Does caring boost the bottom line?

Businesses are under increasing pressure to embrace community concerns . Michael Skapinker and Alison Maitland begin a four-part series by examining whether ethics and environmentalism are just a PR exercise or whether they can help improve profits

Published: March 5 2002 18:17 | Last Updated: March 5 2002 18:28

The moment he walked into the public meeting at the Richmond Theatre in west London, Sir John Egan knew he was in trouble. There were hundreds of people waiting to tell him they did not want BAA, the company he headed, tobuild a fifth terminal at Heathrow airport.

Worryingly, they were clearly not professional agitators. They looked like the people next door - which they were. "These are ordinary people, our neighbours," Sir John told his managers the next day. "They're not promoting an environmental or political cause; they're just upset by the noise and the traffic."

A little later, Sir John flew to an inter-national conference in Budapest where the keynote speaker was Des Wilson, a former chairman of Friends of the Earth and one of the UK's most prominent radical campaigners.

Mr Wilson reminded the tourist executives that their business was selling clean beaches, oceans and lakes. "You should not have to be pressured into environmental responsibility. You should be the leaders," he said. Shortly afterwards, Sir John recruited him to become BAA's public affairs director.

They were an unlikely couple. Sir John, former head of Jaguar cars, was a committed Thatcherite and a leading member of the British business establishment. Mr Wilson left his New Zealand school at 15, arrived in London four years later and, after a series of odd jobs, became a campaigner for the homeless, for lead-free petrol and for the Liberal Democratic party.

Sir John was looking for someone who could speak to environmental campaigners and local opponents of the terminal on their own terms. He succeeded. BAA got permission to build its terminal after a four-year public inquiry, the longest in UK history. Mr Wilson encouraged BAA's airport managers to get to know the local community campaigners and to attempt to incorporate their concerns into expansion plans before submitting them for planning approval.

Sir John and Mr Wilson have used their experience to write a book* arguing the case for corporate social responsibility, advising companies to engage with those who are not on the shareholders' register.

The idea has its opponents. David Henderson, former head of economics and statistics at the Organisation for Economic Co-operation and Development, argued at a debate sponsored by the London Business School and The Economist last week that CSR was misguided and dangerous.

Consulting a wide range of stakeholders and complying with new monitoring and accounting systems raised costs for companies and their customers, he said. Companies that engaged in CSR claimed they were protecting their reputation and enhancing profits by responding to society's expectations. "But you have to ask whether these expectations are well founded and reasonable," he said.

Imagine, Mr Henderson said, that it became the widely held view that senior managers should do five hours' yoga in their working day and that their progress should be monitored and reported. "Perhaps companies would have to go down that path," he said. "But you would hope that some companies would say: 'This doesn't make sense.'"

There are many other executives who profess a belief in CSR - but only because their public relations department has told them to do so. Sir John and Mr Wilson recall being invited by a well regarded company to make a presentation on stakeholder engagement to the board. The finance director spent the meeting checking some figures. One of the leading directors left to make a telephone call. Another repeatedly looked at his watch.

So what is the business case for CSR? There have been many studies purporting to prove that it improves profits but they are not entirely convincing. Craig Smith, associate professor of marketing and ethics at London Business School, has identified 80 studies. Of these, 42 demonstrated a positive impact, 19 found no link, 15 produced mixed results and only four showed a negative impact.

There were problems with the methodology, he said. Such studies tended to focus on companies that were large, successful and admired anyway. They often relied on what companies said about themselves. They often failed to compare like with like: it was meaningless to compare a company's environmental performance with, say, its record on equal opportunities.

There are companies that have managed to turn a commitment to CSR into financial success. Gwyneth Brock, corporate affairs manager for the UK's Co-operative Bank, said the bank's policy of ethical investment had helped to turn it from loss to profit and to bring a nearly fivefold increase in customer deposits in 10 years. An independent cost-benefit analysis last year estimated that the bank's environmental and ethical policies accounted for between 15 per cent and 18 per cent of its pre-tax profits. But it has not worked for everyone. Body Shop became famous for its ethical approach but has ultimately not prospered as a business.

The most obvious answer to the question of why companies should care about the wider community is that it is a way of protecting themselves against potential risk. Just as companies keep an eye on which competitors are working on a cheaper or more attractive product, so they should try to keep tabs on which organisations are planning campaigns that might damage their business.

The most famous illustration of the damage that can be done was the Brent Spar affair in the mid-1990s, when Shell suffered a consumer boycott over its decision to dispose of an oil platform by sinking it at sea. The company had researched the issue thoroughly and had decided that disposal at sea was the most environmentally responsible option. Greenpeace and many members of the public, particularly in Germany, saw it differently. Shell was forced to back down.

Kate Fish, vice-president for public policy at Monsanto, which also fell foul of the campaigners, has spent hours thinking about where companies go wrong. What was so worrying about Shell running into trouble was that it had such highly developed systems for thinking about the future, she recalls. No company had done more to develop the idea of scenario planning. "They had the science on their side but Greenpeace talked about values," Ms Fish says. "What Shell ran up against was: you don't litter. You don't throw your old car into a lake."

It is not enough for companies to persuade themselves that they have right on their side. They need to know enough about campaigning organisations to know whether they are going to agree. Many managers object to this, even if they are reluctant to say so publicly: what right, they ask, do these unelected and unaccountable organisations have, to tell companies what they should be doing?

Their frustration is understandable but pointless. It is the customers, equally un-elected and unaccountable, who decide whether companies prosper or fail - and the customers trust pressure groups. A recent survey by Edelman, the public relations consultancy, found Europeans trusted campaigning organisations substantially more than companies. In the US, trust for campaigning organisations is approaching that for business. The campaigns work when they attract public support. A business that refuses to think about why consumers follow Greenpeace rather than Shell is failing its shareholders just as much as one that prefers not to consider why people buy Nokia's phones rather than Ericsson's.

*Private Business... Public Battleground: the Case for 21st-Century Stakeholder Companies