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.
"[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
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
"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
"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."