The Rise and Fall of Corporate Social Responsibility

Douglas M. Eichar

• Publisher: Routledge
• Year: 2017
• Print ISBN:
  9781412856904
• eBook ISBN:
  9781351614993
• Topic: Business
• Subtopic: Business General
• Index: Business

Corporate social responsibility was one of the most consequential business trends of the twentieth century. Having spent decades burnishing reputations as both great places to work and generous philanthropists, large corporations suddenly abandoned their commitment to their communities and employees during the 1980s and 1990s, indicated by declining job security, health insurance, and corporate giving.

Douglas M. Eichar argues that for most of the twentieth century, the benevolence of large corporations functioned to stave off government regulations and unions, as corporations voluntarily adopted more progressive workplace practices or made philanthropic contributions. Eichar contends that as governmental and union threats to managerial prerogatives withered toward the century's end, so did corporate social responsibility. Today, with shareholder value as their beacon, large corporations have shred their social contract with their employees, decimated unions, avoided taxes, and engaged in all manner of risky practices and corrupt politics.

This book is the first to cover the entire history of twentieth-century corporate social responsibility. It provides a valuable perspective from which to revisit the debate concerning the public purpose of large corporations. It also offers new ideas that may transform the public debate about regulating larger corporations.

1
Introduction

The Rise and Fall of Corporate Social Responsibility

In 1917, working conditions at General Electric plants made the company a fertile ground for union organizers. Whether it was skilled machinists upset by efforts to deskill their craft through scientific management, or assembly line workers disgruntled by speed-ups on the line, many workers had already expressed their dismay by quitting. The company had an annual turnover rate of over 100 percent. In July of the following year the radical International Workers of the World (IWW) led the labor force of the company’s Lynn, Massachusetts plant on a bitter strike.¹

Owen Young, then the company’s general counsel, sent his personal representative, Atherton Brownell, to Lynn to report on what he saw. Brownell characterized the strikers as a coalition of “Socialists, the Russian Labor Union, the IWW., the anarchists, the Bolsheviks, and the more radical men in the established labor unions.” By November, the company experienced strikes at its factories in Fort Wayne, Indiana; Erie, Pennsylvania; and Pittsfield, Massachusetts. Not long afterwards, Brownell advised Young that in order to offset the influence of “the more radical element,” the company needed a new approach to its workers that would mold them into “an articulate body that would stand solidly against unnecessary and harmful labor disturbances and continued friction”—in other words, unions.²

When Young assumed the position of chairman in 1922, he, along with the company’s new president, Gerald Swope, began to experiment with personnel policies designed to nurture employee loyalty, and most importantly, avoid unions. Included in the mix were life insurance, company health care, mortgage assistance, and worker grievance boards. These are examples of socially responsible practices, in which a corporation’s mode of operation is consistent with broader social goals like job security, workplace safety, or environmental sustainability. Of course, whether in 1922 or today, these personnel practices could have been stipulated in a union contract (negotiated responsibility). They could have also been more strongly secured through government regulations (mandated responsibility). What GE attempted to demonstrate was that a corporation could voluntarily adopt such practices (voluntary responsibility). Today, this voluntary approach is referred to as corporate social responsibility (CSR), and GE was a paragon of its original form that focused on the treatment of employees.

In fact, CSR can be traced back to the nineteenth century, when large corporations burst onto the economic scene. Though many Americans marveled at what they saw, many also looked on with alarm. These included small merchants who worried that they might be crushed by the predatory practices of companies such as Standard Oil, as well as craftsmen distressed by the prospect of losing both their craft and independence as wage laborers working for companies like Carnegie Steel. Rising consternation coalesced into a broad array of demands for reform, ranging from antitrust to laws regulating the workplace to the right of workers to be represented by unions. As quickly as it came on the scene, the large corporation became a contested institution.

Corporate owners fought to preserve what they considered the main prerogative of ownership: unhindered decision making. Their resistance wore two faces. The first and most visible was the stern face of hard-nosed, sometimes bare-knuckled politics and violence, like a Rockefeller lobbyist bribing a state legislator or some of Carnegie’s men wielding clubs against strikers. But resistance showed a friendly face as well. Though clearly in the minority, employers like Proctor and Gamble and National Cash Register voluntarily adopted more humane workplace practices and gave generously to their local communities. Concerned that demands for reforms might gain traction and naked resistance might engender even greater hostility, these owners hoped to keep government and unions at bay by showing that both were unnecessary. Thus was born CSR.

From the end of the nineteenth century, CSR grew gradually, both in the number of large corporations that adopted its practices and in the variety of practices that came to signify the trend. The original, central forms of CSR targeted corporations’ chief stakeholder, their employees. Known first as welfare work, analysts eventually settled upon the label of welfare capitalism. As CSR practices expanded to include other stakeholders, especially the cities in which businesses operated, CSR developed the second front of corporate philanthropy. This version of CSR, the combination of welfare capitalism and corporate philanthropy, constituted one of the most consequential business trends of the twentieth century.

When GE joined the trend in the 1920s, it quickly became a leader. Over the course of the next several decades, GE’s commitment broadened to include the schools, hospitals, and other institutions within the local communities like Schenectady, where the company resided. Alongside this growing package of personnel practices and philanthropic commitments, Young and Swope also fashioned a CSR philosophy. Contrasting the orientation of his generation of corporate managers with that of the first generation of entrepreneurial founders, Young stated, “Today, when the corporation has become an institution, the duty of management is no longer solely to the investor.”³ In a speech on “The Responsibilities of Modern Industry,” Swope’s appraisal of constituencies to whom the corporation owed a duty listed the public first and the stockholder last, with workers in between. Later in his career, Swope moved workers ahead of the public.⁴

Just as GE was representative of the rise of CSR, it also came to symbolize its fall. This dramatic turn of events occurred during the reign of Jack Welch, who assumed the positions of president and CEO in 1981. To his many fans, Welch was a business hero who spectacularly increased the price of the company’s stock during his twenty years atop the firm. To his many critics, however, Welch was a corporate villain who had earned the epithet of “Neutron Jack”—a CEO whose explosive decisions destroyed the jobs of thousands of employees, while leaving the buildings intact. In just his first four years at the helm, he took a workforce of 411,000 and eliminated over 100,000 jobs, achieved largely by the closing of seventy-three plants and facilities. For the rest of his tenure, payroll was kept at 300,000, in part by an annual appraisal system, dubbed by some as “management by stress.” Each year GE’s 85,000 managers and professionals were graded on a five-point scale, and the bottom 10 percent were dismissed.⁵

This orientation to employees was consistent with Welch’s business philosophy, which, frequently couched in sports metaphors, centered on winning: “winning’s good. Winning is what it’s all about. . . . You like to be in the football locker room that lost, or won?” An intensely competitive man, Welch pointed to his involvement in youth sports as a formative influence. It followed that “the team that fields the best players wins the game . . . when you don’t you lose.” Not averse to alternative metaphors, Welch also characterized his perennial job cuts as “weeding the garden” and “refining the gene pool.”⁶

The Young-Swope and Welch eras serve as the beginning and ending chapters of employee and community-centered CSR at GE. But this story of the slow, apparently durable growth of CSR, followed by its rapid decline in the 1980s and 1990s, played out at countless other American corporations. In the latter years of the twentieth century, millions of jobs were eliminated, as the words “downsizing” and “restructuring” entered the American lexicon. While layoffs were nothing new to the American economy, it was noteworthy that the list of those issuing pink slips included CSR stalwarts for the first time. Eastman Kodak Company had been a pioneer in employee-friendly practices as far back as 1897. It came to be known for its generous array of benefits, which regularly grew over many years, and it was not uncommon for two or three generations in the same family to be employed in the same plant. In 1986, however, the company announced that it would cut 10 percent of its workforce. Despite the typically thin profit margins of the retail industry, Sears Roebuck had distinguished itself for decades by offering its workers improvements in everything from profit sharing and fringe benefits to secure jobs and the chance of promotion. But in 1992 it announced that it would cut over 43,000 jobs on top of the 21,000 it had already eliminated in 1991. The giants of the insurance industry, companies like Aetna, Travelers, Equitable Life, and John Hancock, who had collectively built a reputation of benevolent paternalism toward their workers over the course of many years, announced thousands of layoffs in 1991. Finally, in 1993, after seventy-nine years of extending virtual lifetime employment to its employees, IBM announced it would eliminate 25,000 jobs. Not only did this wave of downsizing wreak havoc in the lives of those who lost their jobs, but the communities that bore the brunt of the layoffs, like Schenectady (General Electric) and Hartford (Aetna, Travelers), were devastated as well.⁷

Looking back over the last quarter of the twentieth century, downsizing constituted but the leading edge of an across the board decline in the original forms of CSR, as indicted in a raft of trends that by the beginning of the new century had become firmly established patterns. These include:

• A decline in job security. Between 1983 and 2000, the median number of years with one’s current employer declined by over 25 percent for men between the ages of thirty-five and sixty-four (by over 33 percent for men fifty-five to sixty-four).⁸
• The number of workers in less secure, “alternative employment arrangements” (independent contractors, on-call workers, temp workers, and contract company workers) increased during this period and stood at 9.3 percent of workers in 1999.⁹
• The share of low-wage jobs—those that pay wages at or below the poverty line increased from 1979 to 1999 and represented more than 25 percent of all jobs.¹⁰
• A decline in health insurance as a fringe benefit. For full-time employees of large and medium size corporations, the percentage covered by employer provided health insurance declined from 97 percent in 1980 to 67 percent in 2000.¹¹
• A shift in who bears the risks for pensions. For full-time employees of large and medium-size corporations, the percentage covered by a “defined benefit” pension—those that guarantee a fixed payment in retirement based upon wages and years of service—declined from 84 percent to 36 percent between 1980 and 2000.¹²
• Corporate philanthropy, as a percentage of profits, declined by 50 percent between 1987 and 2002.¹³
• The sharp increase in the 1980s and 1990s in the use of offshore tax sheltering schemes—shifting assets or headquarters to places like Bermuda—cost the US Treasury an estimated $50 billion a year in corporate tax revenue. While corporations paid 21 percent of all taxes in 1980, by 2001 they only paid 13 percent.¹⁴

CSR: The Friendly Face of Resistance

Conventional wisdom points the finger at global competition as the cause of the decline in this twentieth-century form of CSR. Up until the 1970s, most major American industries were oligopolies, with each controlled by a handful of large, bureaucratic corporations. For example, in the automobile industry there were the mammoths of General Motors, Ford, and Chrysler, while U.S. Steel and Bethlehem Steel dominated the steel industry. Because they faced little domestic competition, and little international competition, due to devastation of competitor nation economies as a result of World War II, American businesses were able to enjoy profit margins high enough to underwrite their CSR practices. But without competition, the argument goes, these corporate giants became progressively inefficient and slow to change. They were therefore ill adapted for the new environment of global competition that appeared during the decade of the 1970s. Unable to compete, and with declining profit margins, large corporations abandoned CSR because they could no longer afford it.

This conventional narrative suffers from two problems, one comparative and one historical. The comparative problem is that, hit by the same global economic tsunami and forced to be as vigilant in keeping costs down, large corporations in most European countries did not abandon the socially responsible practices that benefited their employees and their communities. The historical problem is that CSR had survived and even grown during earlier economic crises, including the Great Depression.¹⁵

To illustrate the comparative problem further, at the same time that American workers were experiencing the effects of downsizing and the loss of benefits, German workers retained their health coverage, and French workers mostly remained in secure jobs; the massive downsizings that devastate communities did not occur. Of course, German and French employers may have abandoned CSR like their American brethren had they been participants in the trend; they were not, or at least not to the extent of American employers. The reason that European workers and communities fared better was because the constituent features comprising CSR were not left to the caprice of employers. Instead, items like health care and pensions were protected by strong governments (in the form of regulations and welfare provisions) and strong unions, and these could not be readily abandoned. In contrast, CSR, because it constituted a voluntary set of practices, was vulnerable to abandonment by management when economic times got tough.

It is important then to understand CSR in relation to a country’s political economy and labor relations. The comparative question becomes why American regulations and unions were weak, while CSR was strong. To understand the decline of CSR, it is necessary to understand its rise and prominence before the 1980s, or why, in short, the United States came to depend so heavily upon an institution that was so inherently vulnerable.

One possible answer is that CSR represented the efforts of corporate leaders to fill the void of missing welfare provisions left by a deeply rooted political culture characterized by a weak state and weak unions. But this would be a charitable view of American corporate history at best. While some large corporations did step in to fill a void, it was one they had fought to create. The truth is that American corporations, in comparison to their European counterparts, had for the better part of a century done a far better job of keeping both government and unions at bay.

A better approach to understanding America’s dependence on corporations’ voluntary measures is to consider the common problem that all societies face as large corporations begin to dominate the economic landscape. On the one hand, these enterprises generate great wealth and employ a large percentage of the labor force, thus representing tremendous assets for societies as they struggle to meet the needs of their citizens. On the other hand, large corporations concentrate power, and their large size gives them the capacity for doing great harm, ranging from the exploitation of employees to the fouling of the environment.

As a result of the array of problems left in its wake, the large corporation has historically been a controversial, contested institution. The socially responsible policies and practices that are most often associated with CSR, like the provision of health insurance, the availability of safe products, or environmentally sustainable modes of production, are best understood as the outcome of struggles that pit the heads of corporations attempting to protect the prerogatives of ownership against reformers attempting to both control large corporations and tether them to broader social purposes. These struggles, then, determine the balance between the private and public purposes of corporations.

There are three main pathways to engendering any set of socially responsible practices (the public purpose) among corporations. The most effective among these, what can be called mandated responsibility, are government regulations, which, in turn, have two types. Social regulations mandate ...

Table of contents

• Cover
• Title
• Copyright
• Dedication
• Contents
• Preface
• 1 Introduction
• 2 The End of the Nineteenth Century: Regulatory Pathways are Set
• 3 Progressives Attempt to Tame the Beast
• 4 The 1920s: Cooperation is Key
• 5 The Great Depression: Everything Changes, But Remains the Same
• 6 The Postwar Triumph of America's Peculiar Regulatory Structure
• 7 The 1970s: The Peak of America's Regulatory Structure
• 8 The Decline of Corporate Social Responsibility
• 9 Can the Beast Be Re-Tethered?
• Bibliography
• Index