By now, you have probably read – or at least heard about – the Wall Street Journal article “The Case Against Corporate Social Responsibility” by Dr. Aneel Karnani which was published on August 23, 2010. The article looked at CSR from one particularly limited view point, while we at BrownFlynn look at CSR more holistically.
This is the latest in a series of anti-CSR articles by Dr. Karnani, which includes titles such as “Romanticizing the Poor,” “The Mirage of Marketing to the Bottom of the Pyramid,” “Microfinance Misses its Mark,” and “Help, Don’t Romanticize, the Poor.” Karnani shows deep concern for the plight of people at the “base of the pyramid” and a justifiable skepticism of businesses claiming to solve their problems, but his argument is, and has been, that CSR activities can confuse, delay or prevent finding legitimate solutions to the world’s problems.
His approach, however, is to throw out the baby with the bath water and, at least this time, most would say he stretched his argument too far. A summation of his argument is as follows:
- The responsibility of a business is to maximize shareholder value. [This assumption is unstated, but it is required for #2.]
- “Where private profits and public interests are aligned, the idea of social responsibility is irrelevant. …In circumstances in which profits and social welfare are in direct opposition, an appeal to corporate social responsibility will almost always be ineffective, because executives are unlikely to act voluntarily in the public interest and against shareholder interests.”
- “In most cases, doing what’s best for society means sacrificing profits.”
- “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.”
- “The ultimate solution is government regulation. …Governments are a far more effective protector of the public good than any campaign for corporate social responsibility.”
- “In the end, social responsibility is a financial calculation for executives, just like any other aspect of their business. …corporate social responsibility will be truly embraced by those executives who are smart enough to see that doing the right thing is a byproduct of their pursuit of profit.”
Dr. Karnani essentially takes a world of responsible businesses and civic-minded business leaders and reduces them to a profit motive. This does not include us – and we are pretty sure it does not include you – but it is a sticky argument and one that does not paint a pretty picture of what we are trying to do every day.
Our rebuttal is that profits are essential to business and people pursue value in every aspect of their lives, from managing a business to buying toothpaste. Maximizing value is right and good, however limits must be placed on how exactly we can go about maximizing value. We place ethical and legal restrictions on disruptive behavior, such as bribery and theft and these restrictions may lead to a reduction in the maximum achievable value. We all want to maximize value, but few of us are willing to do absolutely anything to get it.
Our view is that while government can, does, and always will provide strong legal boundaries on the acceptable value maximizing behaviors, the social boundaries are always out in front. The law formalizes and recognizes the social boundaries already in place. Every business has a responsibility to be looking beyond compliance at the horizon of social acceptability.
This is only half of the CSR equation. The government can dictate the limitations on behaviors, but it can never install a civic-minded duty to the community. We are reminded of Wal-Mart following Hurricane Katrina. While the federal and state governments and agencies battled for power and control, Wal-Mart applied its logistics experience and vast inventory to supplying relief aid.
“As New Orleans filled with water, Wal-Mart chief executive H. Lee Scott, Jr. called an emergency meeting of his top lieutenants and warned them he did not want a “measured response” to the hurricane.
“I want us to respond in a way appropriate to our size and the impact we can have,” he said, according to an executive who attended the meeting. At the time, Wal-Mart had pledged $2 million to the relief efforts. “Should it be $10 million?” Scott asked.
Over the next few days, Wal-Mart’s response to Katrina — an unrivaled $20 million in cash donations, 1,500 truckloads of free merchandise, food for 100,000 meals and the promise of a job for every one of its displaced workers — has turned the chain into an unexpected lifeline for much of the Southeast.”[i]
Could the government “require” this generosity and proactive response? Is this not the essence of corporate social responsibility? The CEO of Wal-Mart said he wanted a response “appropriate to our size and the impact we can have.” He did not ask for a response that met the limits of the law. Wal-Mart is a giant and H. Lee Scott thought that meant they had a responsibility to the impacted communities to deliver a giant-sized response.
Do not be deterred by Dr. Karnani. Was what Wal-Mart did after Katrina good for business? Sure. But if we take Dr. Karnani at his word, we have to assume that the payoff from their efforts was worth more than the sacrifices. Wal-Mart saw a need that it could uniquely meet, but it would mean sacrificing cash and inventory for the benefit of the community. That might cause a diminished financial return for shareholders, but they were probably never more proud of owning stock and never had more confidence in H. Lee Scott as a leader than they had that day. Do confidence and pride have “value” to the shareholders? You better believe it.
The (triple) bottom line: businesses have a giant-sized opportunity and responsibility – not simply a legal requirement – to be safe employers, to be good neighbors and to be strong stewards of natural and financial resources.
For detailed rebuttals, read more.
[i] Barbaro, Michael and Justin Gillis, “Wal-Mart at Forefront of Hurricane Relief” Washington Post, September 6th, 2005. Accessed online, 8/27/2010: http://www.washingtonpost.com/wp-dyn/content/article/2005/09/05/AR2005090501598.html
1.) The responsibility of a business is to maximize shareholder value.
Response: We can thank Milton Friedman for this position. It is a wonderfully clean, concise and direct understanding of business. It is not, however, the only way to understand business.
A difference in philosophy:
The underlying issue here is a difference in business philosophy, between what is called the “property” view and the “social entity” view. The property view defines a corporation as the property of shareholders. The logical conclusion of this view is that corporations exist to maximize shareholder value. Conversely, the social entity view assumes that businesses exist to serve a public need. By expressing this need and trusting the corporation to fulfill it, the public provides the corporation with the so-called “social license to operate” and profits accrue to the company due to the value it provides to society.
It is interesting to note that both views have a legal precedence: the social entity view is grounded in the fact that corporations are considered legal entities in and of themselves, independent of any shareholder. The property view is grounded in, among other things, a famous lawsuit from Dr. Karnani’s backyard. It is the Michigan Supreme Court case of Dodge vs. The Ford Motor Company, wherein the Dodge brothers sued Henry Ford over cessation of the Ford Motor Co. dividend, claiming that, as owners, they were entitled to the profits of the firm and that management had a responsibility to maximize profits. The Dodge brothers won.
Where the author steers off-course is in considering only one of the view points. The underlying and unstated assumption is that all organizations exist strictly to maximize shareholder value (property view), which leads to the following conclusion:
“Very simply, in cases where private profits and public interests are aligned, the idea of corporate social responsibility is irrelevant: companies that simply do everything they can to boost profits will end up increasing social welfare. In circumstances in which profits and social welfare are in direct opposition, an appeal to corporate social responsibility will almost always be ineffective, because executives are unlikely to act voluntarily in the public interest and against shareholder interests.”
Contrast this with the Johnson & Johnson Credo, which begins: “We believe our first responsibility is to the doctors, nurses and patients, to mothers and fathers and all others who use our products and services…” They get around to mentioning profit at the end.
A slippery slope:
There is a related philosophical problem when it comes to people, known as the “Problem of Altruism.” If altruism is a moral requirement – that is, that the “haves” are morally required to give to the “have nots” – then the question becomes not if they give, but how much they give. What is the right amount? 5% or 50%? Once you accept that altruism is a moral requirement, it is a slippery slope to making the case that the “haves” ought to give away everything! That is, unless you place an arbitrary limit on how much they are required to give, but if you are then placing an arbitrary limit, it begs the question whether altruism is actually required.
This is the position Milton Friedman found himself in – a company either endlessly pursues the interests of society to the point of bankruptcy, or it has no altruistic obligation to society and ought to pursue maximizing shareholder interests. Put this way, we agree with him, except that there is a middle ground.
There is a point at which the “haves” give to the “have nots” and are both made stronger for it. The “haves” have; possessing more is of little intrinsic value. Perhaps to these people, positively impacting society is a far greater reward than possessing the money. Thus, they get to trade up in value. On the flip side, the “have nots” really need the money. The gifts they receive are of incredible value.
It works in a similar way for businesses. The ability to flex the muscles of a business to positively impact society is as valuable – if not more valuable – than the sacrificed profits. There is a point at which a business can serve society and both will benefit. This is the sweet spot of CSR.
2.) “Where private profits and public interests are aligned, the idea of social responsibility is irrelevant. …In circumstances in which profits and social welfare are in direct opposition, an appeal to corporate social responsibility will almost always be ineffective, because executives are unlikely to act voluntarily in the public interest and against shareholder interests.”
Response: CSR considers the general public to be stakeholders and also addresses holistic stakeholder concerns. By definition, CSR promotes public interest by encouraging economic development.
3.) “In most cases, doing what’s best for society means sacrificing profits.”
Response: The article lacks any examples to support this statement (see Wal-Mart example we mentioned above). CSR means having a triple bottom line: increasing social and environmental performance while also increasing your financial bottom line. If a business sacrifices all profits, then it will be out of business and not contributing anything to society.
4.) “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.”
Response: The social entity view – and indeed Dr. Karnani’s own argument – identifies that, in the long run, profits accrue to companies which provide value to the public. Businesses are the engines of innovation, bringing capital to bear on exactly those things which are good for the public. Health care? Businesses did it first. Trans-national transportation? It was businesses that drove the development of the rail system. Telegraph, telephone and internet? Businesses, businesses, and, you guessed it, businesses. But what about parks, schools and libraries? Government – or at least politicians – may have an edge here, but Rockefeller Center and Carnegie Hall tell a different story.
5.) “The ultimate solution is government regulation. …Governments are a far more effective protector of the public good than any campaign for corporate social responsibility.”
Response: We think again of Wal-Mart after Hurricane Katrina. Yes, it has been the government agencies that have done much of the on-going management of rebuilding New Orleans, but let us not forget that it was Wal-Mart that was on the scene with relief aid while the agencies bickered. Businesses are not aside from “the public” – business managers don’t go home in caves and under rocks. They go home to neighborhoods, where they buy goods and services, participate in elections and complain about traffic. Businesses are a part of society and every member of a society has an obligation to that society.
6.) “In the end, social responsibility is a financial calculation for executives, just like any other aspect of their business. …corporate social responsibility will be truly embraced by those executives who are smart enough to see that doing the right thing is a byproduct of their pursuit of profit.”
Response: Dr. Karnani also writes: “Executives are hired to maximize profits; that is their responsibility to their company’s shareholders. Even if executives wanted to forgo some profit to benefit society, they could expect to lose their jobs if they tried—and be replaced by managers who would restore profit as the top priority.”
There are multiple statistics and articles showcasing the teaching of responsibility in business school. Traditionally, yes, executives were taught to look at the bottom line dollars – but the change has shifted to a more holistic picture. The 2009 BAWB Global Forum at Case Western Reserve University’s Weatherhead School of Management is a perfect place to look for examples. It was surprising to see the author mentioned that point since most business schools are moving away from straight bottom line, without regard to the environment or its society, in their curricula.
Other comments worth responding to:
i. “Companies could pay their workers more and charge less for their products, but their profits would suffer.”
Response: If a business is not charging a fair enough price for its product, it will not have profits to support paying its workers more. CSR (and business in general) looks at the financial bottom line for this very reason. Furthermore, is paying workers more money the best thing that a company can do to benefit the greater society? Putting CSR in the context of trade-offs between wages, prices and profits is missing the point.
ii. “That’s one reason so many companies talk a great deal about social responsibility but do nothing—a tactic known as greenwashing.”
Response: Greenwashing reveals its reputational debt in the long run. Companies can make almost any claim because the system does not have standards of transparency or accountability. We must remember that the financial accounting standards and systems grew out of a desire by merchants to manage their businesses, not out of a government mandate. We should take heart that so many companies are looking now to develop sustainability standards and systems so that they can manage the impacts of their businesses.
–Barb Brown and the BrownFlynn Staff