Corporate Social Responsibility

Economist Milton Friedman and The Economist news magazine are only two of the parties who have taken a dim view of corporate social responsibility (CSR). Friedman said in 1970 that the social responsibility of business was to increase its profits. The Economist called it woolly and dangerous thinking and published a two-by-two matrix to explain what that meant. Yet even companies that agree may eventually have to come to terms with it.

The Economist plotted CSR's effect on profits against its effect on social welfare. If CSR raised social welfare while reducing profits, it was nothing but 'borrowed virtue', the magazine grumbled, doing good at the expense of shareholders. If it grew profits while reducing social welfare, it was pernicious and if it reduced both, it was nothing short of delusional. If, however, CSR produced a win-win increase in social welfare and profits at the same time, well, that wasn't CSR -- it was simply good management.

The magazine argued that business should not try to do the work of governments, and vice versa, which is a fair point. But given the preoccupations of a growing slice of society, 'social welfare' is a rather narrow proxy for CSR which, by any current definition, now embraces sustainable development and environmental responsibility.

The view in an old-fashioned boardroom, echoing The Economist, may well be that CSR is little more than a begging bowl, to be fed, at best, by sponsoring the chairman's hobbies or his wife's charities. But the times are a-changing. In the wake of recurring accounting scandals and environmental disasters, the public mood is demanding more of corporate standards of behavior, and mood can have a hard edge. Whether managers believe CSR is within their jurisdiction or not, they have to make decisions based on the facts and, as Alfred P. Sloan would say, opinions in the marketplace are facts.

What Exactly is CSR?

There is no single definition. The World Business Council for Sustainable Development says it's "the continuing commitment by business to behave ethically and contribute to economic development while improving the quality of life of the workforce and their families as well as of the local community and society at large." More succinctly, Mallen Baker of the UK's Business in the Community says it's "about how companies manage the business processes to produce an overall positive impact on society".

Europe vs. US

CSR's cheerleaders are not helped by it meaning one thing in the UK and Europe, and another in the US. The European perception is more inclusive, seeing CSR as honest and considerate behavior that makes a positive attempt to leave the world a better place. In America, the idea of the 'good corporate citizen' is split in two. The closest equivalent to Europe's CSR is 'business ethics', which is more about keeping your nose clean and upholding moral standards. CSR is straight charity or philanthropy, a way of saying thank you for the profits without expecting anything in return -- if you did, it wouldn't be philanthropic.

Taking the broader view, CSR covers a multitude of sins, literally. The Global Reporting Initiative, which provides a framework for companies to report on their CSR compliance, has 32 different performance indicators, ranging from customer privacy and anti-competitive behavior to child labor and indigenous rights. The prospect of adding to their existing compliance reporting burden -- groan -- still blunts some companies' enthusiasm for CSR. Institutional investors are increasingly alert to the issue, however, and more are asking companies to prove their CSR credentials. Ethical investment is showing that it can outperform more general benchmarks, and it is the effect on the share price that may eventually win over the Friedmanite camp.

License to operate CSR proponents argue that this is not about giving away money that rightfully belongs to the shareholders. They say it is about sustaining a business's licence to operate, by managing its relationships with influential constituencies -- customers, staff, the community at large. CSR means managing your risk and your reputation.

There are statistics that purport to show the beneficial impact of CSR on a company's bottom line, but they are not yet overwhelmingly convincing. It's easier to prove the cost of neglect, with mounting examples of the cost of reputational damage from negative CSR. Most quoted is Brent Spar, a North Sea oil platform that had reached the end of its life. Owner Shell decided that sinking it at sea was the most environmentally responsible option and perhaps it was. But the public, orchestrated by Greenpeace activists, decided otherwise. The outcry and ensuing boycott of Shell products forced the company to back down. Shell, past masters of thinking about the future, had science on its side, but Greenpeace armed itself with values. Values won.

Footwear mogul Nike is still dealing with the backlash of a UK-instigated campaign that accused it of employing child labor in developing countries. It responded proactively with a rigorous CSR initiative, including the appointment of a director of sustainable development. In many markets, its reputation has been restored. In a recent survey of most 'ethical' brands by country, however, Nike did not appear anywhere in the UK ranking.

Climate change is the issue du jour in many Western markets, and could drive home the power of public sentiment. The largest UK advertising agencies predict a wave of green marketing campaigns as businesses rush to brandish their environmental credentials. They believe consumers will punish companies not seen to be green.

Tomorrow's World, a pro-CSR business lobby, fears that CSR could go one of two ways. In one future, it would be an expression of values, with companies free to say they cared only for shareholders, but with the market seeing clearly where organizations stood. That would be 'conviction CSR'. In the other, social pressures would force compliance and companies would win applause for saying the right things in their reports -- 'compliance CSR'. The consumer would surely be able to sniff out which was which.