖ DEL. CODE ANN. tit. 8, § 102(b) (2012). But see CA,
Inc. v. ASFCME Emps. Pension Plan, 953 A.2d 227, 234 (Del. 2008) (regarding corporate
governance provisions that may not be included in the corporation’s bylaws).
Do Not Delete
402
2/25/2014 8:35 PM
Chapman Law Review
[Vol. 17:2
transfer away an analogous right to its employees: the firm
remains the highest-value user of the right to change its CSR
policies because the counterparty (in this case the shareholders)
are the superior risk bearer of the risk that the costs of CSR
activities will rise above the shareholders’ willingness to pay for
such activities. The shareholders are the superior risk bearer of
this risk because they, much better than the firm, can evaluate
the risk because they, and not the firm, know their own
willingness to pay for such activities.
Furthermore, if the cost of engaging in CSR activities rose
sharply and was well above the shareholders’ aggregate
willingness to pay, and if further the right was vested in the
shareholders, then the parties would face high costs of rectifying
the situation, for the company would need to call a shareholders
meeting to amend its certificate of incorporation, a process that
would typically cost a public company several million dollars in
professional and other fees. If, in otherwise similar
circumstances, the right is vested in the company, however, the
cost of adjusting the level of the company’s CSR activities is quite
low: management simply decides to modify or discontinue them.
If, as seems intuitively plausible, the shareholders’ demand
for CSR activities is fairly elastic relative to price, then it would
be especially important for the company to be able to vary the
level of CSR activities and not be contractually bound to
maintain them at a given level. If it were so bound, then there
could result the highly inefficient situation in which the
company, bound to maintain the activities, continued to perform
them, primarily under threat from the relatively small number of
shareholders who would continue to value them above their new
cost, while a larger number of shareholders, who did not value
the activities so highly, would also have to continue to pay them.
It is thus in the interest of the average shareholder, even the
average shareholder with significant CSR preferences, to allow
the company to modify the level of CSR activity over time as the
cost of such activity varies.
C. CSR Preferences of Third Parties
In arguing that the CSR preferences of customers,
employees, and investors will be reflected in the activities of the
firm to the extent that such parties are willing to pay for them, I
have conspicuously noted that, in each case, the party is already
in a contractual relationship with the firm and thus the
transaction costs of incorporating the parties’ CSR preferences
into their relationship are low. The presence of low transaction
costs is crucial to the argument because it tends to show that, in
Do Not Delete
2014]
2/25/2014 8:35 PM
Coasean Dissolution of Corporate Social Responsibility
403
accordance with the Coase theorem, the relevant rights will
migrate to their highest value users—that is, the CSR
preferences of the firm’s contractual counterparties will be
effected to the extent that such parties are willing to pay for
them. If, however, transaction costs between a party and the firm
are high, then, even if that party has CSR preferences and is
willing to pay to effect them, it could well happen that the firm
will not respond to these preferences because the high
transaction costs prevent the party and the firm from entering
into an agreement under which the firm would effect the CSR
activities that the party prefers.
Such high-transaction-cost situations typically arise when a
third party not in a contractual relationship with the firm has
CSR preferences regarding the firm’s behavior. For example, the
Sierra Club undoubtedly has preferences about the
environmental policies of large petroleum companies, but it is not
in any contractual relationship with such companies that would
easily admit of incorporating terms regarding environmental
policies that the Sierra Club would desire. Moreover, even if such
a contractual relationship did exist, the Sierra Club certainly
lacks the financial capacity to pay, say, Exxon Mobil, to do all the
environmentally friendly things that the Sierra Club would
prefer. In such cases, since the party’s willingness to pay falls
below the cost to the firm of effecting its preferences, there is no
inefficiency; the relevant rights are already, and remain, with
their highest-value user. But when the party’s willingness to pay
does exceed the cost of effecting its CSR preferences, but a
transaction related to these preferences is thwarted by high
transaction costs, the result will indeed be inefficient.
Happily, however, it is difficult to think of many real-world
cases that would fit this pattern. The reason is that, since the
costs of effecting typical CSR preferences are generally high in a
business of any considerable size, if there were a party that both
had the relevant CSR preferences and had the willingness to pay
to effect them, it would presumably also have the means to enter
into negotiations with the firm to pay it to give effect to its CSR
preferences. Real world instances of such arrangements, if there
are any, must be very rare. The danger of inefficiency on this
score is thus remote.
More common, however, are cases in which a third-party
organization with CSR preferences strongly held in a
psychological sense but with little willingness to pay (because of
the organization’s limited financial capacity) attempts to
influence the behavior of a firm through quasi-political means:
that is, by calling attention to the firm’s policies that it regards
Do Not Delete
404
2/25/2014 8:35 PM
Chapman Law Review
[Vol. 17:2
as immoral and by attempting to enlist parties that are already
in a contractual relationship with the firm, generally customers
and shareholders, to pressure the firm to adjust its behavior to
comply with the relevant CSR preferences. Here, the outside
organization is relying on the willingness to pay of the insiders,
the parties already dealing with the firm. Curiously, such
campaigns appear to target the firm, but if they are to succeed,
they will do so by relying on payments to be made by others to
the firm targeted (in the case of customers) or by reductions in
returns to shareholders (in the case of investors).
It is important to see how the groups who organize such
campaigns fit into the Coasean analysis of the relationship
between the firm and the parties that are already in contractual
relationships with the firm. Such parties do indeed have low
transaction costs in dealing with the firm, but they will often
have high transaction costs with respect to detecting activities by
the firm of which they would disapprove for CSR reasons and
with respect to monitoring the firm’s compliance with its CSR
commitments (for which the firm has presumably charged the
parties with CSR preferences). The outside advocacy
organization, which has developed expertise in detection and
monitoring, acts as an informal agent for the firm’s customers or
investors with CSR preferences, informing them of the firm’s
activities and looking for violations of the firm’s commitments.
Also, since the customers and investors are numerous and
dispersed, they would face high costs of organizing and possible
collective action problems in dealing with the firm. The advocacy
organization reduces these costs and helps overcome these
problems by informally coordinating the actions of the firm’s
customers and shareholders by proposing the CSR actions that it
thinks the firm should take and then relying on customers and
shareholders to demonstrate a willingness to pay for such actions
(e.g., by withholding their business or selling their shares if the
company does not comply). But if the advocacy organization
oversteps, demanding more CSR action than the customers and
shareholders are willing to pay for, it will fail in its efforts to
change the firm’s behavior. Its verbal demands will not be backed
up by real economic demand. There is thus a kind of market
discipline on such activism. Furthermore, quite appropriately
from an economic point of view, the customers and investors may
also pay the costs of the advocacy organization’s activities, for
people with CSR preferences and a willingness to pay to effect
them will often use some of that willingness to pay to make
financial donations to the appropriate advocacy organizations.
Do Not Delete
2014]
2/25/2014 8:35 PM
Coasean Dissolution of Corporate Social Responsibility
405
All that said, there will still be some cases in which parties
with CSR preferences and a willingness to pay in excess of the
costs to the firm of realizing their preferences will be prevented
from contracting with the firm to effect those preferences. In the
Sierra Club example above, it was crucial that the Sierra Club
was in effect coordinating the activities of parties, generally
customers, who were already in contractual relationships with
the firm and had low transaction costs in dealing with the firm.
In some cases, this will not be true: it could happen that there
are third parties, not already dealing with the firm, who, because
they are numerous and not easily organized, will face very high
transaction costs in contracting with the firm to realize their
CSR preferences. When in the aggregate the parties’ willingness
to pay exceeds the cost to the firm of realizing their CSR
preferences but no transaction occurs because of the high
transaction costs, then the result is indeed inefficient. This, of
course, is exactly what Coase has always told us: that high
transaction costs can prevent efficient transactions. These are
the cases when we should look not to the market but to
regulation to solve the problem: although exceptions may be
possible, in general in such cases, the obligation to comply with
the third parties’ CSR preferences should be imposed on the firm
by law, for this will produce the efficient result.
II. MORAL CONCERNS ARISING FROM THE COASEAN ANALYSIS
The analysis in the preceding Part is entirely economic. As a
matter of positive economics, it argues that, when customers,
suppliers and manufacturers, employees, or investors have CSR
preferences and are willing to pay to realize them, the firm will
respond, affecting these preferences and charging the other
parties accordingly. As a matter of normative economics, it
argues that the resulting transactions are efficient. Assuming the
positive argument is correct and this is how CSR concerns are
actually realized in the world, some important moral questions
remain. In particular, in this Part, I shall inquire (a) whether the
firm is really serving the moral ends of CSR if it merely takes
money to perform CSR activities from people who wish to pay for
them, and (b) whether it is morally defensible that parties other
than the firm itself pay the costs of CSR activities, i.e., whether it
is morally right that parties other than the firm have to pay for
the firm to do what it is morally obligated to do.
Do Not Delete
406
2/25/2014 8:35 PM
Chapman Law Review
[Vol. 17:2
A. Corporate Actions Related to CSR but Not Motivated by CSR
Concerns
If the firm engages in CSR activities only because its
customers or other contractual counterparties have CSR
preferences and are willing to pay the firm to effect those
preferences, then it may seem that the firm is not truly engaged
in CSR activities: it is merely maximizing its profits by catering
to the preferences (albeit the moral preferences) of those with
whom it deals. Such activities, someone may say, can hardly be
praised as socially responsible, for they are motivated not by
commitments to any normative values but merely by a selfish
desire for profits. In other words, although the firm may be doing
the right things, it is doing them for the wrong reasons, and so it
deserves no moral credit.
This argument raises a familiar issue in moral philosophy.
Kant distinguished actions that are in accordance with duty from
actions that are done for the sake of duty, and his key example is
actually directly relevant to CSR concerns: he says that a
tradesman who is careful never to overcharge his customers acts
in accordance with duty, but if he does this simply from motives
of prudence because he believes that a reputation for honesty will
be best for his business in the long term, then he does not act for
the sake of duty.86 Famously, or perhaps infamously, Kant held
that actions performed in accordance with duty but not for the
sake of duty have no moral worth; only actions performed for the
sake of duty have such worth.87 Long before Kant, Thomas
Aquinas had a similar but less radical position. He taught that
an otherwise good action may be done from a bad motive
(curiously, his example is close to CSR concerns too: a man who
gives alms not out of concern for the poor but in order to obtain a
reputation for generosity), and he said that such actions are not
good simply speaking, but good in some respects and bad in
others.88 Other moralists in the western tradition have had
similar concerns.
Without attempting to resolve the difficult philosophical
issues involved, I think we can dispose of the objection as it
relates to the CSR activities of business firms on the basis of
86 IMMANUEL KANT, GROUNDWORK OF THE METAPHYSICS OF MORALS 11 (Mary
Gregor ed., trans., 1997).
87 Id. For elementary discussions of this point in Kant, see 6 Frederic Copleston,
S.J., A HISTORY OF PHILOSOPHY, at 108–10 (1964); J.B. Schneewind, Autonomy,
Obligation, and Virtue: An Overview of Kant‟s Moral Philosophy, in THE CAMBRIDGE
COMPANION TO KANT 309, 325 (Paul Guyer ed., 1992); VERNON J. BOURKE, HISTORY OF
ETHICS 169 (1968); 3 TERENCE IRWIN, THE DEVELOPMENT OF ETHICS 27–28 (2009).
88 THOMAS AQUINAS, SUMMA THEOLOGIAE Ia–IIae.18.4 in c. et ad 3.
Do Not Delete
2014]
2/25/2014 8:35 PM
Coasean Dissolution of Corporate Social Responsibility
407
features peculiar to that context. That is, when a person has a
CSR preference, there are usually many different reasons that
might underlie that preference. For example, if a person favors
products with certain environmentally friendly attributes, the
reason most likely is that the person is concerned with the
well-being of current or future generations of human beings who
will have to live in the environment affected by those products.
Or maybe the person is concerned about the environment as an
end in itself, quite apart from the adverse effects that that
environment may have on human beings. Perhaps there are
other reasons as well, but these reasons will generally be
independent of the motives of the firm responding to the person’s
CSR preferences; in other words, a person with a CSR preference
is characteristically concerned with producing certain states of
affairs in the world, not with the moral improvement of
corporations and the people who run them (in the way, for
example, that parents generally care about the moral
improvement of their children). Hence, even if a firm complies
with a person’s CSR preferences only because the firm is being
paid to do so, the person’s CSR preferences would normally be
fulfilled in every relevant way because, for example, the
environment is in fact being protected in the way the person
wants. His preference would be unfulfilled only in the unusual
case when the preference is primarily about the moral
development of the human beings managing the firm and not
really about the environment at all—that is, if the preference
were that the managers of the firm become more moral. That
people’s CSR preferences are not generally about the moral
development of corporations and their managers can be shown
with a simple thought experiment. For example, suppose that a
person had a preference that the firm’s managers behave morally
in environmental matters, and suppose further that these
managers sincerely tried to operate the firm in an
environmentally sound manner out of a moral concern for the
environment, but that through incompetence or bad luck they in
fact caused the firm to perpetrate an environmental catastrophe.
It would be beyond strange to say in such circumstances that the
CSR preferences of the person in question were in fact fulfilled
because the managers behaved morally. But that is exactly what
would follow if we interpret the person’s preferences as being
about the moral development of the corporation and its
managers. Thus, since most people with CSR concerns are not
primarily concerned with the moral worth of the actions of firms
and their managers but about the actual consequences of the
firm’s activities, it seems clear that we should count such people’s
preferences as being satisfied, provided that the firm acts in
Do Not Delete
408
2/25/2014 8:35 PM
Chapman Law Review
[Vol. 17:2
accordance with them, regardless of the firm’s or its managers’
motivations for doing so. Perhaps Kant is right that the
managers’ actions have no moral worth, but for CSR purposes
what matters is that the actions be, as Kant would have said, in
accordance with duty, not that they be done for the sake of duty.
B. Morality of Shifting Costs to Parties Willing to Pay for CSR
Concerns
Another possible moral issue arising out of the Coasean
analysis of CSR transactions presented above concerns whether
it is morally defensible that parties other than the firm itself pay
the costs of the firm’s CSR activities, that is, whether it is
morally right that parties other than the firm have to pay for the
firm to do what it is morally obligated to do. In contradistinction
to the issue discussed immediately above in Section II.A, the
issue here is not whether the firm deserves any moral credit for
doing the right thing for less than the right reason, but whether
the firm is still behaving immorally by effectively charging other
parties to do things that it itself already has a moral obligation to
do. It may seem, for example, that the firm is no better than a
highway robber who accepts a bribe not to rob travelers whom he
has waylaid on the road. If the firm has a moral obligation to
behave in certain ways, surely, some people may say, it is
behaving immorally if it extracts payments from third parties in
order to live up to its moral obligations. A firm whose CSR
activities are the product of Coasean transactions is no better,
from a moral point of view, than a firm that entirely eschews
such activities. The form of immorality may change, but the
immorality remains.
This argument, in my view, turns on the assumption that,
for moral purposes, firms are relevantly like individuals. That is,
if an individual performs his moral obligations only because
someone else is paying him to do so, then the individual would
likely be behaving immorally. But it is quite otherwise with
firms, for, despite the views of some scholars,89 the firm is not a
moral agent in any normal sense of the term. It exists only in the
contemplation of the law90 and amounts to a nexus of contractual
relationships,91 ultimately among individual human beings.92 It
is not a person but a form of organizing activity by persons. If the
89 E.g., Albert W. Alschuler, Two Ways to Think About the Punishment of
Corporations, 46 AM. CRIM. L. REV. 1359, 1369 (2009); Sara Sun Beale, Is Corporate
Criminal Liability Unique? 44 AM. CRIM. L. REV. 1503, 1532–33 (2007).
90 M’Culloch v. Maryland, 17 U.S. (4 Wheat.) 316, 340 (1819).
91 Michael C. Jensen & William H. Meckling, Theory of the Firm: Managerial
Behavior, Agency Costs and Ownership Structure, 3 J. FIN. ECON. 305, 310 (1976).
92 Id.
Do Not Delete
2014]
2/25/2014 8:35 PM
Coasean Dissolution of Corporate Social Responsibility
409
firm engages in costly activities, some individuals or others will
ultimately bear those costs. There is no such thing as the firm
itself bearing the cost; at most, this means that the cost is borne
by the firm’s equity investors. The argument thus reduces to the
proposition that all the costs of CSR activities ought to be borne
by investors. In accordance with the argument in Section I.B.4,
this is already the case with respect to the satisfaction of the
investors’ own CSR preferences. But why should it be the case
with respect to CSR costs in general?
The answer is that there is no reason why it should, and any
sense that this result is counterintuitive probably comes from
failing to appreciate that firms merely intermediate the
relationships among the various parties with whom they
contract. For example, a firm that produces and sells consumer
goods has certain non-CSR costs, such as for physical inputs,
labor, intellectual property, and equity capital. The firm has not
only a legal but also a moral obligation to pay these costs. No one
would suggest that there is the slightest moral impropriety if the
firm builds these costs into the price for which it sells its goods,
thus effectively passing these costs along to consumers. Indeed, it
has no other source of funds with which to pay these costs. If the
firm’s costs go up—for example, because wage rates are rising
and the firm must now pay higher salaries—then these added
costs will also, with all moral propriety, be passed along to
customers. Now suppose that morality, but not market
conditions, requires that the firm pay higher wages. I see no
reason why these costs, unlike all others, may not morally be
passed along to customers, but should rather reduce the return to
equity investors. If consumers have a taste for a certain kind of
product, and morality requires that certain costs be incurred in
making the product, a consumer who is unwilling to pay those
costs is as unreasonable as the consumer who thinks that any
other costs incurred by the firm in producing the product ought
to be absorbed by the investors and not passed on to the
consumer. Once again, there is no basis for distinguishing
between costs arising from moral preferences and costs arising
from any other kind of preferences.
CONCLUSION
The Coasean analysis of corporate social responsibility
presented in this Article is driven primarily by the assumption
that people’s moral preferences, to the extent that they are
backed by a willingness to pay to realize them, should be treated
on a par with all other preferences for economic goods, whether
in positive or normative economic analysis. Once this assumption
Do Not Delete
410
2/25/2014 8:35 PM
Chapman Law Review
[Vol. 17:2
is made, all the rest follows from a straightforward application of
the Coase theorem. To the extent that scholars, corporate
executives, and CSR advocates have not generally appreciated
this point, the reasons are twofold. First, they have too often
thought that economic analysis ought to be confined to
preferences that are more obviously economic in the colloquial
sense—that is, to preferences for self-interested, material gain.
This is just a mistake, a caricature of true economic analysis of
law. Second, such people have mistakenly taken the firm with
more moral seriousness than it deserves; it is not a genuine
moral agent, just a convenient way to intermediate contractual
relationships among large numbers of individuals.
A final consideration pertains to those CSR preferences
people may have that are not backed by a willingness to pay in
excess of the cost to the firm of realizing these preferences, as, for
instance, might happen when consumers prefer products made
from recycled materials but are not willing to pay the added costs
such materials would create. The analysis in this Article predicts,
of course, that such preferences will not be effected by the firms
involved and, moreover, that this result is nevertheless efficient.
If there really is a moral imperative to use recycled materials in
making such products, then the moral and the efficient would
diverge in such cases. We would have an apparent failure of CSR,
though the failure would really lie with the consumers who were
unwilling to pay to realize their moral preferences. But whether
this is really the case seems doubtful. In reality, what is probably
happening in such cases is that, although many people have the
relevant CSR preferences, their willingness to pay to realize
these preferences varies. Most of them would say that, in
determining whether there is a moral obligation to use recycled
materials in given products in fact depends on, among other
things, the costs of doing so. If the costs become too high, the
moral obligation lapses. This is emphatically not to say that our
morals are for sale. It is just to admit, as all reasonable people
do, that very often whether we have a moral obligation to do
something depends on what we have to sacrifice to accomplish it.
A man may have a duty to attempt to save his drowning
neighbor, but not if that means abandoning his own drowning
child. Thus, when the costs of effecting their CSR preferences
exceed consumers’ aggregate willingness to pay, for most
consumers the preference ceases to have the character of moral
obligation and becomes a mere velleity. Such consumers no
longer regard using non-recycled materials as immoral in the
circumstances. For those few consumers who continue to see the
result as immoral, however, the picture looks rather different:
they may be willing to pay their proportionate share of the cost,
Do Not Delete
2014]
2/25/2014 8:35 PM
Coasean Dissolution of Corporate Social Responsibility
411
but their judgment that the overall result is immoral actually
reflects a demand that their fellow citizens agree with their
views on this matter—a demand that they have every right to
make and probably have made, albeit to no effect. That is the
way of democracies. Those imbued with a truly liberal spirit, or
at least a philosophical one, are not surprised to find themselves
in this position from time to time. Some people, however, when
placed in this position, evince an undue insistence on their own
moral judgments and a failure to tolerate the differing moral
judgments of others. And that, I would say, is socially
irresponsible.
Do Not Delete
412
2/25/2014 8:35 PM
Chapman Law Review
[Vol. 17:2