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Corporate Social Responsibility and Management Practice
There is little doubt that we have witnessed a surging interest in corporate social responsibility (CSR) over the past decade. The number of annual sustainability and corporate citizenship reports has skyrocketed, and chief executive officers (CEOs) increasingly rank CSR as a "central" or "important" concern for senior managers (Simms, 2002; Friedman, 2003). Yet the increasing interest in corporate social responsibility is not just limited to talk. Companies are also making significant changes in their business practices. Examples range from global labor standards (Nike, Adidas, Ikea), sustainable supply chains (the decision by Home Depot and Lowe's not to sell wood from old-growth forest), and animal welfare (McDonald's and Yum Brands poultry policies) to general public-policy issues such as global warming and human rights (British Petroleum [BP], Shell). Even Wal-Mart, the current bête noire of political activists, is now aggressively moving in this direction. It has began to work with nongovernmental organizations (NGOs) such as Conservation International and the Natural Resources Defense Council on various sustainability initiatives ranging from sourcing from sustainable fisheries to attempts to reduce waste production and energy use (Baron, 2006b). Particularly striking are the recent attempts of major global corporations to rebrand themselves as ecologically responsible companies. Examples include BP's Beyond Petroleum initiative and its carbon footprint campaign as well as General Electric's Ecoimagination initiative.
Of course, corporate social responsibility is not a new phenomenon. Procter and Gamble pioneered disability and retirement benefits (1915) and an eight-hour workday (1918) long before such policies were required by law. Henry Ford paid his workers twice the market rate, and companies such as Heinz, IBM, and Hershey's subsidized education and other community benefits (Crook, 2005). More generally, corporate philanthropy has a long tradition, especially in U.S. corporate history, from the nineteenth-century robber barons to the "5 Percent Club" in the 1960s and 1970s, so named because its members (for example, Levi Strauss, Cummins Engines, and Control Data) donated at least 5 percent of their earnings (Vogel, 2005) to charitable causes.
What is new is an emerging consensus that corporate social responsibility is no longer a luxury for a few prosperous companies but a necessary component of sound business practice. Companies are increasingly held accountable by standards other than maximization of shareholder value, and they need to develop strategies and policies to address these challenges. In a recent article in the McKinsey Quarterly followed by an op-ed piece in the Financial Times, Ian Davis, worldwide managing director of McKinsey & Co. (Bonini, Mendonca, and Oppenheim, 2006) lists the need for companies to gain sustained social acceptance as one of the five key global, emerging trends:
The role and behavior of big business will come under increasingly sharp scrutiny. As businesses expand their global reach, and as the economic demands on the environment intensify, the level of societal suspicion about big business is likely to increase. The tenets of current global business ideology-for example, shareholder value, free trade, intellectual-property rights, and profit repatriation-are not understood, let alone accepted, in many parts of the world.... Business, particularly big business, will never be loved. It can, however, be more appreciated. Business leaders need to argue and demonstrate more forcefully the intellectual, social, and economic case for business in society and the massive contributions business makes to social welfare.
It is important to understand that this claim is not about a question of morality. The issue is not what companies should do ("What is the social responsibility of business?") but what they need to do to be successful in today's economy, whether their goals are purely motivated by profits or they also include references to ethical motives not captured by shareholder value. In other words, the debate is less about business ethics and more about management practice.
It is conceptually useful to first consider these issues from the point of view of a firm whose sole goal is to maximize profits because it helps to clarify whether and to what extent CSR is indeed a successful strategy (for example, Vogel, 2005). (We will discuss the case of morally motivated managers and owners later in this chapter.) The issues are whether and when CSR improves performance of a business unit, which companies should adopt it, and how CSR strategies should be implemented. From this perspective, the issue of whether a company should engage in CSR activities is not fundamentally different from whether it should pursue a high-quality or a low-cost strategy. It also suggests that we should expect significant variation in the patterns of CSR activities and when CSR activities lead to better business performance.
CSR as a Strategy
Perhaps the most basic question about CSR as a strategy is whether the strategy works. In the management literature, this question has been expressed as whether it "pays to be green" or whether companies are "doing well by doing good" (for example, Dowell, Hart, and Yeung, 2000; Fisman, Heal, and Nair, 2006; Heal, 2005; Porter and van der Linde, 1995). The existing literature on this topic is empirically motivated. It tries to establish whether firms that engage in CSR activities exhibit better financial performance than companies that do not. There is much debate among management scholars about this issue, but the evidence for a positive association between CSR and financial performance is at best mixed. Some studies find a small positive effect, others find no effect, and yet others find a negative effect (for example, Dowell, Hart, and Yeung, 2000; Margolis and Walsh, 2003; Vogel, 2005). In addition, there are serious problems measuring CSR (what exactly counts as CSR activities?) and questions about the direction of causation (are firms more profitable because they engage in CSR, or can they afford to engage in CSR because they are more profitable?).
Irrespective of the validity of the existing findings, from a strategy perspective this line of research is not very fruitful, since (as would be the case with any other business strategy) we would expect the effect of CSR activities to heavily depend on the market or the product. Recall that the existing literature has tried to establish whether on average socially responsible companies do better. But markets are frequently characterized by product differentiation. Some firms in an industry may rely on a high-quality/high-price strategy, others on a low-quality/low-price strategy. In many markets, ranging from consumer goods to financial services or retail, such differentiated markets are highly stable. However, were we to ask whether on average high quality pays off, we may find no relationship whatsoever. Both Tiffany and Wal-Mart may be highly profitable in their respective retailing segment, one adopting a high-quality/high-cost strategy, the other a low-quality/low-cost strategy. Similarly, in a market that is differentiated by CSR activities, it is entirely possible that both the socially responsible and the "regular" firms can be profitable. In other words, there may an "ecological niche" for socially responsible firms and another one for companies that do not care at all for CSR (Vogel, 2005). Empirical studies that correlate social and financial performance are only useful if they can address the question of why and under what circumstances firms can benefit from adopting socially responsible business practices.
Proponents of the business case for CSR have pointed to various benefits of CSR activities, of which the following is a partial list (see, for example, Heal, 2005):
1. Reducing costs and waste
2. Accelerating product innovation
3. Creating and improving brand equity
4. Lowering the cost of capital
5. Improving employee productivity and attracting or retaining talented employees
6. Reducing various forms of risk (legal, regulatory, political, reputational)
7. Improving relationships with political and regulatory entities
It is important to understand that the listed motivations operating suggest conceptually different justifications for CSR. The proposed rationales 1 and 2, for example, are purely operational, not strategic. They use CSR (especially environmental CSR) as a heuristic to improve process performance. A well-known example is BP's adoption of a firmwide cap on greenhouse emissions combined with corporate emissions trading system (Reinhardt, 2000). That decision led to great success. Not only were emissions reduced significantly, but, according to BP, the trading system increased net income by more than US$600 million. A similar example is Dow Chemical's decision to adopt aggressive pollution controls, which led to the capture of tens of millions of dollars' worth of valuable solvents (Heal 2000, 2005). Both cases are straightforward examples of increased operational efficiency. Both Dow and BP had hidden sources of cost efficiencies, unbeknownst to management. For example, BP was flaring natural gas from some of its wells. But these costs were difficult to identify. They did not show up as cash costs on a balance sheet but constituted hidden opportunity costs. Simply polluting the environment, somewhat surprisingly, turned out not to be the least expensive way for the companies to dispose of their waste. CSR played the role of a heuristic that made it more likely for management to identify such cost savings. The same argument (or its mirror image) holds in the context of innovation, item 2 in the previous list. Here the argument is that a focus on sustainability and environmental responsibility will lead to faster rates of innovation in high-impact technologies. GE's Ecoimagination initiative is one of the better-known examples of this approach. CSR again serves as a heuristic, now with a focus on the innovation process.
Both rationales should be utterly uncontroversial. They should be adopted by any company interested in improving its operations. To put it differently, even if ExxonMobil fundamentally disagrees with BP about the fact or the causes of climate change, imitating BP's trading scheme would be advisable, provided the system indeed leads to the stated cost savings. What may vary across companies are the extent to which such heuristics are fruitful and which CSR domain will be most important. For example, a focus on environmental CSR may be a very useful heuristic in the energy sector or the chemical industry but much less important for software companies. On the other hand, a focus on improving access to health care may spur innovation in the medical-device industry but may be of no importance to the financial service sector. The bottom line is that whether and to what extent CSR can serve as an operational heuristic is largely an empirical question and will vary widely from market to market and firm to firm. Unfortunately, we lack empirical studies that would allow us to assess or measure the operational impact of CSR for a large set of companies.
The remaining five proposed benefits (items 3 through 7) have an entirely different rationale. They are based on the belief that adopting CSR will improve a company's competitive advantage in the marketplace. While the focus of competition may vary-the competition may be over customers, talent, or capital-these five benefits all suggest that companies are well advised to consider CSR as a significant component of their business strategy. In contrast to the operational benefits discussed above, this strategic approach is based on the fundamental premise that some significant segment of the actors in the company's business environment care about values other than their own monetary gain. In other words, CSR strategies presuppose the existence of moral agents whose concerns are not addressed by shareholder value maximization and who are willing and able to act on these motivations. These agents may be part of the value chain (customers, employees, investors) or external stakeholders (NGOs, journalists, politicians, and so on). In the first case, CSR is intended to satisfy a (latent?) "demand for virtue" (Vogel, 2005). It provides value to the "moral self" of customers, employees, and investors and therefore would make a company more competitive in the market for customers, talent, and capital. CSR therefore is frequently thought of as a benefit-focused, competitive strategy. That is, it provides a company with a competitive advantage that is based on providing higher value to customers, in contrast to providing lower costs to the company or lower prices to customers. Note that this approach is conceptually distinct from the operational rationale discussed previously. The demand-for-virtue rationale only works if there are agents who care about something other than personal income or profit, whereas the operational rationale does not depend on such a premise. It works even if the world were solely populated by actors straight out of an economics textbook.
Viewed from this perspective, CSR works in the same way as a strategy that focuses on providing customers with high quality. This strategy makes sense if there is a customer segment willing to pay sufficiently more for a high-quality product to more than compensate the company for the higher cost of providing it. There are many successful examples for such strategies, frequently in small companies created by visionary entrepreneurs. Well-known examples are Ben & Jerry's, Patagonia, Seventh Generation, the Body Shop, Whole Foods, and the British retailer Green & Black's. What is striking about this list of companies is that such firms largely provide high-end products to niche markets of well-to-do customers (Vogel, 2005). It is much less clear whether these strategies can be extended to large multinational companies, especially if these companies offer a wide range of products. This is one reason why experiments such as BP's Beyond Petroleum campaign or Toyota's success with the Prius are particularly interesting. To assess the prospects for such strategies, in general we need to understand their logic in more detail.
Satisfying the Demand for Virtue
Let us first consider competition for customers. This is best considered in the context of socially responsible brands. Socially responsible brands are based on the idea that customers prefer to buy their products from companies that abide by certain moral rules or principles. This may result in a higher willingness to pay or in a larger market share. In other words, socially responsible brands allow customers to express a demand for virtue. The existence of such a demand, however, is not enough for a sustainable business model. Companies must also be able to capture this value by building sustainable competitive advantages.
Excerpted from Global Corporate Citizenship
Copyright © 2007 by Global Initiatives in Management, Kellogg School of Management. Excerpted by permission.
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