By Jacqueline Otto
Corporate Social Responsibility (CSR) has varying definitions, but among them is a common theme of “giving back” to the local and global community in which a company operates:
Corporate social responsibility encompasses not only what companies do with their profits, but also how they make them. It goes beyond philanthropy and compliance and addresses how companies manage their economic, social, and environmental impacts, as well as their relationships in all key spheres of influence: the workplace, the marketplace, the supply chain, the community, and the public policy realm. (Harvard.edu)
Corporate initiative to assess and take responsibility for the company’s effects on the environment and impact on social welfare. The term generally applies to company efforts that go beyond what may be required by regulators or environmental protection groups. (Investopedia.com)
Corporate social responsibility is a commitment to improve community well-being through discretionary business practices and contributions of corporate resources. (Corporate Social Responsibility: Doing the Most Good for Your Company and Your Cause, Philip Kotler and Nancy Lee)
Chris Horst blogged about CSR, characterizing it as the behavior in which “companies practice and celebrate their do-goodism.”
An alternative definition is that CSR is an organized corporate attempt to soothe capitalistic guilt.
Peter Brabeck-Letmathe, Chairman and former CEO of Nestlé S.A., spoke to the Chief Executives’ Club of Boston in 2005 on what he called the “wrongheaded idea” of CSR. His speech briefly stirred headlines for his emphatic and defensive claim that he operated a good company and should not be pressured by governments and other CEOs to give back to the community.
“What the hell have we taken away from society by being a sustainable, profitable company that creates jobs and provides good products to people? I don’t understand why I have to give back.”
Brabeck-Letmathe’s argument highlights two misconceptions underlying CSR. First, that business activity in a free market system is inherently exploitive and harmful to society. And second, that free market transactions are a zero-sum game where if someone wins, someone else loses.
The worldview that the economy is a zero-sum game is a myth—and a vile one at that. When two economic entities (a person and a person, a person and a business, a business and a business) voluntarily engage in an exchange of goods and capital, it is a win-win game.
When a company hires an employee, the company gains a (hopefully) valuable new asset, and the employee gains an income. Both win.
When a manufacturing company sells goods to a retail company, the manufacturer is able to pay its employees and debts, and the retailer has the potential to do the same. Also, the consumers have the ability to purchase the products from the retailer at a significantly lower cost than if they had to barter with the manufacturer directly. Everybody wins.
There is also a little recognized moral hazard involved in CSR. A corporation’s finances belong to the shareholders. Any investment with those monies not aimed at maximizing the shareholder’s return on investment (ROI) is a disingenuous use of the funds. If an investor desires to contribute to the community, there are charities and non-profits that could benefit from that money and donating to them should be that individual’s imperative.
Market trends suggest that investors are, in fact, fully aware of the costs CSR extracts on their ROI. In a Forbes op-ed, David Vogel, professor at the Haas School of Business at the University of California, Berkeley, wrote that “the belief that corporate responsibility ‘pays’ is a seductive one: Who would not want to live in a world in which corporate virtue is rewarded and corporate irresponsibility punished? Unfortunately, the evidence for these rewards and punishment is rather weak. There is a ‘market for virtue,’ but it is a very limited one. Nor is it growing.”
Companies that have built their reputation upon their CSR commitment, such as Whole Foods, Starbucks, and Gap, have certainly done well and remain competitive—but for all the efforts and funds they have invested in CSR, there is no evidence that their model will prove the most successful. And there is zero evidence that the CSR serves as any kind of helpful factor in investment decisions.
When Chris Horst discussed the different CSR models of Tom’s Shoes and Whole Foods, he praised the latter’s approach saying, “rather than voicing poetic kudos to their corporate tithing, Whole Foods highlights the inherent and more significant value their business brings to our globe.”
More businesses should celebrate their inherent good, rather than investing millions in programs—the only consistent result of which is to sooth corporate capitalistic guilt. If a company honestly believes that it is a detriment to its community—that it is taking advantage of people and defrauding customers—then it has a moral imperative to cease operations.
The only real corporate social responsibility is to operate the most successful company possible.