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August 26, 2010
Voodoo Academia
Monday’s Wall Street Journal featured an article titled “The Case Against Corporate Social Responsibility,” by Professor Aneel Karnani of the University of Michigan’s Business School. The take-the-cake lines in Karnani’s thesis: ”a focus on social responsibility will delay or discourage more-effective measures to enhance social welfare in those cases where profits and the public good are at odds,” and “in most cases, doing what’s best for society means sacrificing profits.” My greatest fear is that Luddite PR executives will grab this feature story and head into the corner office to tell the CEO that he/she should stand fast against the siren song of the stakeholder society, to continue to be an exclusive devotee of the magic power of markets.
I spoke this morning with three experts to get their views of the story: Matthew Bishop, author of “The Road from Ruin” and “Philanthrocapitalism,” also USA editor of the Economist; Rakesh Khurana, professor at Harvard Business School; and Steve Fludder, GE’s VP of Ecomagination. Here are their views.
Bishop told me that Karnani’s characterization of the world of business falling into two states, either perfectly aligned or not aligned with public interest, is utter fantasy. As he wrote in his blog post, “Markets and their relation to public interests are constantly evolving – and the actions of companies play a crucial role in whether they evolve in a direction that serves the public interest.” He told me that the best people will want to work for a company they believe in. “How can you win the battle for talent in a world where workers are increasingly choosy about the ethics and mission of the firm they work for?” He argues passionately that smart companies are focused on long term shareholder value, not short term earnings. “The current economic crisis was caused not least by endemic short-termism in capitalism.” He jokes at the end of his blog post, “Anything but capitalism red in tooth and claw is a perversion of the true faith.”
Khurana noted that the Karnani model “has no application to the rest of the world, beyond a mile square radius from the University of Chicago campus that housed Milton Friedman. In Europe or in China or in India, a company would not have the license to operate this way.” He added that there “is a group of persistent rationalizers who change the facts instead of changing their theory, offering old wine not even in new bottles.” He insisted that companies change tastes and evolve markets, “because vanguard firms capture the lead in business.” He sent me a brilliant white paper that he co-authored with Professor Rosabeth Kanter, titled “Advanced Leadership Note: An Institutional Perspective and Framework for Managing and Leading.” In this paper, the professors contend, “In addition to economic performance as determined by economic outcomes, organizational decisions are also judged by the criteria of legitimacy…A legitimate organization is one that is perceived as pursuing social acceptable goals in a socially acceptable manner….in some cases the social logic of values is linked to an economic logic of resource maximization, but in other cases these can be in tension, which means that effective societal outcomes cannot be left to the invisible hand of unregulated or unguided markets.”
Fludder (disclosure: a client) pointed out that GE is in the business to make money, “not for altruism.” He added, “We see this evolution as a market opportunity, but one that also serves society. These tough environmental challenges are addressable through technologies we can implement.” He suggested that companies attempt to shape the future, “leading by example….with innovative products….reinventing the category.” But Fludder provided great advice, “Try to influence the regulatory environment. Show the government through demonstration projects that you can remediate a problem.”
We are at a very important moment in the relationship between business and society. The catastrophic economic events of September 2008 undermined the confidence in the private sector’s ability to self-regulate. Bankruptcies of centerpiece companies in the global economy, such as GM, plus reputation issues for leaders in finance (Goldman Sachs), energy (BP) and transport (Toyota) have called into question the values of corporate leaders. In the race for public credibility, it is fortunate for business that its prime regulator, government, is not seen as a worthy replacement as the leader in the dance.
The role of the PR person is to advocate for a stakeholder approach, to engage with non-traditional partners (such as NGOs) and to enable solutions that serve private and public interests. Then the PR person should communicate differently by engaging employees first, being completely transparent on the timeline, reporting progress on corporate commitments, and not just communicating to consumers about responsibility and sustainability – but engaging with them to join the journey.
Here are four examples of client work:
GE spent considerable time engaging business unit leaders and initiating a new conversation internally among employees on Ecomagination before it went public. GE employees are now at the forefront of driving its commitment to address the world’s environmental challenges.
Clorox Brita’s FilterForGood campaign inspires consumers – and communities – to take a personal pledge and even engage in (planet) healthy competition with others to reduce their bottled-water use, as well as informs them about other environmentally-friendly decisions that each can personally make.
Unilever’s Omo Detergent adopted the “Dirt is Good” campaign - aligning with the brand’s business proposition by asserting that “every child has the right” to be a child and get dirty. After fielding new academic research highlighting the importance of outside play for the physical and social development of children and engaging parents, governments and NGOs to take action, the campaign triggered real social change – Vietnamese schools agree to assess national provisions for school recess while the brand commits to build 100 playgrounds over three years.
The Pepsi Refresh Project, partnering with NGOs and experts, is directly crowdsourcing ideas from consumers to foster innovation in social good – awarding more than $20 million this year to fund local community initiatives and ideas that refresh the world.
These companies demonstrate that contrary to Karnani’s assertion, the decision isn’t whether to run an effective, “smart” business or a socially responsible, engaged one. Performance with purpose (a term used by PepsiCo CEO Indra Nooyi) is not an either/or proposition.
Posted by Edelman at August 26, 2010 2:22 PM |
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Comments
Richard:
Yes, we are witnessing a change in how individuals and organizations interact.
This is the latest of three editorial articles attempting to argue against the concept of corporate social responsibility. All of them failed to recognize how a connected society is changing the roles of institutions - companies, non-profits, and government.
How a company makes it profit matters more as we become even more connected. Corporations can no longer act like a man shaving with a face full of Novocain oblivious of the damage he's causing with his actions and decisions.
This greater intimacy and immediacy changes how shareholder value is created AND destroyed. My piece in the Chronicle of Philanthropy yesterday explored this line of thinking in greater detail. If you'd like, you can read it here:
http://philanthropy.com/blogPost/Corporate-Responsibility/26469/
Posted by: Scott Henderson at August 26, 2010 7:43 PM
Thanks for this insightful post. Love that you point out that, when it comes to social responsibility, it's not an either or proposition. I'm sharing this with my team.
Posted by: Becky Frost at August 27, 2010 1:57 PM
Posted by: Paul Seaman at August 27, 2010 4:14 PM
Excellent column. Wish I'd written it myself! Thanks for bringing Prof. Khurana et al into this conversation.
Personally, I think Khurana is exactly right to pinpoint the twin sources of misinformation as being the tendency toward dogmatism (U of C Friedman, with a dash of Ayn Rand) and a deplorable proclivity for the short-term. Amen, and well said.
The relationship between government, society and business is, as Bishop says so well, constantly evolving. It is also far more nuanced than Karnani and his ilk allow for.
We need a little more sociological observation and a little less economic theory in our business schools these days.
Thanks for pinpointing this issue so sharply.
Charles H. Green
Trusted Advisor Associates
Posted by: Charles H. Green at August 30, 2010 1:58 PM
Seems like this old debate never goes away. I think the problem with the argument is that those who come at it from the perspective of "corporations maximize social good by maximizing profit" always assume that CSR strategies are not aligned with the company's strategy and therefore not profit enhancing or profit preserving.
I agree that CSR programs implemented as boardroom vanity (shareholder dollars contributed to the CEO's favorite cause) are not appropriate or smart. But companies that can align their CSR programs with their core business strategy, and hence make them profit enhancing, can generate returns significantly better than the money they shovel into advertising or other sales efforts.
The real problem is that the majority of companies are indeed practicing "dumb CSR" and not aligning their philanthropy or other social engagement strategies with their profit making activities. I think this comes from the old thinking that if your philanthropic activities are at all tainted by your business interests then they are somehow sullied. But that notion is ridiculous: a company that aligns its philanthropic expenditures with its profit interest is no different than a wealthy individual who aligns his/her contributions with their social and personal interests.
Posted by: Darryl Siry at August 30, 2010 8:30 PM
While it may be difficult for companies to pick the right CSR project, it's an investment I think most should make. They should see it as a long-term investment in their success. That said, we need more research on the impact these programmes have on a company's bottom-line. We may just be assuming that customers, care, when they really don't.
Posted by: Soyini at August 31, 2010 3:07 AM
Richard,
Your excellent post flashed me back to a November 2009 LIVE from the NYPL event Capitalism and the Future. The program included, among others, Indra Nooyi, Chair and CEO of Pepsico. The link to a Multimedia and printed transcript is: http://www.nypl.org/audiovideo/live-nypl-aspen-institute-present-capitalism-and-future.
The text which follows references “performance with purpose” during an interaction between Walter Isaacson, President of the Aspen Institute and Indra Nooyi.
WALTER ISAACSON: Well, let’s talk about externalities—they can be anything from carbon to obesity to foreign oil causing wars or whatever it may be. How should capitalism price those externalities that the marketplace doesn’t capture, such as pollution and whatever?
INDRA NOOYI: I don’t know, I can’t speak about capitalism in general, Walter, but what I can tell you from our perspective. We articulated a goal for our company which said we as a company want to deliver performance with purpose, and the performance is commercially we want to be known as a great company, but we said we had to do our job ethically, too, which meant that in anything we do, we didn’t want to create costs to society, so we wanted to transform the portfolio because society has changed, and to keep up with the changes in society, we’ve committed to making massive changes in our portfolio. And just to give you an idea, in the United States alone, where servings of beverages has grown about five percent, the calories per serving has come down seven percent, so net there’s a massive reduction in the calories that we’re putting out in beverages, so we’ve committed to transform the beverages massively. We’ve committed on the environmental plank to have net zero plants, to make sure that we reduce water usage massively across the world, go to washing of our bottles that are not done with water but are done with eBeam. We are deploying green technologies so that we don’t add costs to any of the communities or societies in which we operate in and we want to be viewed as one of the greatest employers in the world of capitalism. So I look at us and say if all companies, and again, I’m not here to make a commercial on PepsiCo, but that’s the company I know best, but I just look at our company and say if all companies practiced performance with purpose and wanted to be viewed as a responsible corporation, why isn’t capitalism great, and how can we get more companies to behave that way?
WALTER ISAACSON: But do you do that because it gives your shareholders a better return on investment, or do you do it because it’s the correct moral thing to do and you would do it even if it reduced your return on investment?
INDRA NOOYI: Look, I think the definition of shareholders is an ancient definition. The new definition is the multiple stakeholders, because you know, there’s been a definition which said, just earn the biggest bang for the buck and don’t worry about the debris you leave behind. That’s what’s got us into this mess and I think if you start taking a holistic view and saying, “You can’t make a profit at the expense of multiple communities,” because it’s all going to come back to haunt you. If society gets worse, if the environment is terrible, your taxes are going to go up because somebody’s got to clean up that mess, and then it’s going to come back to you in terms of higher health care costs or higher corporate tax or individual tax rates, so I think all companies who have major roles to play in society should practice performance with purpose. And I don’t use that as our cliché, but it’s much more a set of words that every company should be held accountable for.
Posted by: Hugh Campbell at August 31, 2010 9:56 AM