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Corporate Social Responsibility: Where's the beef?

The Discussion Issue

Corporate Social Responsibility (CSR) is not only a buzz word at business schools but is also an item that companies spend billions of dollars promoting. While its proponents claim that it should be a key component of every company's mission, their arguments range the spectrum. Some suggest that it is the right thing to do, even if it costs profits/value, and that it is part of the responsiblity of being a good corporate citizen. Others argue that it is a tool for managing risk whereas still others claim that it is in the company's financial interests to be socially responsible. Whatever the contention, it is also clear that an entire ecosystem of consultants, non-profits and measurement services are making money of CSR.

CSR: What is it?

What does it mean for a company to be socially responsible? The answer may seem obvious to you, but the problem lies in the subjectivity of the definition. Put differently, the factors that I weigh in to classify a business as socially responsible can be very different from the factors that you weigh in. This is brought home when you look at the rankings of companies, based upon CSR scores, since each ranking service uses its own weighting system. To illustrate this process, you can start by looking at the top 100 corporate citizens, as ranked by CR (one fairly high profile service) in 2013:
Top 100 corporate citizens according to CR
If you look towards the top of the page, you see the weights attached to the different factors weighed in by CR: 19.5% for environmental behavior, 16.5% for climate change effect, 16% for human rights (?), 19.5% for employee relations,
7% for corporate governance, 9% for philanthropy and 12.5% for financial. Talk about subjectivity piled on top of more subjectivity. Why these factors? Why these weights? Who gets to decide what goes into each variable? In fact, take a look at the top ten firms, according to CR, and make your own judgments on what you think about their rankings. It is not surprising that each interest group has its own rankings that are very different. Here are a few other rankings that I was able to find:

  1. Top green companies (from Newsweek)
  2. Top companies to work for (Fortune)
  3. Most reputable companies (The Reputation Institute)

With social responsibility, the rankings seem to be very much in the eyes of the beholder.

Arguments for CSR

There are three arguments for CSR, ranging from the moral to the legal to the economic. Here is my attempt to summarize all three:

1. The Moral Imperative
Argument: The rationale here is that if you own and run a business, you have a responsiblity to the community that you serve, that goes beyond the purely legal. Consequently, all businesses (small and large, public and private) should be willing to set aside some of their profits to meet social needs.
Consequence: CSR is a voluntary cost to businesses that will lower their profits but that should be borne anyway.
(a) Since it is voluntary, it will be borne disproportionately by those who are most moral who will then have to compete against those who are less so and face a cost disadvantage.
(b) In publicly traded companies, the people making the philanthropic decisions (i.e., the top managers at companies) are being charitable with other people's money. After all, that money could have been paid out to investors, who could then have chosen their own charitable targets (or not).

2. The Legal Imperative
Argument: We live in a litigious society and all businesses risk being sued. Being socially responsbile gives you cover against lawsuits, merited or otherwise, since businesses that are viewed as good corporate citizens are less likely to be targeted and if targeted, less likely to be held liable.
Consequence: CSR is a risk management technique that will come with a cost (the cost of being socially responsible) but will provide benefits (fewer lawsuits, less money lost in lawsuits) that exceed these costs. It will be directed by lawyers and risk managers to where the legal risks are greatest.
Challenges: The implicit assumption is that good people (and businesses) are less likely to be sued. However, casual empiricism suggests that lawyers are less interested in the virtue of businesses and more interested in how deep their pockets are. In other words, rich, virtuous businesses (and people) are more likely to be sued than poor, craven businesses (and people). The question of whether companies that are more socially responsible are less risky is an intriguing one and there seems to be some evidence backing it.

3. The Economic Imperative
Basis: Doing good is in a company's best interests. A company that is socially responsible will be able to grow faster, earn more and become more valuable because customers will be more willing to buy it's products, suppliers and bankers will trust it more and employees will stay on longer.
Consequence: CSR will help the bottom line, both in terms of profits and value. If the company is publicly traded, its stock will do better than other companies that are less socially responsible.
Challenge: To make this argument, you have to be able to back ut up with evidence and that evidence cannot be anecdotal. Much of the research in this area comes from people with agendas, on both sides of the argument. Thus, those who believe CSR is a good thing manage to find evidence that backs them up and those who think that this is a fad, find evidence to back that contention up. Removing the obviously biased studies from the mix, the evidence is mixed in favor of CSR. There is some evidence that being more socially responsible increases profitability, but only in some sectors/businesses and not all. The marginal returns to investing in CSR do seem to decrease as companies invest more and markets are generally receptive to increases in CSR spending (if the company is financially healthy to begin with). I know that the literature is not conclusive (and I have just given you the tip of the iceberg), but that is the nature of this debate.

Key Questions

  1. If you were creating a CSR ranking, what are the factors that you would weigh into your ranking? (I know that this is subjective, but be as subjective as you want. That is the nature of the exercise).
  2. Do you believe that being socially responsible is primarily a moral, a legal or an economic imperative?
  3. Do you believe that firms that are socially responsible are more profitable or less profitable than firms that are not?
  4. Do you believe that firms that are socially responsible are better or worse investments (for you as a potential stockholder) than firms that are not?