Why There Is a Case for Corporate Social Responsibility, Des

by Aman Singh Das | August 24, 2010

The cover essay in The Wall Street Journal's special Executive Advisor report yesterday attacks advocates ofcorporate social responsibility, calling the belief that "businesses havea responsibility to act in the public interest and will profit from doingso" ineffective and flawed.

Aneel Karnani, an associate professor of strategywith University of Michigan's Stephen M. Ross School of Business—ironically thevenue for the 2011 Net Impact Conference, where I am headed in October asa speaker on Diversity as a Strategic Advantage--brings up several issues inhis op-ed, some that rankle, and others that well underline today's complexmarket.

To get some perspective on how Karnani's claimshave 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 inKarnani's article: they are professionals committed to furthering corporateresponsibility, and while they view the debate from a variety of standpoints,there is unanimous agreement that business strategies must evoke sustainablepractices for continued growth—whether we call it CSR or not.

CorporateProfits Benefit Society As Well

Karnani's basic argument is that the appeal for CSRis moot because "[c]ompanies that simply do everything they can to boostprofits will end up increasing social welfare. In circumstances in whichprofits and social welfare are in direct opposition, an appeal to corporatesocial responsibility will almost always be ineffective, because executives areunlikely to act voluntarily in the public interest and against shareholderinterests."

At a very rudimentary level, that argument holdssubstance: Companies like PepsiCo who do well tend to share more and give back more to their community.

However, FabianPattberg, founder of SustaianbilityForum.com and a well-respected, U.K.-basedthought leader on CSR suggests that Karnani's argument is both unrealisticand dated: "[The argument that] profits will benefit the overall societyas an argument is old school Milton Friedman thinking. History and our presentdire situation, economically (bank crisis, unethical trading, etc.) andethically (values and purpose of employees in companies in general) has shownthat this is NOT the case. Otherwise there would not be an outcry and need formore responsible business practice. CSR is the real world view."

According to Pattberg, Karnani's argument might havebeen astute in a different time. "For me, the author's points areunrealistic and [speak of] open market economy business talk from at least 30years ago!"

The Role ofa CEO: Profits or Sustainable Growth?

Maximizing profits, says Karnani, is a chiefexecutive's "responsibility to the company's shareholders. Even ifexecutives wanted to forgo some profit to benefit society, they could expect tolose their jobs if they tried—and be replaced by managers who would restoreprofit as the top priority."

Besides reeking of short-termism—a recent point ofdiscussion with BRANDfog CEO Ann Charles—this also gave me pause about theperceived role of shareholders. Elaine Cohen, a CSR consultant, sustainability reporter andauthor 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 thisprofessor's argument is the trade-offs between short and long term. Manygenerally believe that shareholders want to maximize short-term profit atalmost any expense (though there is a growing body of evidence that this is notthe case) whilst CSR is by definition focused longer term. Yes, there is anelement of sacrificing short term profit for greater long term profit, whichcontinues to be in shareholder real interests. Talk to Stuart Rose of Marks andSpencer, Jeff Immelt of GE and many others, and they confirmthat CSR-type activities repay themselves many times over. How can aprofessor of strategy be so hooked in the short-term vision box? Perhaps[Karnani] is a professor of monthly strategy?"

It's NotCSR OR Good Business; Its CSR AND Good Business

Dave Stangis, Campbell Soup's vice president for CSRis a well known figure among management as well as corporate responsibilityadvocates for the extraordinary benchmarks he has accomplished at the consumerproducts company. Via email, Stangis acknowledged that he agreed with Karnaniabout aligning business with social value but saw why he had managed to ranklemany.

"Corporate Social Responsibility isn't aboutgiving money away and adopting the latest cause of activists. CSR andsustainability are approaches to business operation and execution that buildemployee engagement, improve environmental performance, create positive socialimpacts, enable operational efficiency, reduce cost, foster innovation,strengthen relationships with customers and consumers and ultimately… createbusiness advantage."

Michael Sater, a brand strategist and independent consultant,had a different take as well, suggesting that Karnani had failed to back up hisargument with examples of companies that saw negative results from pursuinghonest corporate responsibility: "In every industry, companies with strong CSR andsustainability practices have greater profit, lower costs, stronger brands,higher market share, and enjoy better relations with regulators, communitiesand their employees." Sater also pointed out that accounting andgovernance debacles like Enron and WorldCom had led to increased demand forCSR, emphasizing that companies like Tyco have managed to recover only becausethey embraced CSR and accepted responsibility.

For Stangis though, the problem with Karnani'sanalysis 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 notCSR or good business. It's CSR and good business...making betterbusiness."

The Roleof Business Is To Increase Shareholder Value & Pursue Profit

However, there is yet another side to thisargument—one that Alice Korngold, founder and CEO of Korngold Consulting,knows well: Directors and management teams often don’t have a linear definitionof how to be socially responsible while pursuing corporate goals.

Fine-tuning the debate, Korngold offered thefollowing perspective:

"Since I have been avociferous advocate for CSR for over 20 years, it might surprise people tolearn that I concur with Karnani. I agree that the role of business is toincrease shareholder value and hence to pursue profits; that companies shouldand will only do good when doing so will also serve their business interests;that government regulation and enforcement have a vital role in protecting thepublic interest; and that civil society (nonprofit watchdogs and advocates)have an important role in protecting the public interest as well."

So what isthe business case for CSR?

"Theway I have always made the case to businesses—as many of my CSR colleagues doas well—is to seek and present specific opportunities for businesses to have itboth ways: to increase their profits by doing good."

"BP has been the negative example. By taking costlyrisks with employee safety and the environment, the company may even have tofile for bankruptcy; Wal-Mart has proven to be a positive example bysaving money while building good will through a large scale eco-friendly model;and PepsiCo is another example of a company that recognizes thatinvesting in access to water is important for their profitability andgood for the world."

Karnani considers the concept of a business case toCSR to be a dangerous illusion. Korngold disagrees: "In the past decade,we are seeing more and more examples of companies that are increasing theirprofitability by establishing and implementing policies that protect theenvironment, human rights and worker safety, and provide healthcare andliteracy education for employees and their children."

Summing up her pointof view, she said "In certain cases, what's good for business can also begood for the world."

SimpleAltruism Doesn't Interest a Capitalistic Society

My next stop was Brian Wasson, SAP's global lead of employee communications for sustainability. Speaking strictly as asustainability practitioner and not an SAP representative, Wasson said heagreed with Karnani, acknowledging that for CSR to be successfully embedded andembraced, "it must drive profitability in some way for the hostcompany."

"Now, that could be by increasing employeemorale, helping the company keep its social 'license' to do business, or evenhelping it sell more products to customers that want green products like hybridcars. 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 orserve to increase the perceived value of the company or its products."

Thinking back to Pattberg's argument, how realisticis Karnani's argument in today's economy? Wasson was quick to set the recordstraight: "I believe that Karnani is actually for the positive outcomes ofthese activities, but that he is also a realist in thinking that simplealtruism does not enter into the equation for companies in a capitalisticsociety."

IsGovernment Regulation the Way Forward?

Karnani argues that government regulation is theultimate solution for ensuring corporate responsibility because it is bindingand relieves the reliance on "best intentions." That is because,despite "their faults, governments are a far more effective protector ofthe public good than any campaign for corporate social responsibility."

That logic didn't appeal to JohnC. Ronquillo, a research consultant with the Department of Housing and ConsumerEconomics, and a PhD Candidate with the Department of PublicAdministration and Policy, at University of Georgia's School of Public andInternational Affairs:

"I was more than a bit shocked to readProfessor Karnani's suggestion that the 'ultimate solution' to striking abalance between corporatism and social welfare is government regulation, notonly because government mistrust is at an all time high in this country, butbecause 1) the vast majority of corporations in America would be highly averseto more regulation, and 2) the government is a regular partner with businessand third sector organizations, thereby demonstrating that they're committed toworking 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.

DaveMeyer, the VP for Northwest Operations with sustainability consulting firmSustainable Economic & Environmental Development Solutions (SEEDS),concurred: "I prefer a free market approach (supplemented by a transparentshareholder process and increased corporate accountability) that recognizesvalue in balanced clean and green industry and social enterprise."

The TripleBottom Line: Did Karnani Miss the Point Completely?

Calling the op-ed "extremely shortsighted andnarrow-viewed," Meyer reiterated that Karnani may just have missed theentire point of pursuing a triple bottom line business model.

"[He] ignores the fact that most companieshave a relatively short business planning horizon, which often runs counter tocost effective, long term resource management, thus limiting impacts to theenvironment (which requires a longer term horizon). Taking a more holisticsystems view on social responsibility is a fundamental characteristic of anorganization seeking to optimize its organizational resources, be less wastefuland manage its bottom line. But even then, many forward thinking companies arenow accounting for socially responsible behaviors in the short termtoo. So business is responding to its most valued stakeholders by seekingto manage the increasingly sophisticated triple bottom line expectations of itsshareholders through the shareholder resolution/proxy process and SEC reportingrequirements—and adjusting their business plans annually—this is a very nimblebehavior."

It Is NotBusiness as Usual, Professor Karnani

And finally I turned to NamrataRana, director of Futurescape, an experience design services company. Rana is a vocal proponent of corporateresponsibility and realizes that some of Karnani's arguments might stem from ageneration gap. She explained:

"After 2008, there has been a fundamentalshift in business, employee and consumer mindsets that states that corporationsare public citizens. A company without its people is only a set of processesthat fall apart without the support of any one of its stakeholders: employees,consumers or shareholders. The company, therefore, cannot exist withoutignoring the fundamental principles of sustainability. Taking a reductionistview that only talks about profitability implies ignoring the very real trendsin customer and employee behavior that we see today."

"Companies who have understood this trend havefought back with changed products, greener supply chains, reduced emissions andflatter work structures with increased transparency and built in CSRinitiatives that support core values."

As Cohen put it, today's realities are drasticallydifferent. "What we are seeing today as the concept of CSR matures is theconvergence of these roles, the fuzzying of these boundaries and the comingtogether of the complex interplay and multiple influences in which lawinfluences business, business influences law, and both are influenced byeffective NGO activism."

Ina world where social media has unparalleled power to build or corrode acompany'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 usof any responsibility toward our constituents—as informed professionals as wellas decision makers.

In summation, perhaps Rana put it best:"Nothing takes away from the fact that the world is facing the threat ofdepleting resources and a growing population. To have a long-term view ofbusiness, sustainability and CSR is no longer optional. The increased role ofthe corporation in society is a reality and cannot be seen as a 'dangerousillusion.'"

Got something to add? Please feel free to weigh inby leaving a comment below, emailing In Good Company or connecting with me onTwitter @VaultCSR.

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