Feb 05, 2008

Corporations: Responsible as they Have to Be

by Laura Starita

Few would have to search long to find evidence of bad behavior in the name of commerce. From the pharmaceutical industry’s early refusal to reduce the price of anti-retroviral drugs, to Big Agriculture’s inhumane, energy-intensive methods, short-sighted things are done frequently in the pursuit of profits. But that doesn’t make business itself bad. On the contrary, business provides employment and production, creates economic health and encourages the type of innovation that leads to overall improvement in lifestyles. Humankind couldn’t survive without it. For these reasons and more, business is irreplaceable. Its practices need not be, however.

Enter corporate social responsibility. CSR has evolved in recent years as the catch-all umbrella under which businesses have housed all the ways in which they do good, whether reducing emissions in operations or improving worker conditions or donating to humanitarian causes. As its scope has grown so has its relevance to the boardroom, notes the Economist in a recent series on the subject. This executive priority has come about as a consequence of the corporate scandals of the past few years, as well as the larger, longer-term dynamic of increased exposure. The press, as well as the “citizen press” enabled by the Internet, can be thanked in large part for this development, as it is very difficult to hide erroneous dealings when anyone can download the video off YouTube. In the end this exposure is a good thing, as few could find fault with anything that encourages companies to treat their employees – and the earth – in a more humane and sustainable way.

Still, the dramatic increase in self-labeled CSR initiatives raises some legitimate questions about their short-term value. CSR proponents argue that good deeds done for the planet and for employees reflect positively in returns. There are certainly some point examples where that has been the case, such as car makers building more efficient machines and getting a jump on their slow-moving competition. The opposite is probably more true, as evidenced by the sales plunges seen whenever Gap is exposed for employing children in its factories abroad. A study conducted by the Economist showed a small but significant relationship between CSR and profitability, though the causality remains in question: are companies more profitable because of CSR or is CSR encouraged by greater profits? Either way, the question will eventually become moot, because if the mid-term shows that companies with CSR programs indeed have greater profits, everyone will launch CSR initiatives and thus precipitate the demise of CSR as a competitive differentiator. In short, companies should not engage in CSR in a quest for profits.

So why should they? Ultimately, companies will likely be motivated to engage in socially responsible ways because they have to, either because regulations mandate it or the risk of not doing it is simply to great. Already there have been some movement in this direction, such as efforts to discourage corruption in vulnerable industries such as diamonds or oil. In these and other industries businesses have joined together to create voluntary requirements where laws are lax or legal domain questionable. These things have their obvious limits, since voluntary means just that, and can be manipulated for public relations purposes while discouraging more compulsory requirements. And the compulsory, ultimately, is necessary. As much as small-government proponents want to keep politics out of business, legal requirements have to date encouraged good behavior more effectively then voluntary mandates. An article in the Stanford Social Innovation Review points out that corporations in industries with clear legal mandates for behavior show the best CSR engagement in regulated areas: financial institutions do the most community investment (required by the Community Reinvestment Act); industries regulated by the EPA, such as petroleum refining and utilities, have the best environmental record, etc. In short, CSR based on voluntary acts cannot serve forever as a substitute for laws that help protect a country’s resources and its citizens.

But for now, the absence of clear mandates creates the risk that a few initiatives launched in the interest of social responsibility will be revealed to have done more harm than good, as is possible with carbon neutralizing campaigns, for example. The result could be a backlash to the status quo of corporate indifference, a circumstance not preferable to the current state of over-exuberance. A middle ground is possible, and perhaps attainable if we remember that so-called CSR is simply the natural evolution of what started with steel magnates providing housing for their workers in far-flung locations, or large businesses subsidizing employee health care: good deeds motivated by self-interest. The dynamics are no different in Unilever’s initiative to promote frequent hand washing in India, or GE’s $20 million in-kind equipment donations to medical facilities in Africa. These are generous acts and should be viewed as such, but for all their generosity they are still serving the business. In each case the firms got strong public relations boosts for giving away items that arguably didn’t cost them much.

Which brings us to the question of cost: who is going to pay for all this altruism? Customers will, eventually, since CSR in its inevitability will have to become part of a company’s calculation of what it costs to do business. As such, the specific CSR efforts launched by any given entity had better make sense and have a relevant link into the enterprise’s core competence. In the case of Unilever, the hygiene classes could be viewed through the lens of social marketing: Unilever is creating a market for itself by introducing a new audience to vigorous hand washing for the purpose of disease prevention, a method that requires soap. It just so happens, Unilever makes soap, a lot of it, and it hopes when people who have taken one of its classes goes to the market it will be a Lifebuoy bar they buy. By expanding its markets it may also grow profits, possibly creating local jobs when demand gets high enough to justify local manufacturing, sales, and distribution facilities. It is, in short, doing what society relies on businesses to do: providing employment and making profits. All the better that it do it with a neutral impact on the environment and on the people it employs.