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February 22, 2005
Book Review--Corporations and the Public Interest: Guiding the Invisible Hand
by William Baue
Steve Lydenberg eloquently describes corporate social responsibility and socially responsible
investment, fields in which he is an expert, and recommends mechanisms to fuel their trajectories.
SocialFunds.com --
"[D]emystifying the language that surrounds the business and financial communities" is a
prerequisite to inviting widespread debate about the most appropriate relationship between
corporations and the public. This is one of the presuppositions in Steve Lydenberg’s new book Corporations and the Public Interest. A cofounder of the
corporate social research firm KLD Research &
Analytics, Mr. Lydenberg is now chief investment officer at socially responsible investment
(SRI) firm Domini Social Investments.
 Mr. Lydenberg satisfies the demystification prerequisite
extremely well, conveying complex concepts and detailed historical developments in clear,
well-organized prose. When he employs business vernacular or terms of his own invention, he
defines them simply and understandably--for example "long-term wealth," which "demands that the
profits generated not be made at the expense of society or the environment." When he introduces
his arguments, he outlines how he intends to proceed in numbered steps that he then follows. The
straightforwardness of Mr. Lydenberg's book makes it a perfect starting point for readers
intimidated by business lingo or unfamiliar with the principles of SRI and CSR. For those working
in SRI and CSR, it is also insightful survey of where these fields are heading.
This
strength may also represent a weakness, though, as he sometimes sacrifices depth of analysis to
gain breadth of accessibility. For example, he subtitles the book Guiding the Invisible
Hand, a reference to Adam Smith's oft-quoted (and more often misinterpreted) notion from The
Wealth of Nations of how business advances the public interest. The prevalent misreading of
the invisible hand holds that profit maximization and minimization of government oversight
automatically ("invisibly") advances the public interest.
All too briefly, Mr. Lydenberg
gives a closer reading, revealing that Mr. Smith embraced some forms of government oversight and
certainly did not trust "those who live by profit" to advance the public interest without guidance.
("As one Wall Street Journal reporter put it recently, 'Markets are a great way to organize
economic activity, but they need adult supervision,'" Mr. Lydenberg writes in reference to a 2003
article by David Wessel.) Given that he bases not only his title but also his thesis on this
metaphor, a more thorough demystification of how the "invisible hand" is commonly misunderstood
would have been helpful.
Indeed, the "invisible hand" effectively functions as a launching
pad for one of the book's strongest arguments. Instead of drawing a static line dividing the
responsibility between government and business for advancing the public good, Mr. Lydenberg calls
on the government to draw the line.
"Once government has established a level playing field
and distinguishes the public from the private, the marketplace then can be particularly useful--but
currently isn't constructed to be particularly effective--in encouraging positive and innovative
initiatives that create long-term wealth," Mr. Lydenberg writes. "What appears confusing and
contradictory about the current situation is that the role of government needs to simultaneously
expand and contract."
In other words, when direct government oversight of business
contracts in order to encourage free markets to flourish, government needs to simultaneously expand
the degree to which it creates mechanisms for business to regulate itself. Currently, the US
government in particular is contracting both sides of the equation, relying on a misinterpretation
of the "invisible hand" to "automatically" advance the public interest. Put another way, the
current administration has set the kids loose outside to play while retiring to the sitting room
for martinis. As most parents know, establishing clear boundaries allows kids to play fairly while
minimizing the need for parental refereeing.
Mr. Lydenberg posits what he considers to be
the mechanisms necessary to create a playing field where corporations can profit while concurrently
advancing public interest without the need for overregulation. He calls for four separate
mechanisms of corporate disclosure, including global voluntary reporting, for example according to
Global Reporting Initiative (GRI)
guidelines, nationally mandated disclosure, and disclosure of disaggregated data (broken down by
site, for example).
Such widespread disclosure will require interpretation by two types of
research organizations: "infomediaries," or specialists who can translate voluminous information
into understandable and relevant terms, and "raters" who evaluate companies' social and
environmental performance. Mr. Lydenberg acknowledges obstacles to the proliferation of such
research organizations.
"The need for these research specialists may be clear, but it is
less clear how they will be funded," Mr. Lydenberg points out. "Today, a kind of catch-22 prevents
this market from developing: the development of demand is hampered by a scarcity of providers and
development of providers is hampered by a scarcity of demand."
"The funding challenge is
exacerbated by the need for these intermediaries to be independent, and thus credible," he adds.
He suggests the possibility of endowing a foundation to support such research
organizations with portions of the fines and penalties from financial scandals paid by errant
corporations.
"Whatever the solution, it should be implemented with speed," Mr.
Lydenberg concludes. "Without a network of such specialized research firms, there is a risk of
assuring the disclosure of social and environmental data, but not a capacity to analyze it."
©
SRI World Group, Inc. All Rights Reserved.
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