Why There Is a Case for Corporate Social Responsibility, Despite WSJ's Obituary
The cover essay in The Wall Street Journal's special Executive Advisor report yesterday attacks advocates of corporate social responsibility, calling the belief that "businesses have a responsibility to act in the public interest and will profit from doing so" ineffective and flawed.
Aneel Karnani, an associate professor of strategy with University of Michigan's Stephen M. Ross School of Business—ironically the venue for the 2011 Net Impact Conference, where I am headed in October as a speaker on Diversity as a Strategic Advantage--brings up several issues in his op-ed, some that rankle, and others that well underline today's complex market.
To get some perspective on how Karnani's claims have been received, I reached out to many of my contacts in the CSR community, largely through social media. Everyone who responded has a distinct stake in Karnani's article: they are professionals committed to furthering corporate responsibility, and while they view the debate from a variety of standpoints, there is unanimous agreement that business strategies must evoke sustainable practices for continued growth—whether we call it CSR or not.
Karnani's basic argument is that the appeal for CSR is moot because "[c]ompanies that simply do everything they can to boost profits will end up increasing social welfare. In circumstances in which profits and social welfare are in direct opposition, an appeal to corporate social responsibility will almost always be ineffective, because executives are unlikely to act voluntarily in the public interest and against shareholder interests."
At a very rudimentary level, that argument holds substance: Companies like PepsiCo who do well tend to share more and give back more to their community.
However, Fabian Pattberg, founder of SustaianbilityForum.com and a well-respected, U.K.-based thought leader on CSR suggests that Karnani's argument is both unrealistic and dated: "[The argument that] profits will benefit the overall society as an argument is old school Milton Friedman thinking. History and our present dire situation, economically (bank crisis, unethical trading, etc.) and ethically (values and purpose of employees in companies in general) has shown that this is NOT the case. Otherwise there would not be an outcry and need for more responsible business practice. CSR is the real world view."
According to Pattberg, Karnani's argument might have been astute in a different time. "For me, the author's points are unrealistic and [speak of] open market economy business talk from at least 30 years ago!"
The Role of a CEO: Profits or Sustainable Growth?
Maximizing profits, says Karnani, is a chief executive's "responsibility to the company's shareholders. Even if executives wanted to forgo some profit to benefit society, they could expect to lose their jobs if they tried—and be replaced by managers who would restore profit as the top priority."
Besides reeking of short-termism—a recent point of discussion with BRANDfog CEO Ann Charles—this also gave me pause about the perceived role of shareholders.
of soon-to-be-released book titled "
CSR for HR: A Necessary Partnership for Advancing Responsible Business Practices
" expressed it best:
"The key flaw in this professor's argument is the trade-offs between short and long term. Many generally believe that shareholders want to maximize short-term profit at almost any expense (though there is a growing body of evidence that this is not the case) whilst CSR is by definition focused longer term. Yes, there is an element of sacrificing short term profit for greater long term profit, which continues to be in shareholder real interests. Talk to Stuart Rose of Marks and Spencer, Jeff Immelt of GE and many others, and they confirm that CSR-type activities repay themselves many times over. How can a professor of strategy be so hooked in the short-term vision box? Perhaps [Karnani] is a professor of monthly strategy?"
Dave Stangis, Campbell Soup's vice president for CSR is a well known figure among management as well as corporate responsibility advocates for the extraordinary benchmarks he has accomplished at the consumer products company. Via email, Stangis acknowledged that he agreed with Karnani about aligning business with social value but saw why he had managed to rankle many.
"Corporate Social Responsibility isn't about giving money away and adopting the latest cause of activists. CSR and sustainability are approaches to business operation and execution that build employee engagement, improve environmental performance, create positive social impacts, enable operational efficiency, reduce cost, foster innovation, strengthen relationships with customers and consumers and ultimately… create business advantage."
Michael Sater, a brand strategist and independent consultant, had a different take as well, suggesting that Karnani had failed to back up his argument with examples of companies that saw negative results from pursuing honest corporate responsibility: "In every industry, companies with strong CSR and sustainability practices have greater profit, lower costs, stronger brands, higher market share, and enjoy better relations with regulators, communities and their employees." Sater also pointed out that accounting and governance debacles like Enron and WorldCom had led to increased demand for CSR, emphasizing that companies like Tyco have managed to recover only because they embraced CSR and accepted responsibility.
For Stangis though, the problem with Karnani's analysis wasn't his logic or its soundness but a dated, and therefore, irrelevant perspective. "We all like to do the right thing, but it's not CSR or good business. It's CSR and good business...making better business."
The Role of Business Is To Increase Shareholder Value & Pursue Profit
However, there is yet another side to this argument—one that Alice Korngold, founder and CEO of Korngold Consulting, knows well: Directors and management teams often don’t have a linear definition of how to be socially responsible while pursuing corporate goals.
Fine-tuning the debate, Korngold offered the following perspective:
"Since I have been a vociferous advocate for CSR for over 20 years, it might surprise people to learn that I concur with Karnani. I agree that the role of business is to increase shareholder value and hence to pursue profits; that companies should and will only do good when doing so will also serve their business interests; that government regulation and enforcement have a vital role in protecting the public interest; and that civil society (nonprofit watchdogs and advocates) have an important role in protecting the public interest as well."
So what is the business case for CSR?
"The way I have always made the case to businesses—as many of my CSR colleagues do as well—is to seek and present specific opportunities for businesses to have it both ways: to increase their profits by doing good."
"BP has been the negative example. By taking costly risks with employee safety and the environment, the company may even have to file for bankruptcy; Wal-Mart has proven to be a positive example by saving money while building good will through a large scale eco-friendly model; and PepsiCo is another example of a company that recognizes that investing in access to water is important for their profitability and good for the world."
Karnani considers the concept of a business case to CSR to be a dangerous illusion. Korngold disagrees: "In the past decade, we are seeing more and more examples of companies that are increasing their profitability by establishing and implementing policies that protect the environment, human rights and worker safety, and provide healthcare and literacy education for employees and their children."
Summing up her point of view, she said "In certain cases, what's good for business can also be good for the world."
Simple Altruism Doesn't Interest a Capitalistic Society
My next stop was Brian Wasson, SAP's global lead of employee communications for sustainability. Speaking strictly as a sustainability practitioner and not an SAP representative, Wasson said he agreed with Karnani, acknowledging that for CSR to be successfully embedded and embraced, "it must drive profitability in some way for the host company."
"Now, that could be by increasing employee morale, helping the company keep its social 'license' to do business, or even helping it sell more products to customers that want green products like hybrid cars. Depending on the market in which a company operates or looks to reach, just being seen as 'green' can increase brand equity (e.g., Timberland, Patagonia, and even IKEA as mentioned), which can be a profitability driver or serve to increase the perceived value of the company or its products."
Thinking back to Pattberg's argument, how realistic is Karnani's argument in today's economy? Wasson was quick to set the record straight: "I believe that Karnani is actually for the positive outcomes of these activities, but that he is also a realist in thinking that simple altruism does not enter into the equation for companies in a capitalistic society."
Is Government Regulation the Way Forward?
Karnani argues that government regulation is the ultimate solution for ensuring corporate responsibility because it is binding and relieves the reliance on "best intentions." That is because, despite "their faults, governments are a far more effective protector of the public good than any campaign for corporate social responsibility."
That logic didn't appeal to
, and a PhD Candidate with the Department of Public Administration and Policy, at University of Georgia's School of Public and International Affairs:
"I was more than a bit shocked to read Professor Karnani's suggestion that the 'ultimate solution' to striking a balance between corporatism and social welfare is government regulation, not only because government mistrust is at an all time high in this country, but because 1) the vast majority of corporations in America would be highly averse to more regulation, and 2) the government is a regular partner with business and third sector organizations, thereby demonstrating that they're committed to working in an inter-sectoral manner to confront society's biggest problems (e.g. the Social Innovation Fund, as one glaringly apparent, contemporary example)," Ronquillo wrote.
Dave Meyer, the VP for Northwest Operations with sustainability consulting firm Sustainable Economic & Environmental Development Solutions (SEEDS), concurred: "I prefer a free market approach (supplemented by a transparent shareholder process and increased corporate accountability) that recognizes value in balanced clean and green industry and social enterprise."
The Triple Bottom Line: Did Karnani Miss the Point Completely?
Calling the op-ed "extremely shortsighted and narrow-viewed," Meyer reiterated that Karnani may just have missed the entire point of pursuing a triple bottom line business model.
"[He] ignores the fact that most companies have a relatively short business planning horizon, which often runs counter to cost effective, long term resource management, thus limiting impacts to the environment (which requires a longer term horizon). Taking a more holistic systems view on social responsibility is a fundamental characteristic of an organization seeking to optimize its organizational resources, be less wasteful and manage its bottom line. But even then, many forward thinking companies are now accounting for socially responsible behaviors in the short term too. So business is responding to its most valued stakeholders by seeking to manage the increasingly sophisticated triple bottom line expectations of its shareholders through the shareholder resolution/proxy process and SEC reporting requirements—and adjusting their business plans annually—this is a very nimble behavior."
It Is Not Business as Usual, Professor Karnani
And finally I turned to Namrata Rana, director of Futurescape, an experience design services company. Rana is a vocal proponent of corporate responsibility and realizes that some of Karnani's arguments might stem from a generation gap. She explained:
"After 2008, there has been a fundamental shift in business, employee and consumer mindsets that states that corporations are public citizens. A company without its people is only a set of processes that fall apart without the support of any one of its stakeholders: employees, consumers or shareholders. The company, therefore, cannot exist without ignoring the fundamental principles of sustainability. Taking a reductionist view that only talks about profitability implies ignoring the very real trends in customer and employee behavior that we see today."
"Companies who have understood this trend have fought back with changed products, greener supply chains, reduced emissions and flatter work structures with increased transparency and built in CSR initiatives that support core values."
As Cohen put it, today's realities are drastically different. "What we are seeing today as the concept of CSR matures is the convergence of these roles, the fuzzying of these boundaries and the coming together of the complex interplay and multiple influences in which law influences business, business influences law, and both are influenced by effective NGO activism."
In a world where social media has unparalleled power to build or corrode a company's brand, Karnani's editorial could have been cause for much applause. However, his argument not only misrepresents the work of leaders like Stangis, Meyer and Ronquillo, but also shows an archaic way of thinking that absolves us of any responsibility toward our constituents—as informed professionals as well as decision makers.
In summation, perhaps Rana put it best: "Nothing takes away from the fact that the world is facing the threat of depleting resources and a growing population. To have a long-term view of business, sustainability and CSR is no longer optional. The increased role of the corporation in society is a reality and cannot be seen as a 'dangerous illusion.'"