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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.


"[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."

 

 
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