An editorial in yesterday’s Wall Street Journal, The Case against Corporate Social Responsibility, by Professor Aneel Karnani of the University of Michigan’s School of Business, joins a number of other recent well-meaning but uninformed essays critical of corporate responsibility. In July, Chrystia Freeland lit up the blogosphere with her article in the Washington Post suggesting the CR practitioner community is to blame for the Gulf of Mexico oil spill. While legitimate criticism of corporate responsibility is healthy and welcome, suggesting it will destroy the free enterprise system is nothing more than hyperbole.
Karnani’s essay recycles the old Milton Friedman theory that the social responsibilities of a business in a free enterprise system are to make as much as money as possible unencumbered by outside interference from government bureaucracy or a meddlesome civil society. Karnani suggests companies must choose one of two conflicting paths: pursuit of the bottom line or pursuit of social welfare: “Can companies do well by doing good?” asks Karnani. “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.”
The idea that companies seek to generate profits at the expense of the public interest is the real flawed argument.
Companies are able to realize profits precisely because they fulfill a public interest; identifying a social need, developing a product or service to fulfill that need and charging an amount commensurate with the perceived benefit or value provided. True, this exchange isn’t always so simple. Alcohol, tobacco and weapons have legitimate yet narrowly defined societal benefits and arguably significant societal costs. Generally, however, companies that don’t fulfill a public interest are not likely to succeed. Similarly those that would intentionally generate profits at the expense of the public interest are likely to have a limited run.
Karnani believes that the private sector is drifting blindly from Friedman’s tried and true principles towards the beguiling and dangerous cult of corporate responsibility. He sounds the alarm that, while CR may look appealing, it’s really an illusory construct and a direct threat to traditional profit making. Corporate leaders who succumb to the false promises of CR do so at their own peril, Karnani warns.
Karnani replays the tired adage that “executives are hired to maximize profits; that is their responsibility to their company’s shareholders” and that CR is contradictory to good governance which “demands that managers fulfill their fiduciary duty to act in the shareholders’ interest” Perhaps Karnani is unaware that good governance is considered an important cornerstone of CR; in fact it’s one of five critical aspects of the Tomorrows Value Rating assessment methodology. Karnani is correct that corporate managers have a fiduciary duty to their shareholders; however, unlike Karnani, the investment community considers CR issues to be relevant to corporate financial performance and firmly within the bounds of fiduciary duty. If “complete information” that empowers investors to make informed decisions is a tenet of our free market economy, Karnani should encourage greater transparency regarding CR risks and opportunities.
It’s also naive to suggest that corporate managers should put the interests of shareholders ahead of all other stakeholders. There is simply no legal basis that gives shareholders exclusive priority. In reality, the role of management is to create value for shareholders. This can’t be done by ignoring the priorities of other stakeholders who are intrinsic to the viability of the business. While expectations of the private sector are evolving – and may not always be realistic — balancing the needs and expectations of all stakeholders is a business imperative and a vivid illustration of good governance. This is why the principle of materiality is so critical to the process of determining what issues are most important, who they are important to, and how they play out in the achievement of long-term business success.
According to Karnani, managers have no right to “sacrifice profit for the common good” because doing so imposes “a tax on their shareholders”. However, managers are required to forego or relinquish profits every day as part of running an effective organization and building long-term, sustainable value. They regularly make decisions that cost shareholders real money in the short-term but may save or earn then more money in the long-term. Karnani continues: “Even if executives wanted to forego 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.” I’m sure this statement would come as a surprise to visionary CEOs such as Ray Anderson, Andrea Jung, Jeff Immelt or Jim Rogers.
Karnani says that what motivates companies is “the relentless maximization of profits, not a commitment to social responsibility”. For example, Karnani suggests that fast-food restaurants expanded their healthier menu options and auto makers began offering fuel-efficient vehicles only when these activities became profitable. “These companies are benefiting society while acting in their own interests,” says Karnani. That social welfare is improved is incidental, not central to their decision-making, he implies. Never mind that consumers have punished the auto industry for not staying aligned with their expectations and are currently doing the same to the fast food sector.
At least I agree with Karnani when he suggests that some companies’ CR efforts are not sincere. He also expresses a legitimate concern that we are becoming inoculated from the world’s complex social and environmental challenges the longer we disregard them. Yet many of these very real challenges are leading to some very real innovations. What better way to motivate the private sector than by monetizing solutions in the form of cost efficiencies and new revenue streams?
Finally I also agree when Dr. Karnani says: “Very simply, in cases where private profits and public interests are aligned, the idea of corporate social responsibility is irrelevant.” We have numerous examples of leading companies who successfully demonstrate exactly that, from GE’s ecomagination business to Clorox’s Green Works to car sharing to credit unions. These and many other companies are finding ways to achieve financial success in ways respectful to people and the planet.
Companies that find profit making and social welfare to be in direct opposition, however, should likely look at their business model before it’s too late. Most of the corporate scandals we’ve recently witnessed were experienced by companies who plainly and simply lost sight of the original societal purpose for which they were created. Ultimately, a lack of alignment between business objectives and societal expectations is the real threat to profit, not some covenant of rogue CR practitioners.