CSR: It’s Not Humbug

16 Dec, 2009

By Doug Pinkham
Public Affairs Council President

December 16, 2009

Ebenezer Scrooge is alive and well and working for the Heritage Foundation.

Heritage Research Fellow James M. Roberts, in a white paper published earlier this month, castigates large corporations for launching corporate social responsibility (CSR) programs. “The bottom-line reality,” he says, “is that CSR efforts are just the most visible signs of a growing and disturbing trend toward ‘public-private partnerships,’ the goal of which is the transformation of free-market capitalism into a sort of corporate socialism.”

Roberts is afraid that companies will become extensions of domestic and foreign governments, with the funds they spend on corporate citizenship projects turning into “the functional equivalent of taxes on their customers.”  All of this talk about sustainability? “Humbug,” says Roberts. (Well, he doesn’t exactly say “humbug,” but it’s easy to imagine.)

So whom does Roberts call out for being particularly socialistic? Wal-Mart. Roberts notes that Wal-Mart has imposed a “Sustainability Index” on its 100,000 suppliers that will help it support renewable energy sources, reduce waste and create markets for sustainable products.

He also has less-than-kind things to say about “fair-trade” products sold by Starbucks, Wal-Mart (again) and other firms that are trying to meet demands for socially and environmentally responsible coffee, bananas and other foods. Rather than marketing such products and engaging in similar initiatives, Roberts suggests that firms focus on providing the highest quality goods and services – at the best price – while earning a solid return for shareholders.

His arguments sound simple enough, but that’s because they reflect simplistic thinking. Roberts’ assumption is that investments in social responsibility programs are little more than protection money to keep anti-corporate activists at bay. He also claims that CSR “has not always been the boon to profitability for corporations that its promoters promise.”

That may be true in some cases, but it doesn’t explain why thousands of companies around the world embrace corporate citizenship.  Putting altruism aside, companies have acted in their own best interests by investing in such programs. For example:

  • Successful CSR initiatives can improve a corporation’s reputation. According to the 2009 Global Pulse Report survey, the top drivers for reputation are ratings for quality products/services, ethical and transparent governance and corporate citizenship. These factors score higher around the world than leadership, innovation or even financial performance. 
  • Socially responsible companies can build positive relationships with government. According to the 2009 Edelman Trust Barometer survey, two-thirds of 25-to-64-year-olds around the world expect business to partner with government and third parties to address major global challenges. People in the 20 countries surveyed are also 43% more supportive of “good and responsible” companies pursuing changes in local laws or government planning.
  • A commitment to CSR can help firms attract and retain talented employees.  A wealth of research has shown that addressing social issues can motivate employees, keep them loyal and increase a company’s applicant pool.
  • Sales can rise when brands are linked to popular causes that customers support. A 2008 study by Cone Communications indicates that – price and quality being equal – 79% of Americans are likely to switch brands if the new brand is associated with a good cause.
  • As the socially responsible investment (SRI) field grows, companies are better able to attract new shareholders. SRI now accounts for an estimated $2.71 trillion out of $25.1 trillion in the U.S. investment marketplace. While some SRI firms use questionable screens to decide who is socially responsible, there’s no denying that many people care deeply about the behavior of the companies in which they invest their money.

So why the objection to corporate social responsibility? Clearly, the “Ghost of Christmas Past” in this story is economist Milton Friedman, who created a stir with his 1970 essay in The New York Times Magazine, “The Social Responsibility of Business is to Increase its Profits.” Like Roberts, Friedman refers to support for such programs as “imposing taxes” on customers and stockholders.  CSR advocates, he says, are preachers of “pure and unadulterated socialism.” Friedman also makes the erroneous assumption that, by definition, companies and greater society don’t share common interests.

In contrast, Michael Porter and Mark Kramer, in a now-equally-famous 2006 article for the Harvard Business Review, propose that “CSR can be much more than a cost, a constraint or a charitable deed – it can be a source of opportunity, innovation and competitive advantage.” In fact, while Porter and Kramer acknowledge CSR’s reputational and brand-building benefits, they say those justifications are of secondary importance.

Their primary rationale for corporate social responsibility is remarkably simple and worth remembering:

Successful corporations need a healthy society. Education, health care, and equal opportunity are essential to a productive workforce. Safe products and working conditions not only attract customers but lower the internal cost of accidents. Efficient utilization of land, water, energy and other natural resources makes business more productive. Good government, the rule of law, and property rights are essential for efficiency and innovation. Strong regulatory standards protect both consumers and competitive companies from exploitation. Ultimately, a healthy society creates expanding demand for business, as more human needs are met and aspirations grow.

At the same time, note Porter and Kramer, “a healthy society needs successful companies.” Government and non-profit organizations can’t compare with the business sector when it comes to creating jobs, wealth and improved living conditions. If companies aren’t allowed to operate productively, wealth will evaporate.

This doesn’t mean every company needs to solve all of society’s ills. Kramer and Porter point out that firms need to be strategic about their CSR programs to ensure they match the company’s expertise and can produce a measureable result. Otherwise, nobody wins – and critics will have more evidence to support their arguments against community involvement.

It’s easy to be cynical about business these days. But more and more companies are finding creative ways to earn profits while serving society. The most successful corporations, in fact, don’t even talk about managing CSR programs anymore. That’s because they’ve already integrated the function into their standard business practices.

Comments? Email me at http://pac.org/contact/blog.