In 1970, the economist and Nobel laureate Milton Friedman published an article in The New York Times Magazine titled, “The Social Responsibility of Business Is to Increase Its Profits.” In the article, he referred to corporate social responsibility (CSR) programs as “hypocritical window-dressing,” and said that businesspeople inclined toward such programs “reveal a suicidal impulse.” Even four decades ago, at a time of growing public concern for the environment, his views represented the general skepticism and contempt with which many in Corporate America viewed CSR.
Times have changed. There remain company chieftains who take a Friedman-esque view, of course, but many more have made CSR a priority. Ten years ago, for instance, only about a dozen Fortune 500 companies issued a CSR or sustainability report. Now the majority does. More than 8,000 businesses around the world have signed the UN Global Compact pledging to show good global citizenship in the areas of human rights, labor standards and environmental protection. The next generation of business leaders is even more likely to prioritize CSR. According to data released this month by Net Impact, the nonprofit that aims to help businesses promote sustainability, 65% of MBAs surveyed say they want to make a social or environmental difference through their jobs.
Today, amid a lingering recession that has dented corporate profits and intensified pressure from shareholders, companies are devising new CSR models. Rather than staffing a modest CSR department — and slapping it on the org chart as a small offshoot of the public relations (PR) or philanthropy division — many companies are instead trying to embed CSR into their operations. Some blue-chip companies, such as Visa, are creating new markets in the developing world by closely aligning social causes with their overarching corporate strategies. Others, such as Walmart, have made ambitious commitments to sustainability as a way to save money and tighten their supply chain.
“CSR is an old-fashioned idea that needs to be upgraded,” says Eric Orts, professor of legal studies and business ethics at Wharton and director of the school’s Initiative for Global Environmental Leadership. “For companies to take CSR seriously, it has to be integrated into the DNA of the enterprise. Companies need to say: ‘We want to make money, sure, but we also care about our effect on society and the environment. And that comes through in the kinds of jobs we provide, the kinds of products we make and the ways in which we use resources.'”
Ignore CSR at Your Peril
One of the biggest criticisms leveled against CSR is that companies only care about it for marketing purposes. CSR is merely a buzzword embraced by corporations because they “should.” “For most companies, [CSR] is PR,” according to Ian C. MacMillan, professor of innovation and entrepreneurship at Wharton. “It looks good. It sounds good. It’s the ‘right’ thing to do — and it gets the media out of their face.”
These days, corporate motivation seems almost beside the point because of the significant business risks to ignoring CSR. Consumers and other companies are likely to shun firms that develop unethical reputations. And arguably, companies that don’t pay attention to their ethical responsibilities are more likely to stumble into legal troubles, such as mass corruption or accounting fraud scandals.
Quite simply, companies care about CSR because their customers do. Consumers, by and large, are a self-motivated and self-interested lot. But numerous studies indicate that a company’s CSR policies increasingly factor into their decisions. For example, a survey by Landor Associates, the branding company, found that 77% of consumers say it is important for companies to be socially responsible. “There’s a heightened awareness of the need to be, and to be seen as, a good corporate citizen,” says Robert Grosshandler, CEO of iGive.com, which helps consumers direct a percentage of their online purchases to support charities.
And in the Electronic Age, where information about a given company’s environmental record and labor practices is readily available — and readily tweeted and retweeted — companies must pay careful attention to what their customers do and say. “In the Information Age, customers have more access to information,” says Grosshandler. “They’re more educated. They’re no longer hidden from how their food is produced or how their iPods are made. And, because of things like social media, like-minded people more easily find each other, have their say and effect change. There’s a level of transparency that wasn’t there before.”
CSR is also a way to attract and retain talent. In a global workforce study by Towers Perrin, the professional services firm, CSR is the third most important driver of employee engagement overall. For companies in the U.S., an organization’s stature in the community is the second most important driver of employee engagement, and a company’s reputation for social responsibility is also among the top 10. According to a Deloitte survey conducted last year, 70% of young Millennials, those ages 18 to 26, say a company’s commitment to the community has an influence on their decision to work there.
“The Millennial generation has seen a lot of natural disasters, political disasters and corporate disasters. They think the world is screwed up,” says Kellie McElhaney, who is the faculty director of Haas’ Center for Responsible Business. “They feel personally responsible, and they feel empowered to create change.”
Bottom of the Pyramid
The global financial crisis has not been kind to CSR departments. While data on precise numbers of CSR positions is hard to come by, sustainability practitioners say that many companies have scaled back in recent years (although CSR has not been cut disproportionately to other cost centers).
Partly as a result of the crisis, some companies have refined their approach to CSR by more closely relating social causes to their core businesses. This approach, according to Jerry (Yoram) Wind, a Wharton marketing professor, interprets CSR as “socially responsible capitalism…. At the company level, the business objectives need to be to both maximize shareholder value in the long term and to address society’s biggest problems,” says Wind, also the director of the school’s SEI Center for Advanced Studies in Management. ” This requires having any CSR initiative be an integral part of the business strategy and not a separate department.”
Take the Coca-Cola Company, which recently started a program to empower young women entrepreneurs. The 5×20 program aims to bring five million women in the developing world into its business by 2020 as local bottlers and distributors of Coca-Cola products. Research suggests that such an investment in women can have a multiplier effect that leads not only to increased revenues and more workers for businesses, but also to better-educated, healthier families and eventually more prosperous communities.
Visa is another example. The company has built partnerships with local governments and non-profits focused on financial inclusion. These alliances are already transforming the economic architecture in parts of the developing world by giving financially underserved people a way to pay, get paid and save money, sometimes through electronic and mobile payment systems. Research by the Gates Foundation and others has shown that the usage of these kinds of services enables poor people to better withstand blows to their personal finances, build assets and connect into the wider economy.
Does Coca-Cola benefit from more bottlers? Yes. Does Visa benefit from more people using its services? Absolutely. But these CSR efforts seek to capitalize on “the fortune at the bottom of the pyramid,” an idea that C.K. Prahalad popularized in his 2006 book of the same name. Prahalad referred to the largest, but poorest, socio-economic group in emerging economies as seeds for future growth markets.
“There are large numbers of people in the world who have no jobs and who have no hope. They need jobs and more education, better healthcare and food. They need to be self-sufficient, not dependent because some do-gooder gave them a handout,” says Wharton’s MacMillan. “Companies need to start creating markets in these places.”
These new markets represent a long-term investment, he adds. “It’s a pattern of enlightened self-interest: The company ends up better off with customers they have seeded who are healthier, better nourished and have more education. And [the company] has residual loyalty because [it] was there first.”
Saving Money, Saving the Planet
Other companies are taking a slightly different approach: viewing CSR as a cost-saver. “The downturn has refocused CSR practitioners,” says Marcus Chung, vice president of the CSR and sustainability practice at Fleishman-Hillard and former head of CSR at Talbots, the women’s apparel chain. “There are more CSR practitioners today whose main job is to find ways to support business strategy and save the company money.”
Many CSR professionals serve as internal consultants providing counsel to colleagues and acting as a resource for decisions concerning real estate, supply chain or operations, he adds. “They are helping other departments understand the financial rewards of more sustainable operations. This approach to CSR has become more key in the last few years.”
Climate Corps, the Environmental Defense Fund’s summer internship for business school students, follows this model. The fellowship places MBA students in Fortune 500 companies, cities and universities to build the business case for energy efficiency. Since 2008, the program has helped organizations cut 1.6 billion kilowatt hours of electricity use and avoid more than one million metric tons of CO2 emissions annually, and has saved $1 billion in net operational costs.
Walmart is another example. Its social responsibility policy is encompassed by three goals: to be fully supplied by renewable energy, to create zero waste and to sell products that sustain people and the environment. These are lofty targets — and if achieved, ones that ultimately save the company a great deal of money. “The company is not perfect, but it is dealing with sustainability squarely as a business imperative,” says Haas’ McElhaney, adding that “These are hard-core measurable and reportable goals. The main criticism is that the company is shoving this down the supply chain’s throat, but if you’re Wal-Mart, that is your leverage.”
Nien-hê Hsieh, co-director of the Wharton Ethics Program and a visiting professor at Harvard Business School this year, describes Walmart as a company that complicates the CSR picture. “On one hand, it has been challenged on its labor practices and the Mexican bribery scandal,” he says. “But on the other hand, it has had an aggressive sustainability policy. If Walmart does alter its global footprint, it would make a difference in the world.”
At the entrepreneurial level, some smaller, niche companies are experimenting with CSR as a mission of the triple bottom line: people, planet and profits. Take, for instance, the advent and gradual spread of so-called B Corporations, which are recognized in seven states, including California and New York. B Corps, as they are known — the “B” stands for beneficial — are a new kind of business entity that by law are required to generate social and environmental advantages.
The designation is only a few years old, but already there are more than 500 certified B Corps across 60 different industries. Companies include Seventh Generation, the maker of natural household and personal care products; Pura Vida, which sells organic, fair trade coffee; Etsy, the online market for handmade goods; and King Arthur Flour. Wharton’s Orts calls B Corps “interesting experiments for a more fundamental merging of the goals of traditional profit-making and social responsibility.”
The B Corps model of integrating CSR concerns into normal business practices may hold a key for how large publicly traded firms ought to reset their corporate vision and objectives, he says, adding that a “major rethinking of the relationship between Wall Street investors and business management” is in order. The pressure on companies to maximize shareholder returns makes it very difficult for them to undertake long-term investments for the social good if these decisions will drive down their short-term stock prices.
“If there is one thing that the financial crisis and stock market crash of 2008 should have taught us, it is that short-run share prices are an unreliable indicator of long-run business sustainability,” says Orts. “The idea that companies don’t have any independent ethical responsibility for the consequences of their actions on the environment and society just doesn’t make sense. It is an outmoded view to say that one must rely only on the government and regulation to police business responsibilities. What we need is re-conception of what the purpose of business is.”
Republished with permission from Knowledge@Wharton, the online research and business analysis journal of the Wharton School of the University of Pennsylvania.