The Social Responsibility of Directors: Dangerous and Harmful, though maybe not Irrelevant

The question of how fiduciary duties should be allocated within the public corporation has been the subject of intense interest recently. This holds not only in today's US but also in other economies including Japan. Indeed, it has bee a constant refrain since the 1960s. But, as Professor Friedman argued, there is one and only one social responsibility of business - to use its resources and engage in activities designed to increase its profits so long as it stays within rules of the game, which is to say, engages in open and free competition, without deception of fraud. Upon the theoretical foundation of firms and organizations, the nexus of contract theory and the role of 'the controlling group', this paper first analyses the corporate governance in large Japanese firms in which the board of directors have fiduciary obligations only to shareholders. In most large Japanese firms, the controlling group is the body of employees, which is elected in shareholders meetings and must induce shareholders to be friendly and remain friendly. The dynamics of the market drive the controlling groups to act as if it had every other resource owners' interest at heart. As a result, for instance, many argue in Japan that because the board members elected among the body of employees so successfully maintain the support of shareholders, shareholders meeting have become ceremonious, and the management treats the interest of shareholders too lightly. The paper then proceeds to ask why and for whom should we ask 'social responsibility' to corporations, and to discuss its potential enforcement. Upon logical investigation and Japanese experiences, it concludes: The corporate social responsibility argument, so long as it concerns only the choice among feasible alternatives under normal conditions, has at least only a limited and marginal influence on a director's behavior. As a result, even if such a responsibility were mandatory, it would have only a correspondingly marginal effect on firm performance. It is, however, the indirect effect of the argument that endangers our open and free market economy. If widely supported by the public, as has been the case until very reently in Japan, the argument would indirectly but seriously influence corporate behavior in general, and director's decision making in particular.