Monday, 23 August 2010

Response to the Case Against CSR

I suppose a response on this blog is preaching to the converted, but I still couldn't let pass the professorial post from Dr. Aneel Karnani, associate professor of strategy at the University of Michigan's Stephen M. Ross School of Business.. Dr. Karnani explains why CSR is flawed in his article of 23rd August 2010: The Business Case Against CSR.  The flavour of his piece, which at the time of posting already generated 52 responses, some for, some against, can be seen in the following excerpts:

"Can companies do well by doing good? Yes—sometimes. But the idea that companies have a responsibility to act in the public interest and will profit from doing so is fundamentally flawed. Large companies now routinely claim that they aren't in business just for the profits, that they're also intent on serving some larger social purpose."

"Irrelevant or ineffective, take your pick. But it's worse than that. The danger is that 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. As society looks to companies to address these problems, the real solutions may be ignored."

"Still, the fact is that while companies sometimes can do well by doing good, more often they can't. Because in most cases, doing what's best for society means sacrificing profits."

"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."

"In the end, social responsibility is a financial calculation for executives, just like any other aspect of their business. The only sure way to influence corporate decision making is to impose an unacceptable cost—regulatory mandates, taxes, punitive fines, pubic embarrassment—on socially unacceptable behavior."


So, ok, stop, think. It amazes me actually how many business people actually think like this, that money is the sole thing that interests shareholders. It frightens me that a Michigan professor thinks like this. I doubt that any amount of rational retorts will change the mind of this CSR-dissenter, and I guess he is entitled to his opinion and I guess the Wall Street Journal is entitled to print it. For the record, the Wall Street journal is owned by the Dow Jones Company, who has both a Code of Conduct and a Corporate Environment and Safety section on its website, which includes voluntary contributions. Not a wholehearted leap into CSR practices and transparency, but a toe in the water.

The fact that regulation, taxes and fines will not comprehensively change corporate behaviour and never have done, should be clear enough to a Professor of Strategy, I would have thought. The fact that CSR is a financial calculation, just like any other aspect of the business, is not really in dispute - CSR should support delivery of stronger financial returns over time, and data shows this to be the case. The key flaw in this prof's argument is the trade-offs between short and long term. Many generally believe that shareholders want to maximinse SHORT-TERM profit at almost any expense (though there is a growing body of evidence that this is not the case) whilst CSR is by definition focused longer term. Yes, there is an element of sacrifcing short term profit for greater long term profit, which continues to be in shareholder real interests. Talk to Ray Anderson of Interface, Stuart Rose of Marks and Spencer, Jeff Immelt of GE and many others, and they confirm that CSR-type activities repay themselves many times over. How can a professor of STRATEGY be so hooked in the short-term vision box? Perhaps he is a professor of monthly strategy ?

The other core flaw in Dr Karnani's writing relates to the fact that the adoption of business of social policies will delay governments doing it themselves. Excuse me ? Is not the response by business to social and environment global issues required precisely because governments have not resolved these issues, and almost certainly never will. The essence of this argument pits businesses against governments and civil society, ie that each has a role and each should stay in their own corner, ne'er the twain shall meet. What we are seeing today as the concept of CSR matures, is the convergence of these roles, the fuzzying of these boundaries and the coming together of the complex interplay and multiple influences in which law influences business, business influence law, and both are influenced by effective NGO activism. In fact, I have just read an outstanding book (my review to be published soon on www.CSRwire.com)  called The New Corporate Accountability - Corporate Responsibility and the Law in which these issues are discussed intelligently and cohesively. I recommend this book to Dr. Karnani. The more we try to keep business in splendid isolation to make as much money as possible, governments in splendid impotence to prescribe social and environmental regulations and NGO's in splendid righteousness, accusing and condemning, our planet will not be sustainable. CSR is much more than a business strategy, it is a convergence strategy of partnership within and across sectors, and across narrow-minded artificial boundaries.

The good news is that the arguments of short-termists are good only as long as their thinking lasts. Fortunately for us, and the world, in the case of Dr Karnani, this is about a month. Then we can get back to doing the business in a way which benefits people and environment, in other words, we can revert to the case for CSR.

elaine cohen, CSR consultant, Sustainabilty Reporter, HR Professional, Ice Cream Addict. Contact me via www.twitter.com/elainecohen  on Twitter or via my business website www.b-yond.biz/en  (BeyondBusiness, an inspired CSR consulting and Sustainability Reporting firm)

13 comments:

Stewart McKie said...

Elaine - This guy needs to read his E.M. Forster "Only Connect". If companies really reported the connections between their financial data and their sustainability data they would start to realize that it's not one or the other - they are inextricably linked. Arguments like this continue to treat financial performance and sustainable behaviour as two unconnected aspects of organizational life but as someone else once said "silos are for grain"...

Jennifer Hicks said...

An issue I have with the WSJ piece is that Dr. Karnani appears to equate CSR with "do-goodism" by companies he sees as destined to fail or as marketing techniques of more savvy companies that he seems to think look at CSR benefits to people, planet and profit as a (perhaps) short-term thing to be exploited.

Karnani uses the word sustainability only 2 times -- once in terms of shareholders looking for continuing profit; once when referring to the work of the Rainforest Action Network.

I think until we can marry CSR and sustainability -- which to me would mean care of people, earth, and business concerns -- it is likely that Karnani and others will continue to think in the old paradigm.

Terri Rylander said...

Excellent reply Elaine! I knew you'd have something to say about this. I appreciate your thoughts and clarity.

elaine said...

Thanks Stewart, Jennifer and Terri for reading and for commenting. This certainly has been a topic that has gained much reaction from our #csr/business/twitter community.

I just hope they cancel a few of Karnani's classes haha give him a chance to cool off !

elaine

Joe McCarthy said...

I like this analysis, especially on the short-term vs. long-term impact of social responsibility on financial responsibility (or at least returns).

You state "Many generally believe that shareholders want to maximinse SHORT-TERM profit at almost any expense (though there is a growing body of evidence that this is not the case)"

Can you offer any pointers to this growing body of evidence? Nearly everything I read suggests that people are increasingly anxious about their jobs and other elements at the lower levels of Maslow's hierarchy of needs, which would lead me to believe that most people are increasingly thinking and acting in shorter cycles. Of course, the thinking and acting of those who still have resources to invest in shares of corporations may have different perspectives.

In any case, I'd welcome the chance to learn more about the trend you describe. Thanks!

elaine said...

hello Joe, thanks for reading and commenting. Certainly, I think we are seeing shifts in investor focus, with the socially responsible investment market gaining ground year-on-year, and slowly, more ESG factors being build into investment analyses. This is the reflection of longer term thinking (and also, good returns!) see this speech from Pax CEO
http://www.paxworld.com/pax_code/articles/JKeefe_Boston_Economic_Club.pdf

The HIP Investor (book) by Paul Herman et al also shows a correlation with social investing and Maslow's needs and also gives evidence for greater investor interest in socially responsible long term investments. Also, the book One Report covers investor interest in ESG factors. Bloomberg issue ESG data to over 100,000 analysts directly to their PC terminals.

Also, Paul Pohlman of Unilver specifically stated in his AGM 2010 address that Unilever "adandoned short-term market guidance to focus on long term viability" and refuses to give short term market forecasts. This is excellent news and hopefully, the start of similar practices by other large companies.

These are the things that spring to mind, althouth, I do admit, that we are still far from mainstreaming long termism :)

Thanks again for your question
elaine

Thanks again, elaine

Art Huston said...

Hi Elaine,
Nice post, and great comments from everyone.

The larger point I take from Dr. Karnani's article is not that CSR is dead but instead that depending on businesses to practice CSR is not sufficient. There are times when profit and the environment clash, especially in the short term. For this reason we need to use every means possible to encourage CSR and responsible behavior, but also to pressure governments to legislate and enforce it.

The biggest problem with Kulkarni's article is the title "The Case Against Corporate Social Responsibility" which is misleading. I think there are substantial areas where you share common ground with Dr. Karnani, for example his assertion that "pressure from shareholders for sustainable growth" can change a company from short to long-term thinking. We can all agree that short-term thinking has gotten us into an economic and environmental mess that badly needs fixing.

Thanks again.

Perry Goldschein said...

Thanks for the quick response on this op ed, Elaine. I was glad to see you and other CSR colleagues agreeing on one of the major shortcomings of this piece being short-term thinking as opposed to long-term thinking. I also made a post, debunking some of the myths of this and earlier, similar pieces, titled "The Case Against CSR? Not! Four CSR Myths Debunked," at http://sdialogue.com/csr/the-case-against-csr-not-four-csr-myths-debunked/

Katie said...

I really enjoyed your analysis and insight. Thank you.

elaine said...

Hello Art, Perry and Katie, thanks so much for reading and taking the time to comment, I appreciate that. It looks like we are agree on the key issues. Now, how do we make business school profs take notice ?!

Perry, read your excellent post (and tweeted it!) thanks for letting me know.

elaine

Joe McCarthy said...

Thanks for the references on longer termism!

I was just reading an article in The New Republic about Get Ready for Sebelius v. Insurers, and found myself wondering about the applicability of CSR and long termism in the context of health care [insurance].

I'm not sure whether / how much you want to delve into this in yet another comment, but here is a brief excerpt form the article:

One of the central challenges of health care reform is getting insurers to behave better. And it's really a round-peg-into-square-hole sort of problem.

The primary obligation of a for-profit insurer is to satisfy its shareholders and make a lot of money. But that's not always, or even usually, good for the people who want or need insurance. To take one classic example, somebody with a serious chronic disease will need expensive, ongoing care. An insurer who has that person on its rolls may try to skimp on that person's care, in the hopes of spending less money or, better still, convincing that person to switch policies.

Non-profit insurers may or may not want to pursue similar business strategies, but, in a market dominated by for-profits, they don't really have much choice if they want to compete.

elaine said...

Hello again Joe, thanks for the dialogue. Yes, I think you have hit the nail on the head with an example from the insurance sector - selling insurance policies in the interests of profit or in the interests of the insured client. But I actually dont see this as so different from the short-term / long-term trade-off in any industry sector. Every sector has its specific sustainability issues where long-termism has to play a part - this is where the material focus ought to lie. Fast fashion, electronics, banking, food and nutrition - all of these sectors and more have similar issues . Ultimately, the long-term, responsible, sustainable approach will deliver best results over time. There are several reporters in the insurance sector who adress these points, but at the end of the day, it is the individual agent who needs to take this on board and act with a sustainable mindset.
warm regards, elaine

Auren Kaplan said...

I quoted your blog post in the CauseCast Cause Integration blog. Please read my post, and then let's connect! Email me at aurenkaplan@causecast.org, it would be great to establish a cross-post collaborative relationship.

Here is the post link: http://www.causeintegration.com/2010/the-cases-for-corporate-social-responsibility/

Best,
Auren Kaplan
http://CauseIntegration.com

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