Shell Game

by Mike Metzger & John Seel

Shell games started in the streets as sleights of hand—no pea was under any shell. The game played on baseball Jumbotrons is different. There is a pea and most can pick it out. The old shell game is still played, but now by the likes of British Petroleum and Goldman Sachs. It’s known as Corporate Social Responsibility. And it’s still a sleight of hand.

The sleight is seen in the fact that Corporate Social Responsibility (CSR) “stars” have facilitated many of the business and environmental disasters of the past 24 months. British Petroleum’s “Beyond Petroleum” Campaign was supposed to position it as the greenest fossil fuel producer. Yet over the last decade BP has racked up more than 750 safety violations, accounting for 97 percent of all violations cited by regulators in the industry.¹ Over the past five years there have been 12,087 oil-related incidents in the Gulf of Mexico alone. Between 2006 and 2009, those incidents resulted in 30 worker deaths, 1,298 injuries, and 514 fires across the industry. A total of 23 blowouts have left wells out of control in the Gulf, many of them operated by BP.

Goldman Sachs is another CSR star with the “10,000 Women” project. It is supposed to organize and fund business education for 10,000 “underserved” women around the world. But Goldman’s good works are dwarfed by the damage they have caused to the economy. The Securities and Exchange Commission recently imposed a $550 million fine on Goldman to settle it’s civil fraud case—the largest penalty ever for a Wall Street firm. The SEC charged Goldman with misleading investors who put millions of dollars in a subprime mortgage deal in 2007, just as the housing market was about to collapse. In effect, the unwary investors bet on mortgages that Goldman Sachs expected to fail.

This is how shell games were first played. An operator paid shills (co-conspirators) to place bets to distract gullible gamblers. In the same way, hedge fund manager John Paulson paid Goldman Sachs to market a synthetic debt obligation (CDO) that he had fashioned from risky subprime mortgages. A CDO is a financial instrument that investors use to bet on whether the worth of the underlying assets will rise or fall. Paulson bet the subprime market was headed for a crash. But he sold the CDOs to investors via a shill, the Goldman-selected ACA Financial Guaranty Corporation. Then Paulson covered himself with credit default swaps and bet against his own CDOs. He won a billion dollars. Unwary investors on the other end lost an equal amount.

The SEC accused Goldman of the “material omission” of not revealing to ACA that Paulson planned to go short. An investigation turned up internal emails documenting Goldman’s systematic shorting of subprime mortgage investments. Goldman did not admit wrongdoing, but agreed that a number of its business practices “contained incomplete information” and will pay the hefty fine. It’s a small pittance of their profits.

The reality is CSR has become a shill for the likes of Goldman and BP. Shills divert attention. Helping 10,000 women does not offset the reality that tens of thousands of deserving women and men—including over 25 percent of the graduating classes of 2009 and 2010—are currently unemployed. Last week, the Federal Reserve confessed that the U.S. economy might not recover for five or six years. Goldman Sachs played a part, even as Goldman alumni, Goldman-mentored men, and beneficiaries of Goldman’s largess pocketed huge financial rewards and now staff key positions in administrations of both major parties, according to Julie Creswell and Ben White of The New York Times². In BP’s case, there is no future “beyond petroleum” for tens of thousands affected by the Macondo well blowout. BP’s playing a shell game. CSR is the shill.

The solution is in understanding how corporate social responsibilities came to mean essentially nothing. As recently as the 1930s, companies were considered “social institutions” as well as moneymaking enterprises. Social institutions had social responsibilities. Corporations measured whether they were linking people together and promoting human flourishing. After the 1930s, corporations began to dispense with the idea of being a social institution, reducing work to a “nexus of contracts between self-interested individuals,” writes economist Ronald Coase. The corporation existed to turn a profit. Maximizing financial return was taken for granted by 1970 when economist Milton Friedman wrote that the sole responsibility of capitalism is to increase shareholder profit. Corporations were no longer essentially social, so there were no social responsibilities. It was at this time that CSR was launched. The goal is to help corporations take seriously their social and financial responsibilities. But by the 1970s, such language lacked any meaningful connection to reality. It was a shell game.

The solution is reframing corporations as social institutions. Jon Phelps is one of several examples. The founder of Storyville Coffee Company, Phelps’ vision is a new form of business, one that is designed from its inception to address the social, economic, and environmental needs of all its shareholders. He’s also discussing a new business school equipping a new generation of entrepreneurs who will practice business as an instrument of social good. It’s what some are calling “conscientious capitalism.”

Danielle Sacks, an award-winning senior writer for Fast Company, has started a monthly column in the magazine called, “Ethonomics,” a self-conscious combining of “ethics” and “economics.” In April 2008, Vermont became the first U.S. state to allow a new type of business called the “low-profit limited liability corporation.” These corporations are what Nobel Peace Prize winner Muhammad Yunus calls “social businesses.” They represent a new category of corporation that is both economically self-sustaining and animated by a public purpose writes Daniel Pink in Drive³. They are not shell games.

The good news is that most innovations, good and bad, only last for one generation—40 years. Corporate Social Responsibility is 40 years old. The next generation needs to return business to what it formerly was—a social institution as well as a moneymaking enterprise. Otherwise, noble ideas like “corporate culture,” “ethics,” and “do the right thing” are simply sleights of hand performed by those playing a shell game.

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¹ http://www.publicintegrity.org/articles/entry/2085/
² Julie Creswell & Ben White, “The Guys from Goldman Sachs,” The New York Times, October 19, 2008.
³ Daniel H. Pink, Drive: The Surprising Truth About What Motivates Us (New York, NY: Riverhead Books, 2009), p. 24.