Reply to the Case Against CSR - Updated

26 August 2010

Man presenting polluting company

The Wall Street Journal recently carried a piece by Aneel Karnani, associate professor of strategy at the University of Michigan's Stephen M Ross School of Business. Karnani was the author some years ago of a thoughtful and trenchant critique of the 'Fortune at the Bottom of the Pyramid' work of CK Prahalad, which I wrote about at the time. Now he has turned his attention to an attack against corporate social responsibility generally.

Unlike his previous critique, the CSR arguments draw upon well-trod ground. The summary goes something like this.

  • Executives owe a single duty in their jobs - to maximise returns for shareholders.
  • Where the interests of company and society are aligned, then maximising profits can work to the benefit of society. But it isn't CSR.
  • Where the interests of company and society are opposed, then executives have no business looking to the benefit of society, because it's against the interest of their shareholders.
  • It is the job of governments to worry about society. They should introduce the laws, taxes and other incentives to make sure that companies can operate without having to worry about such things.

This line of argument is simply the most recent expression of the rationale that goes back to Milton Friedman. It has the illusion of being based on mathematical certainty - where there is no such thing - and carries a value judgement that we have a duty to question.

First, the maths. People that argue that the duty of CEOs is to maximise profits for shareholders imply that it is possible to know in advance how this is to be done. At the very least, they carry the implication that it is all about the cash - and any dilemma or problem can be resolved by calculating how it will impact the bottom line in the short term.

You would think that - post financial crisis, post BP oil spill - nobody would use such arguments with a straight face. But never underestimate the resilience of old ideas even in the face of new realities.

How does one make profits? By and large by providing goods and services that customers want and prefer, with the agreement of society. The best CEOs describe this task in terms of getting the right people and looking after them, finding the best products that meet customer needs in new ways, and doing so in a way that governments, their employees and customers feel good about in terms of the impact on society.

That is not the only way to make short term profits, of course. And that is the point. There is a choice.

If, as Karnani implies, there were no choice, it wouldn't matter. But the fact that you find successful companies today that are committed to social responsibility, and you find successful companies today that couldn't care less - apparently - shows that there is a choice about how profits are made.

Social responsibility is not, in itself, a guarantee of profits. Lack of concerns for the impact of your operations is hardly one either.

Badly executed, either approach can destroy value. 

You can take this as an 'enlightened self interest' argument if you like. Ironically, Karnani quotes auto makers as an example where business interest and social welfare have been aligned. "Auto makers have profited from responding to consumer demand for more fuel-efficient vehicles, a plus for the environment".

Well, that's not quite how it happened.

Auto makers in the US for years fended off legislation to improve energy efficiency standards, and were supported in so doing because of customer indifference to fuel efficiency during a time of cheap oil. 

Companies in other countries - notably Japan - took a different approach. Rather than ONLY asking 'what does the customer want today?' - which they did, of course - they also asked where society, and the science of climate change, was taking us into the future. They created the vehicles that would begin to meet those needs before the customer had actually got there.

Had US companies had more of a care to the environmental impact of the vehicles they might have survived in better shape. As it is, they went to the brink.

The fact is that businesses only do well so long as they provide things that people want. Those that see opportunities to make their products serve their customers well and benefit society will generally do well if they execute effectively. Profit maximisation as a strategy has been historically poor in actually delivering profit. Ask the banks.

So much for the maths. The other aspect is to do with values.

The argument that says that the role of the executive is to maximise profits regardless of the consequences depends upon a view of business as standing apart from society. This is just not true, and neither should it be.

Businesses will do well in a healthy society, with a thriving economy and a robust natural environment. These are life support systems for the business, they are not unnecessary distractions. Few businesses will thrive as little islands of prosperity alone in a sea of deprivation.

This is why, through history, businesses have often supported education. They understood easily and intuitively that if people were generally better educated, it would pay dividends for them when they were recruiting into the workforce. 

Such things, according to Karnani, are best left to governments. Even, he says, when those governments are weak or corrupt.

So, on that basis, those companies like Anglo American who gave AIDS support to their workforce, their families and local communities at a time when the South African government was officially in denial about the disease - these companies were going beyond their brief.

And when Hurricane Katrina ripped through New Orleans, Wal-Mart should have sat on its hands and nursed its profits, not mobilised its logistical network to the benefit of the country on the basis that it had a better position to do so than did the federal government.

Such a position is to deny that companies are a part of society, and that therefore they have no role as corporate citizens. Without being silly about it, it is time to challenge the absence of values behind such a position. We create our own reality. If we want businesses that have values, we can have that. It is our choice, as a society. The law of 'profit maximisation' is not as immutable as the laws of physics.

It may not be the primary role of a business to alleviate poverty, as Karnani says, but it benefits business if poverty is minimised. Henry Ford understood this when he paid his workers more, seeing the logic that this would make them able to afford to buy his cars. 

Of course, that led to the first shareholders' action against Ford in 1919 that disputed his right to pay workers more, because this reduced profits. The case (Dodge vs Ford) was won - and serves as the origin of the logic over profit maximisation in the first place. 

I have seen no shareholders attacks on, for instance, Marks & Spencer for adopting a highly ambitious 'Plan A' programme prompted by climate change. The company's board reviewed Al Gore's presentation on An Inconvenient Truth, and came to the conclusion that business in the next decades would have to evolve radically to meet the new demands that would emerge from our fast-changing world.

On the one hand, you could say they went far beyond their brief. But they have found a way to make real progress whilst continuing to make profits - indeed many of the things they do add to the profits. But that was not clear before they took the commitment. The commitment came first. They found the way to make it work to the benefit of the business.

That is what it means to make a choice. That is corporate social responsibility.