Tuesday, August 24, 2010

CSR is Not Dead

The Wall Street Journal has reignited a debate about the value of corporate social responsibility (CSR). Does it add value to a business, or is it an unnecessary drain of resources away from shareholders?

The WSJ article, posted by Professor Aneel Karnani, rehashed the old Milton Friedman argument of 'the social responsibility of business is to maximize profits.' The argument goes that by generating profits, the benefits of business innovation will trickle down and society will be better off in the long run. Sure, in a simple world this would be the case. But as many practitioners in the CSR field have pointed out, there are a few holes in this theory.  As Nathan Schedroff succinctly points out, "how good was Enron, Worldcom or Blackwater for society?" Not to mention the financial crisis precipitated by excessive short-termism.

Karnani's argument essentially ignores the issue of time horizons.  Cost-cutting now, whether on safety (read Halliburton/BP), wages and benefits or environmental protections may boost quarterly returns in the short-term while creating more entrenched and systemic problems in the long term.  As pointed out in this blog post by CSR consultant Elaine Cohen, the argument assumes that only short-term time horizons matter.  While many investors are still living from quarter to quarter, large and small shareholders are starting to look at the long-term consequences of issues like climate change, labour relations and human rights.

The Lobbying Machine
Karnani calls for more and better government regulation to ensure companies do the right thing, particularly when the profit motive and the social benefits are not directly aligned.  As Leon Kaye points out, not all actors have equal access to the regulatory system, despite our best efforts at creating fair and democratic systems.  Corporations spend huge amounts of shareholders' money on lobbying against proposed regulation.  Just think of how much money companies in your portfolio have spend lobbying against climate change regulations.  In fact, concerns about such lobbying efforts have now become the subject of shareholder action, with some US investors seeking better disclosure of political donations from companies. This includes greater disclosure of 'soft' contributions to industry associations that may lobby against regulatory proposals designed to protect the long-term interests of society.

Triple Bottom-Line Still Has Appeal
Corporate responsibility still has appeal for many companies and their stakeholders.  As Aron Cramer points out in the Huffington Post, companies have used it to create innovative new products, reach out to new markets or build powerful brand identities.  Advocates such as Elsie Maio argue that CSR is a win/win model that "integrates business' goals of high performance with the social spirit of their people and other stakeholders."  Indeed there is a growing desire for blended value - financial AND social success.  New entrepreneurs increasingly understand that it is not an either/or question.  There is a growing community of innovative social enterprises and social finance mechanisms that seek both to do well and to do good.

The World Has Changed
Finally, societal expectations of the corporation are changing.  As this blog post points out, it is not business as usual - companies are increasingly viewed as citizens - holding both rights and responsibilities.  CSR is no longer optional - companies that fail to understand this shift and integrate it into their business strategy may be hard pressed to attract employees, customers, and even shareholders, in the future.

Karnani has recently responded to the various rebuttals - read his response, posted by Elaine Cohen.

Other Rebuttals to Karnani's WSJ Post
"Few Businesses will thrive alone in a sea of deprivation" - Ethical Corporation (my favourite response so far)
NearWalden Blog
Perry Goldschein - Four CSR Myths Debunked
Committee Encouraging Corporate Philanthropy - The CEO View
WSJ Letters to the Editor

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