The Sept 8-14 issue of The Economist runs an article, "In search of the good company," about Corporate Social Responsibility (CSR). It mentions a new book by Robert Reich, former labor secretary under Bill Clinton, who apparently has done a 180-degree turn about CSR -- he used to urge companies to pursue socially responsible actions, but now believes that expecting companies to do so is not only futile, but diverts attention from the responsibility of the government to attend to social issues.
In The Halo Effect, I show how the conventional wisdom -- that CSR leads to profitability -- is poorly done and inconclusive. First, it is easy to attribute enlightened management to companies that are performing well -- that's an example of the halo effect. But even if we conduct a longitudinal study and look
at changes in CSR and company performance over time, we still may not have isolated the performance impact of CSR, because so much of what we mean by CSR is hard to separate from so many other things that are understood by good management, leading to what I call The Delusion of Single Explanations.
Of course, proponents of CSR want to show a performance impact -- they want companies to conclude that it makes sense to pursue enlightened policies about consumers, the environment, diversity, and more. But if these sorts of things are beneficial to the company, then doing them is merely another form of enlightened self-interest. The crux of the matter is this question: Suppose that CSR initiatives are not congruent with profit maximization. Suppose that they come at the expense of profits. What then? Should a manager still pursue them or not? This is the issue that Reich confronts in his book. As he puts it, for a manager to pursue CSR when it also leads to profit is hardly social responsibility at all -- but just another form of corporate optimisation.
Such a view need not to be troubling -- but it does require that we think clearly about performance and CSR. It means only that consumer groups, NGOs, and other socially minded organizations should help shape public opinion so that the interests of companies are aligned with some perceived greater social ends. That's fine. But we should not expect companies, which are ultimately economic entities and pursuing economic goals, to sacrifice those ends in the pursuit of other objectives. Such is not their nature, and we should not expect it to be so. If by CSR we mean an alingmnet of objectives, so that companies seek to do those things that social advocates wish, fine; but if we imagine that companies will suboptimize their performance in order to seek some mix of objectives, economic considerations balanced with other goals, we will be disappointed -- and the error would lie with us, for failing to recognize the basic motivation of private sector management.
Agreed. However, discussions of whether CSR is good/bad hinge on the definition of a corporation's goal. Above you mention potential lack of congruency between CSR and "profit maximization." Is "profit maximization" the actual goal of a public corporation? If so, how do we define "profit"? Quarterly? Yearly? Over the next century? And how do you discount future profits?
Lack of clarity in the goal obviously leads to lack of clarity in what constitutes optimal strategy. For a public corporation, it seems that the goal is really to maximize shareholder value, which is more than just maximizing profits (see http://blog.provisdom.com/?p=13 for a discussion).
I recently had a similar discussion at a conference. The topic of the conference was basically adoption of "green" processes. The key difficulty, as pointed out by more than one speaker, is that environmental initiatives often pay off many years down the road, yet the costs are incurred in the near future. Using the standard method of corporate discounting, the NPV of these future payoffs tends to be small compared with near-term profit maximization.
But if you properly calculate the effect on shareholder value, this may not be the case. The risk from future uncertainties may have an inverse relationship with the Market, in which case the associated discount rates could be less than the risk-free rate, or even negative.
So in such cases you could potentially demonstrate that shareholder value is increased more by strategies which would otherwise simply be considered "socially responsible". And I've only touched on the aspect of discount rates. Usually we have other information available as well, such as the possibility of future government regulation, reputation effects, etc. To the extent it is practical, we need to include all of our information in the analysis, and understand its impact on shareholder value, as opposed to just taking the short-term view of profits.
Posted by: Dave Dixon | October 11, 2007 at 05:17 PM