Does Corporate Social Responsibility Make Sense?

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PHOTO: Mark A. Cohen, Justin Potter Professor of American Competitive Enterprise and Professor of Law

Does corporate social responsibility make good business sense? Does it create win-wins? Or is it little more than “stealing from shareholders?” Is it “Green-washing” — conducted to placate NGOs and hold them at bay? In that sense, is CSR essentially just corporate PR?

These questions are of great interest to corporate leaders, academics, and policy makers today. Even as more business leaders are beginning to emphasize — and publicize — socially responsible efforts and policies, the debate over these questions remains far from settled. 

In fact, there’s no real agreement even on what corporate social responsibility means, nor a framework for analyzing what is “good” or “bad.”

In a real sense, CSR is in the eye of the beholder. For example, some SRI (Socially Responsible Investment) funds exclude firms that conduct abortions. Some argue that Microsoft should be excluded from SRI funds because of the company’s antitrust violations. Still others say that companies that are involved in mass offshoring of U.S. jobs, regardless of the other merits of these businesses, should not be categorized as socially responsible.

This ongoing debate provides the subtext for the larger question of whether CSR actually benefits corporations (or does much good for anyone else). It goes back to another question: “What is the business of business?” Should companies be concerned more about maximizing social value than about maximizing share value?

My two colleagues on the AEI panel, Professor Elaine Sternberg of Leeds University and Tulane University and Professor David Vogel of the University of California at Berkeley, take a mostly dim view of CSR initiatives. Both have written extensively on this issue.

Vogel argues that social responsibility rarely produces competitive advantages for firms. In fact, he says, “for most firms most of the time CSR is irrelevant to business financial performance.” He suggests that consumers and capital markets alike are largely indifferent to CSR, the social benefits produced by such efforts are modest, and assumptions by advocates of CSR that companies will behave responsibly without government regulation are mostly unfounded. In the end, he argues, “the weakness of the business case for corporate virtue limits the extent to which CSR can change business behavior.”

Professor Sternberg, meanwhile, goes even farther — arguing that CSR is “inimical to business” and that the initiatives it spawns are “uneconomic and oxymoronic, irresponsible and unethical. Unless business ethics is understood as conducting business ethically, and CSR is understood as a form of personal responsibility, neither is likely to produce conduct that is genuinely responsible, good for business, or good for communities in which business operates.”

These views run counter to what is becoming the prevalent view in the corporate world: that corporate profit and social virtue not only are not mutually exclusive but can be mutually reinforcing.

I would take a slightly different perspective, focusing on the link between corporate social responsibility and corporate strategy.

In an article last May in The Economist, Ian Davis — the Worldwide Managing Director of McKinsey & Company, a boutique strategy consulting firm — recasts the debate over CSR in a way that is very close to my own view. As he writes,

Large companies must build social issues into strategy in a way that reflects their actual business importance. Such companies need to articulate their social contribution and to define their ultimate purpose in a way that is more subtle than “the business of business is business” and less defensive than most current CSR approaches.

Companies that treat social issues as either irritating distractions or simply unjustified vehicles for attacks on business are turning a blind eye to impending forces that have the potential to alter their strategic focus in fundamental ways. Although the effects of social pressures on these forces may not be immediate, that is not a reason for companies to delay preparing for them or tackling them. Even from a strict shareholder perspective, most stock market value — typically, more than 80 percent — depends on expectations or corporate cash flows beyond the next three years.

Firm strategy is not static. It evolves as the external environment changes. Firms that hold onto static strategies tend to die when the external environment changes.

This doesn’t mean that mean firms should bow to every demand and trade share value for other “stakeholder value.” Instead, firms need to carefully study and embrace CSR in ways that add long-term value to their shareholders, reduce risk, and increase the long-term sustainability of their company. In other words, they should use CSR strategically.

Over the past two decades, the external environment in which firms operate has changed in three, interrelated ways.

First, we’ve seen the globalization of capital markets, coupled with the digital/Internet age of instant worldwide communication.

Second, we’ve witnessed increased organization and sophistication of NGOs in areas such as the environment, human rights, and labor practices.

Third, governments have become increasingly unable to translate societal demand into effective legislation. There are many reasons for this shift, including the rising importance of campaign contributions, lobbying by corporate interests, and revolving doors between corporations and legislatures and regulatory agencies. Another reason is globalization itself: Congress might impose minimum health insurance standards for U.S. employers, for example; with outsourcing, however, such efforts could be counterproductive for U.S. labor.

As a result of these shifts, instead of regulation we are seeing more and more voluntary international initiatives that cover everything from labor practices to the environment, health and safety, and human rights. Major global companies, including financial institutions, are signing up for such initiatives as: Global Compact; the Global Reporting Initiative; Equator Principles; and certification organizations such as the Forest Stewardship Council (FSC).

When the external environment changes, firms must reassess — and, in some cases, alter — their strategy. I would note that there is more than one way to maximize shareholder value. All business decisions are made in an uncertain environment; while business leaders ultimately must select one path, there is often a good case for alternative paths. Instead of spending over $200 million to put the company’s name on the Washington Redskins’ stadium, for example, Fed Ex might obtain as much brand awareness value by investing that money in ways that would provide additional social value.

While I think my colleagues’ unfavorable views on corporate social responsibility have merit, I also believe that CSR makes sense to some firms in some circumstances. But which firms and when? 

Sometimes, CSR is appropriate as a defensive strategy. It can reduce the risk of a serious loss in a company’s reputation, for example, or stave off a consumer boycott. CSR can also represent a pre-emptive move to reduce the risk of further government regulation or legal liability.

For other companies, CSR can make sense as an offensive strategy. For example, a company’s CSR reputation can help attract and motivate employees to work on behalf of their organization. Just ask Home Depot employees about the pride they take in building Habitat for Humanity homes with products donated by their employer. CSR can also serve as a way to raise rivals’ costs, especially among large corporation. And CSR can be an even better fit when it appeals to an important segment of the company’s consumers; that is, it becomes part of the corporate brand.

Notice one important common denominator between the above scenarios: They  are all consistent with firm share value maximization. They all relate to the bottom line.

I like the way that Ian Davis put it. Social issues are not tangential to business, he wrote. They are fundamental to it.

Business should respond accordingly.

Editor’s Note:
This article is based on a presentation by Professor Mark Cohen as part of a panel discussion at the American Enterprise Institute earlier this year.

Send comments to mark.cohen@owen.vanderbilt.edu

Published 2/15/07 in OWENintelligence
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