07/19/2010 09:19 pm ET Updated May 25, 2011

Is Corporate Social Responsibility Evil?

Is corporate social responsibility to blame for the oil spill in the Gulf or for the meltdown of the global financial system in late 2008? This accusation has been made by our friend Chrystia Freeland, the editor at large of Thomson Reuters, in the Washington Post.

While it is easy to understand the contrarian appeal of this claim -- how ironic that the instinct to do good resulted in doing bad; if only they had stuck to greedily pursuing profit maximisation -- it is nevertheless utterly absurd. The lack of any evidence in Chrystia's article, beyond the fact that both BP and Goldman Sachs have long been seen as leaders in the CSR movement, is telling. We are only surprised that she overlooked the fact the Toyota has also been found wanting in its core product quality, despite its public association with greenery. Three prominent failures by CSR leaders would have met any journalist's definition of an 'indisputable trend.'

Let's consider BP and Goldman Sachs in turn. The exact chain of events that led to BP creating America's (probably) worst environmental catastrophe remain to be seen. Certainly, individual errors will be found, and corners were probably cut. Yet it is also clear that the rest of the oil industry drilling in the Gulf were as equally unprepared to deal with such a spill as BP, even those -- as Chrystia presumably prefers -- most committed to maximising profits regardless of the cost to the environment. All of them seemed to believe that walruses would have to be rescued in the event of disaster in the Gulf, because they had simply copied disaster response plans designed for colder parts. As The Economist reported, according to Amy Myers Jaffe, an oil expert at Rice University, the industry's strategy on blowouts was not to have them, rather than to work out how to put one right quickly. Surely no one believes that a strategy based on zero failures is prudent.

It is true that, according to BP board member Walter Massey, its espousal of CSR did buy the firm time and greater leniancy than it might otherwise have received after the fatal accident at its Texas refinery. "The company's reservoir of goodwill, built up over years of committed corporate stewardship, was of critical aid in helping us to weather the storm," he said in March. But there is no suggestion that this led the firm to think it could get away with anything.

Moreover, after the initial thrill of an oil major declaring the need to go "beyond petroleum" to stop climate change, the CSR movement's enthusiasm for BP had waned long before the recent disaster. In particular, BP had been criticised for silo-ing its renewable energy activities away from the firm's mainstream activities, and for increasingly putting financial performance ahead of everything else. Ironically, one of the justifications for replacing Lord Browne with Tony Hayward was his lordship's lack of technical experience.

Financial short-termism seems the likeliest explanation for the problems of Goldman Sachs -- though there is again no evidence to suggest that the Goldman's commitment to social responsibility played any part in the financial crisis nor the unpopularity of the Wall Street bank after it. Goldman actually exposed society to less systemic financial risk than its rivals, including Lehman Brothers, Bear Stearns and Merrill Lynch. Ripping off customers -- for which it has just agreed to pay a large settlement to the SEC, without admitting any fault -- is easier to attribute to sacrificing long-term reputation for short-term profits than it is for being blindsided by the urge to be socially responsible.

Unlike BP's recognition that it needs eventually to move beyond petroleum if it is to survive, the 10,000 Women campaign launched by Goldman Sachs, though brilliantly designed and executed, can hardly be viewed as core to the bank's business strategy. In that respect, it is
somewhat at odds with the trend in the CSR movement to focus on the sort of doing good that helps the firm do well. (And, let's be clear, there are plenty of things to criticise the CSR movement for -- just not the things that Chrystia claims.) Goldman Sachs is notable in doing its corporate philanthropy, and encouraging the personal philanthropy of its staff, in ways that entirely ring-fence them from the every day business of making money.

Indeed, the main reason Goldman Sachs is so unpopular today is surely that it made so much money after the financial crisis, and paid its staff such large bonuses. In this respect, it failed to recognise that the world had changed -- that the public had bailed out the banking industry, Goldman Sachs included, and in return expected some evidence of gratitude and remorse for the events that had made the bail out necessary. From Goldman Sachs, it got neither.

It is our belief that a firm that had been more attuned to society and more committed to engaging with it constructively -- the main goals of the CSR or corporate citizenship movement -- would have been far less likely to make the basic mistakes that Goldman Sachs did, the costs of which are only starting to become clear. As we have said many times, the firm would have done far better, even in PR terms, if it had paid far smaller bonuses and given away far more of the money. (A more core strategy, for the longer term, would be to use its undoubted financial skills to do good, for example by helping to develop the nascent social
investment market.

Rather than justifiying Chrystia's dismissal of CSR, the failings of Goldman Sachs and BP underscore the need for firms to take their engagement with society more seriously, and to put being on the right side of social progress at the core of their long-term profit-making
strategy. A firm that did this would not cut corners with safety or show so little gratitude to taxpayers for helping it survive.

Rather than criticise firms for being part of what Chrystia calls the "cult of CSR", we should be figuring out how to destroy the cult of financial short-termism in the business world. (Our new book, The Road From Ruin, has some suggestions for doing that!) Admittedly, the conclusion that firms need to get better at CSR, and pinning the blame for BP's oil spill and Goldman Sachs's errors instead on short-termism, lacks the contrarian appeal of attacking CSR. But it does at least have the ring of truth.