Monday, 30 August 2010

SCOOP! Karnani responds.

Many thanks to Professor Aneel Karnani of Michigan who has now responded to the myriad of comments, blog posts, commentaries, tweets and all other reactions to his article published in the Wall Street Journal of 23rd August. See the original article: The Case Against Corporate Social Responsibility" here.

This is the full, unedited text of Prof. Karnani's response provided to me by email today 30th August 2010 for which he gave permission for me to post here:

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As the author of this article, I am grateful for the amount of interest and commentary it has attracted. The world faces many social problems such as climate change, resource depletion, disease epidemics, and pervasive poverty. While there are no easy solutions, a good starting point is a widespread public debate on the appropriate approach to tackling these challenges. A critical element of that debate focuses on the roles that business, government, and civil society should play in solving these problems. I hope my article has helped stimulate this debate by challenging some widely held views.

I strongly believe in social justice and that companies should not be left free to pursue the greatest possible profits without regard for social consequences. So, how can we get companies to act to increase social welfare? Whether companies will do so voluntarily or have to be compelled to take such actions depends on whether private profits and public interests are aligned or in conflict.

Many of my critics have pointed out that CSR can and does drive profitability. That is absolutely true when private profits and public interests are in harmony -- the invisible hand at work. That is exactly why the capitalistic system is so good. In these instances, firms driven by the profit motive will also achieve social objectives. Equivalently, firms acting to increase social welfare will simultaneously increase profits. In these cases, the profit motive is the driving force, even though companies might trumpet CSR.

However, the 'invisible hand' argument depends on markets being efficient. We must also be aware of the limitations of markets. Market failures occur due to three causes: externalities (such as pollution), asymmetric information (such as in pharmaceuticals), and market power (such as in electricity distribution). Many of the social problems confronting the world are linked to market failures. In these instances, private profits and public interests are fundamentally in conflict. CSR, a voluntary mechanism, will not be effective in these cases. Then it is the role of government and citizen activism to compel companies to act to achieve social objectives.

It is true, of course, that much government intervention has not been effective either. A practical challenge is to weigh the costs of market failure against those of government failure. However, there is a big difference between market failures and government failures. For example, the externality of pollution is inherent in the nature of gasoline cars. But, incompetence is not inherent in the nature of government, and the costs of government failure can be reduced with improved management. The challenge is to design and implement an effective blend of government regulation, citizen activism and self-regulation that strikes the right balance between private profits and public interests. Government regulation, or at least the threat of such regulation, is a critical element of this blend. It is very unlikely that large social problems linked to market failures will be solved only through voluntary CSR.

Finally, a red herring of an argument is to claim that the conflict between profits and social welfare is caused by companies being short-term oriented. The shareholders collectively want the managers of companies to maximize long-term profits, not short-term profits. In cases of market failure, long-term private profits and long-term public interests are in conflict. In practice, there is, of course, much uncertainty about the long-term impact on both profits and social welfare. But, that does not change the conceptual argument about the role of business in society.

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When Prof. Karnani talks about " an effective blend of government regulation, citizen activism and self-regulation [of corporates]" , I think we share a common ground. Clearly, no-one believes that voluntary CSR alone can solve all the world's problems. But it is my firm belief that CSR AS WELL is a critical element in doing just that.

Thank you again to Professor Karnani. Whether or not we agree with his original article, his willingness to respond and engage is in the spirit of ... well ..... CSR . Haha. 
 


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)

5 comments:

Lavinia Weissman said...

Elaine, this is wonderful. What I would enjoy is shifting a view of this note from debate, protect and argue to finding out if you and others learned something form Karnani discourse?

Have a great week. Waiting to see my guest blog post on Vault.com about how this inspired me to think and think on the progress of CSR progressing from movement to sustainable change.

Wesley Gee said...

I don't think that what Karnani and his 'opponents' believe are much different...indeed I am sure that they would agree on almost all points raised. Many CSR folk just get defensive when their acronyms/buzz words get challenged - rather than digging deeper and looking at the attributes of the discussion.

Successful and responsible companies will be those which focus on understanding and meeting the needs of their most important stakeholders - whoever they are, whatever they are (some are bound to be linked to reducing ESG risk). If they can do this they will end up on top.

Linked to this is that if they do things that seem completely misaligned from their business objectives (so called "random acts of kindness" - e.g. auto company giving bicycles to children, or beverage company trying to cure malaria) they may take a nasty hit. Focus on business objectives, and performance measurement, and you'll end up on top.

One big challenge though is I don't think Karnani can speak on behalf of shareholders and corporate investors in knowing what they want. Most don't know what they want outside of more money, and leave investment decisions to their advisors (who are largely uninformed or sceptical of ESG risk and still use P/E ratio) - this is a major issue.

We need to focus on how to work collaboratively with folks like Karnani, to focus on areas of common interest, so that many issues related to CSR can hit the (grumpy old white man) mainstream.

Susan McPherson said...

Excellent, thank you for sharing, Elaine. Debate is healthy and helps encourage those who don't agree to come to the table, engage and possibly walk away with new inspiration!

Best,
Susan

Celesa Horvath said...

Thanks for posting this, Elaine, and thanks to Professor Karnani for providing more content to chew on.

I thought it was most revealing that Prof. Karnani refers to "externalities" such as pollution as a market failure. The real failure is that our "capitalistic" market economy does not include the direct environmental cost (or social cost, for that matter) of industry in its accounting, thus allowing the conflict between private profit interests and public interests to arise.

All of the direct costs of business and industry, whether its a labour or materials cost, an emissions control cost, or other, should be internalized; this is the 'responsibility' part of CSR. A company should not be able to generate profit by transferring a cost burden to a third party. Through licencing and other regulatory mechanisms, companies acquire the privilege of exploiting a public natural resource. Over time, our society has allowed industry to act as if such permissions also grant an implicit right to pollute (or otherwise transfer costs out of their profit equation). Corporate responsibility is necessary, in part, to remind all stakeholders that the onus is and should be on the polluter to pay.

The private interest profit motive will be aligned with public interests of environmental and social health when such "externalities" are seen for what they are: internal costs of doing business.

elaine said...

Thank you Lavinia, Wesley, Susan and Celesa for reading and for taking the time to comment.

Lavinia, got your post on Vault. Excellent post!

Wesley, i agree that businesses need to meet the needs of STAKEholders. But Prof Karnani specifically talks about meeting the needs of SHAREholders. Between SHAREholder and STAKEholders is a world of difference, and that is usually where you find CSR.

Celesa, I fully agree with your point about externalising costs. This has been in part a negative outcome of globalization. That , I think, is why so much of the CSR focus today is on supply chains.

thanks again to all
elaine

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