The concept of Corporate Social Responsibility has attracted ever growing camps of both advocates and detractors in recent years. On the "pro" side, a loose confederation has formed of NGOs, certain "socially responsible" investors, consultants and CSR practitioners inside companies, all of whom who focus on the environmental and social impacts of business on both society and our planet. Think of them as CSR, Inc.
There is also a growing club of CSR skeptics, who believe a focus on social and environmental performance distracts from, even undermines, the corporation's traditional -- and fiduciary -- responsibility to shareholders. Aneel Karnani's recent examination of corporate social responsibility in the Wall Street Journal is the most recent missive from the skeptics; and it has fomented a late-August stir within CSR, Inc., with some of the more polite reactions including: "Conservative." "Old-fashioned." "Doesn't get it."
However, Karnani's greatest offense, and that of other CSR-skeptics, is actually perpetrated against a figure with whom many of the CSR cognoscenti probably hold in disdain, and that Mr. Karnani would likely claim ideological allegiance and personal reverence -- Milton Friedman.
Mr. Karnani's advances a familiar disbeliever hypothesis which is based on the flawed choice of whether a company should be either "good" (for society) or "great" (for shareholders). By starting with the wrong question, we are led to half-answers, distractions and immaterial metrics.
Instead, there are three questions to consider which are far from the musings of idealistic do-gooders and wild-eyed tree-huggers and should be asked by and of any CEO. Each question is directly related to the "business of business" as well as the most traditional notions of shareholder value, competitiveness and long-term performance.
Is my company acting ethically?
In the sub-prime lending debacle, consumers were duped and led blindly into mortgages they didn't understand and couldn't afford; and the capital markets were lied to, or chose to ignore, the true risk in various mortgage-backed securities.
Put aside any moral judgment about the stories of terrible personal hardship and devious practices perpetrated by individuals and incentivized by organizations. Most every company has an Ethics & Compliance program that is intended to ensure employees follow the letter and spirit of the law. But too many compliance programs receive an implicit, even explicit, eye-rolling from senior management. The result is a meaningless corporate function that becomes a rote, box-ticking exercise not at all considered a business imperative, let alone a competitiveness driver.
Looking at the sub-prime mess through a singular lens of the primacy of shareholder return, an aggressive zero-tolerance approach to ethics and compliance would have greatly mitigated the entire chain of events that unfolded which destroyed hundreds of billions of dollars in shareholder value.
Is my company developing and providing sustainable products and services?
Moore's Law -- proffered by Intel co-founder Gordon Moore -- states that computer processing speed and memory capacity will double every two years; and this has been borne out for the last 40 years. Many factors are responsible for this, but one in particular has been true competition. Intel didn't continually improve the performance of its chips for mere bragging rights. They knew that if they didn't, AMD would quickly pass them by in the marketplace. Intel needed to innovate or they would die.
Now look at the recent history of "innovation" in terms of automobile fuel economy. In the 20 years since 1984, year over year, the average fuel economy of all the cars manufactured in U.S. remained exactly the same. Why is that? Did all the smart engineers go to work at Intel instead of Detroit? Maybe. But in addition, the U.S. auto industry in particular maintained a multi-million dollar permanent political and lobbying campaign to ensure that government-mandated fuel economy standards remained exactly the same. The imperative was not to respond to market dynamics with innovative engineering, but to engineer the market dynamics to maintain the status quo.
Put aside moral judgment about the environmental impact of the internal combustion engine. 20-plus years on from 1984, we find ourselves with GM still a ward of the government, wildly fluctuating fuel prices impacting the true cost of car ownership, a general demand among consumers for greener products and the current global center for electric car battery innovation residing in China, with BYD Motors (a key investment of that noted tree-hugger, Warren Buffet).
So was it too costly for Detroit to develop more environmentally sustainable products, or too costly not to do so?
Is my company trustworthy?
A free market is based on access to capital, whether it's equity or debt. Without access to capital, markets don't work, companies can't operate and we all quickly feel the impact in both the macro and micro economies. In 2008, the global financial crisis caused business and government to fear that the economy would take a devastating, irreparable hit. The government quickly pumped hundreds of billions of dollars into banks with the hurried and confident assurance that this would provide the needed liquidity to keep our economy going. But something interesting happened -- nothing. The banks didn't start lending. Following the distribution of hundreds of billions of dollars, our economy actually seized up more quickly and deeply.
Banks said they were sound. CEOs assured law makers -- and citizens -- that they would be trusted stewards of these public funds. But in those late days of 2008 and well into 2009, the banks didn't start lending in large part because, given the inter-connectedness of our financial system, the banks didn't trust each other enough to put their own capital to work.
Put aside moral arguments about whether the banks should have received the funds or what constitutes egregious compensation. If the financial industry truly needs a further additional government bailout at some point in the future, it will likely be politically impossible regardless of whatever affirmative statements are made, either through CEO rhetoric, or more dry regulatory filings, because there is a great likelihood that they just won't be trusted.
Where are we left?
While the basic assumptions and arguments of Mr. Karnani's and his ideological brethren are flawed, they do shine light on an important issue. CSR as a formal concept has probably not incubated and evolved in a manner that is, well, sustainable.
Over the last 10 years, businesses' focus on CSR issues was often a reaction to high-profile NGO campaigns, consumer boycotts and pressure from socially responsible investors. Much of the dialogue about CSR caused companies to re-examine, or discover, social and environmental issues related to their core business activities. Awareness often led to action. But this action frequently took place within a politicized context and consequently, companies placed CSR in a gilded-ghetto within their organizations, with unique access to the C-suite, and a high profile externally, but often less-than-optimal interaction, or credibility, with business functions across the company.
This needs to change.
We should not think of "CSR" or "Sustainability" as a separate program or box on a company's org-chart. Instead, these concepts should be considered as strategic and management tools with specific utilities and benefits, such as:
•Antenna to assess and better understand stakeholder expectations and provide a credible level of transparency as well as anticipate and mitigate criticism
• Filter for identifying business risks, as well as indentifying opportunities in areas such as talent recruitment and retention, and opening new markets
•Driver to establish specific management goals and accountability within the organization, measure performance and maintain leadership, both in terms of reputation and operations
•Thread that weaves together seemingly disparate policies across various business functions and geographies thereby providing greater strategic and operational alignment across the entire company.
We need to shatter the preciousness of CSR. Companies are in fact in the "business of business." To this, Mr. Karnani and Milton Friedman would readily agree. But what must be understood is that the business of business is now everyone's business.