Can companies do well by doing good? 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.
Large companies now routinely claim that they aren’t in business just for the profits, that they’re also intent on serving some larger social purpose. They trumpet their efforts to produce healthier foods or more fuel-efficient vehicles, conserve energy and other resources in their operations, or otherwise make the world a better place. Influential institutions like the Academy of Management and the United Nations, among many others, encourage companies to pursue such strategies.
It’s not surprising that this idea has won over so many people—it’s a very appealing proposition. You can have your cake and eat it too!
But it’s an illusion, and a potentially dangerous one.
Very simply, in cases where private profits and public interests are aligned, the idea of corporate social responsibility is irrelevant: Companies that simply do everything they can to boost profits will end up increasing social welfare. In circumstances in which profits and social welfare are in direct opposition, an appeal to corporate social responsibility will almost always be ineffective, because executives are unlikely to act voluntarily in the public interest and against shareholder interests.
Irrelevant or ineffective, take your pick. But it’s worse than that. The danger is that a focus on social responsibility will delay or discourage more effective measures to enhance social welfare in those cases where profits and the public good are at odds. As society looks to companies to address these problems, the real solutions may be ignored.
Well and Good
To get a better fix on the irrelevance or ineffectiveness of corporate social responsibility efforts, let’s first look at situations where profits and social welfare are in synch.
Finding the Balance
- The Illusion: Because companies sometimes can profit from acting in the public interest, it fuels the belief that executives have a responsibility to serve not only their shareholders but also some larger social purpose.
- The Reality: When companies do well by doing good, the driving force is the pursuit of profit, not a commitment to social welfare. More often, profits and social welfare are at odds, and executives can’t be expected to heed the call for social responsibility at the expense of shareholders.
- The Danger: Appeals to corporate social responsibility are not an effective way to strike a balance between profits and the public good, and they may be a distraction from moreeffective initiatives, such as government regulation.
Consider the market for healthier food. Fast-food outlets have profited by expanding their offerings to include salads and other options designed to appeal to health-conscious consumers. Other companies have found new sources of revenue in low-fat, whole-grain and other types of foods that have grown in popularity. Social welfare is improved. Everybody wins.
Similarly, auto makers have profited from responding to consumer demand for more fuel-efficient vehicles, a plus for the environment. And many companies have boosted profits while enhancing social welfare by reducing their energy consumption and thus their costs.
But social welfare isn’t the driving force behind these trends. Healthier foods and more fuel-efficient vehicles didn’t become so common until they became profitable for their makers. Energy conservation didn’t become so important to many companies until energy became more costly. These companies are benefiting society while acting in their own interests; social activists urging them to change their ways had little impact. It is the relentless maximization of profits, not a commitment to social responsibility, that has proved to be a boon to the public in these cases.
Unfortunately, not all companies take advantage of such opportunities, and in those cases both social welfare and profits suffer. These companies have one of two problems: Their executives are either incompetent or are putting their own interests ahead of the company’s long-term financial interests. For instance, an executive might be averse to any risk, including the development of new products, that might jeopardize the short-term financial performance of the company and thereby affect his compensation, even if taking that risk would improve the company’s longer-term prospects.
An appeal to social responsibility won’t solve either of those problems. Pressure from shareholders for sustainable growth in profitability can. It can lead to incompetent managers being replaced and to a realignment of incentives for executives, so that their compensation is tied more directly to the company’s long-term success.
When There’s a Choice
Still, the fact is that while companies sometimes can do well by doing good, more often they can’t. Because in most cases, doing what’s best for society means sacrificing profits.
Don’t Miss
Articles from MIT Sloan Management Review with other views on this topic.
- How to Do Well and Do Good
Rosabeth Moss Kanter
The key to achieving both of those goals together? Integrate societal benefits with company strategy. - Does It Pay To Be Good?
Remi Trudel and June Cotte
In surveys, customers say they’ll pay more for ethically produced goods. But is that what happens when they actually buy things? - Using Corporate Social Responsibility to Win the War for Talent
C.B. Bhattacharya, Sankar Sen and Daniel Korschun
Research indicates that there are five steps that can help business leaders increase CSR’s effectiveness as a lever for talent management. - Beyond Selfishness
Henry Mintzberg, Robert Simons and Kunal Basu
A syndrome of selfishness has taken hold of our corporations and our societies, and it must be challenged.
This is true for most of society’s pervasive and persistent problems; if it weren’t, those problems would have been solved long ago by companies seeking to maximize their profits. A prime example is the pollution caused by manufacturing. Reducing that pollution is costly to the manufacturers, and that eats into profits. Poverty is another obvious example. Companies could pay their workers more and charge less for their products, but their profits would suffer.
So now what? Should executives in these situations heed the call for corporate social responsibility even without the allure of profiting from it?
You can argue that they should. But you shouldn’t expect that they will.
Executives are hired to maximize profits; that is their responsibility to their company’s shareholders. Even if executives wanted to forgo 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. The movement for corporate social responsibility is in direct opposition, in such cases, to the movement for better corporate governance, which demands that managers fulfill their fiduciary duty to act in the shareholders’ interest or be relieved of their responsibilities. That’s one reason so many companies talk a great deal about social responsibility but do nothing—a tactic known as greenwashing.
Managers who sacrifice profit for the common good also are in effect imposing a tax on their shareholders and arbitrarily deciding how that money should be spent. In that sense they are usurping the role of elected government officials, if only on a small scale.
Privately owned companies are a different story. If an owner-operated business chooses to accept diminished profit in order to enhance social welfare, that decision isn’t being imposed on shareholders. And, of course, it is admirable and desirable for the leaders of successful public companies to use some of their personal fortune for charitable purposes, as many have throughout history and many do now. But those leaders shouldn’t presume to pursue their philanthropic goals with shareholder money. Indeed, many shareholders themselves use significant amounts of the money they make from their investments to help fund charities or otherwise improve social welfare.
This is not to say, of course, that companies should be left free to pursue the greatest possible profits without regard for the social consequences. But, appeals to corporate social responsibility are not an effective way to strike a balance between profits and the public good.
The Power of Regulation
So how can that balance best be struck?
The ultimate solution is government regulation. Its greatest appeal is that it is binding. Government has the power to enforce regulation. No need to rely on anyone’s best intentions.
AUDIO
Hear more from Aneel Karnani on why the concept of corporate social responsibility is flawed.
[audio: /wp-content/blogs.dir/3/files/mp3s/pod-wsjjrkarnani.mp3]
But government regulation isn’t perfect, and it can even end up reducing public welfare because of its cost or inefficiency. The government also may lack the resources and competence to design and administer appropriate regulations, particularly for complex industries requiring much specialized knowledge. And industry groups might find ways to influence regulation to the point where it is ineffective or even ends up benefiting the industry at the expense of the general population.
Outright corruption can make the situation even worse. What’s more, all the problems of government failure are exacerbated in developing countries with weak and often corrupt governments.
Still, with all their faults, governments are a far more effective protector of the public good than any campaign for corporate social responsibility.
Watchdogs and Advocates
Civil society also plays a role in constraining corporate behavior that reduces social welfare, acting as a watchdog and advocate. Various nonprofit organizations and movements provide a voice for a wide variety of social, political, environmental, ethnic, cultural and community interests.
The Rainforest Action Network, for example, is an organization that agitates, often quite effectively, for environmental protection and sustainability. Its website states, “Our campaigns leverage public opinion and consumer pressure to turn the public stigma of environmental destruction into a business nightmare for any American company that refuses to adopt responsible environmental policies.” That’s quite a different approach from trying to convince executives that they should do what’s best for society because it’s the right thing to do and won’t hurt their bottom line.
Overall, though, such activism has a mixed track record, and it can’t be relied on as the primary mechanism for imposing constraints on corporate behavior—especially in most developing countries, where civil society lacks adequate resources to exert much influence and there is insufficient awareness of public issues among the population.
Self-Control
Self-regulation is another alternative, but it suffers from the same drawback as the concept of corporate social responsibility: Companies are unlikely to voluntarily act in the public interest at the expense of shareholder interests.
But self-regulation can be useful. It tends to promote good practices and target specific problems within industries, impose lower compliance costs on businesses than government regulation, and offer quick, low-cost dispute-resolution procedures. Self-regulation can also be more flexible than government regulation, allowing it to respond more effectively to changing circumstances.
Executive Adviser
Innovations in management theory & business strategy – a collaboration with The Wall Street Journal
The challenge is to design self-regulation in a manner that emphasizes transparency and accountability, consistent with what the public expects from government regulation. It is up to the government to ensure that any self-regulation meets that standard. And the government must be prepared to step in and impose its own regulations if the industry fails to police itself effectively.
In the end, social responsibility is a financial calculation for executives, just like any other aspect of their business. The only sure way to influence corporate decision making is to impose an unacceptable cost—regulatory mandates, taxes, punitive fines, pubic embarrassment—on socially unacceptable behavior.
Pleas for corporate social responsibility will be truly embraced only by those executives who are smart enough to see that doing the right thing is a byproduct of their pursuit of profit. And that renders such pleas pointless.
(Reprint #:5231)
Copyright © Massachusetts Institute of Technology, 1977-2011. All rights reserved.
So elitist that it could have been written by Goldman Sacks. I am increasingly tired of reading articles like this that simply accept as wrote all the assumptions of concentrated power. Why pay livable wages if they reduce the gains to the shareholders? And who are these shareholders, greedy and narrow minded windbags. Yes, the ultra wealthy must have their way. It will not do to call them the ultra-wealthy, so they are renamed “shareholders.” Now the standard retort comes that actually “shareholders are all of us.” However, not so fast, stock ownership in the US society and all societies is highly concentrated. We are talking about the rights of the wealthy here. I have a solution. Eliminate the stock market, it does nothing but concentrate power, increase corruption, cause companies to look for short term profits, and serve as justification for immoral behavior.
This article uses coded language to argue for corporate irresponsibility. Congradulations Aneel you serve you masters well. If you keep writing articles like this maybe you can get a seat on the board of directors of BP.
Nice article.
Government is slow, inefficient and easily bias. I have always found that “you get what you measure”. If government can help, it is in the definition and publication of measurements. Watchdogs put them in your face, socially responsible people will use them to make better decisions.
This analysis may be logical if one assumes that “Executives are hired to maximize profits; that is their responsibility to their company’s shareholders”.
But what if shareholders, and customers and employees, care about CSR? [which seems quite likely?].
Then the tension between the apparently opposing goals of profit and CSR then (almost) disappears. And the value of CSR – as a pragmatic initiative to inculcate a wider moral sense into the everyday world of business – becomes apparent.
Provocative article, but I would like to offer three additional reasons for executives to pursue an agenda of corporate responsibility:
1) The belief that consumers can see value in a corporate responsible company and pay a premium for its products, or at least become more loyal to their brand.
2) The idea that you can attract and retain talent by becoming a differentiated employer.
3) The credibility to influence regulation and legislation that could significantly impact profits.
These are long term plays to protect/enhance profits.
Ricardo
Please, please, please…can you speak to BP?
Dr. Kamani: Given the timing of your article just after the BP Deepwater platform explosion, your plea for a balanced approach ( in favor of profits vs. social responsibility ) certainly sounds more like an apologia for the likes of BP, EXXON, Big Pharma, and currently the U.S. Chamber of Commerce campaign against climate change policies of the Obama Administration. If you were to apply your criteria to wage and hour legislation a hundred years ago, child labor, pregnancy leaves, employee health protection, higher taxes on tobacco products– would your proposal hold up? It’s a fact of life for corporations that as civilization matures, the protection of humans and the environment becomes more important as against corporate welfare.To bet against this trend is to stuff your head in the sand, and make it MORE expensive to catch up later. Look at Detroit cars vs. the Japanese!
Look at French domestic firms such as AREVA, ALSTHOM, CARREFOUR all being protected by the Government, vs. the Germans and especially the smaller countries of the E.U. that have forced their companies to adapt or die. They say you shouldn’t spit into the wind. Might that be the effect of your proposal?
About freggin time someone said this!!!
We deal with a lot of Fortune 500s that feel a need to ‘share the wealth’ – bend over backwards to extend opportunities to third-world countries to provide services to them…. to “raise their bar” to the “us standard”…
In the end, the US companies “lower” their bar to support the ‘weakest’ link in the chain. As a result, the cost to manage the third world resources INCREASES and the time to deliver something INCREASES (with a dip in quality and stability).
Govenments are, and are not, the answer. You have to assume that the third-world government and banking institutions will be geared towards a one-sided relationship (100% to their benefit). That assumption is not ‘an assumption’ it is experience. They will do everything possible through tariffs, banking fees and regulations, etc. to keep your products from being imported, but allow your technology to be imported, then to make it hard to get your money out. All in the name of helping their own poor and starving “under privileged” have an opportunity via your company’s willingness to ‘help’.
Governments ARE the answer if they can ensure that trade is fair (e.g. SAME tariff for Import and Export between the countries) -AND- that the banking if fair (e.g. no hidden tax payments required to get money out of the country, or other fees that are essentially a tax/punishment for the company trying to ‘take from the people’). As long as third-world countries have governments that are working for the government and not the best interests of the people (e.g. FREE MARKETS and CAPITALISM) – the cost of dealing with them simply does not make it worth the price.
The more liberal the management is at some of these companies, the worse it is. They seem to do everything to avoid the sting of a critical investment class (stock holders), and fly around the world picking up “participation trophies” for the “corporate responsibility” they are demonstrating (which is hard to criticize because – who the hell is going to complain about charity – uh hm…. besides the investors whos profits are being thrown around the world so the CEO can fly and pick up ANOTHER ‘participation trophy’).
I am glad this article was written – it is common sense for anyone that has done work internationally, or had to work with any of the resources that were forced because of these decisions.
Two of the greatest positive influences on the social good are pure, unadulterated capitalism and personal virtues. Even with major weaknesses in the latter from time to time, capitalism has, overall, created far more pleasant places to live than alternative economic systems. Countries that rely on government regulation seem end up with neither corporate nor personal commitment to social responsibility.
This debate already happened in 1970, with Friedman’s “The Social Responsibility of Business is to increase profits.”
This article is myopic and old school, and shows a real lack of understanding of how consumer demographics, public policy, and the sources of firm innovation have changed dramatically in recent history.
As I read the article, the point can be summarized (pulling selective quotes) as “Irrelevant or ineffective, take your pick. …. The danger is that a focus on social responsibility will delay or discourage more effective measures … The ultimate solution is government regulation.”
By and large, I agree. If corporations are chartered and managed to maximize profits, then the counterbalancing force has to come from outside – namely regulation.
Which isn’t to say that there are additional approaches, not mentioned by the article – notably, reform of corporate charters (in the old days, it was HARD to get a corporate charter, and charters included public interest requirements) and ownership considerations (when public interest groups, socially motivated investment funds, and such, own large chunks of corporations, there’s ownership pressure to do things other than simply maximize profits).
This a good article that cuts to the nub of the problem with so-called Socially Responsible Investing, namely that there are inherent conflicts between the fiduciary role of management teams at publicly held co’s and the various and varied definitions of what is “responsible”. Investor’s have to be the final arbitor or what is “responsible”. Managers are fiduciaries and have to deliver profits to investors. Restricting investment choices will likely restrict profits. Prof. Alex Edmunds at Penn has shown that when management’s do well by their employees by creating superior corporate cultures of ethics and purpose, they also outperform in terms of returns to shareholders. So, the best way to be “socially responsible” is to act locally by buying stock in co’s well-regarded by their employees, and trust that the employees will, in turn, act globally to create a company with a postive impact. Anything else is doomed to paralyzing conflicts of interest.
What a wonderful arguement against manufacturing (of any kind) and shifting blame to the greedy, short-term obsessed investors who are driving companies to cut corners on safety, the environment, quality and maintaining a happy and productive workforce. The article feeds into everything that is allegedly ‘wrong’ with capitalism in America, fueling the sentiment that our day has come and gone; while companies that develop, build and produce (!) safer, greener and more efficient products continue to flourish.
It is not only socially responsible, it is fiscally responsible to have a safety program that encourages employees to report problems (saving injuries, medical costs, lawsuits and insurance premiums). It is not only environmentally responsible, it is fiscally responsible to have programs in place that reward protecting the environment to avoid costs associated with clean ups, mitigation, fines and increased permitting times).
I would be reluctant to purchase a used vehicle from the author. Clearly changing the oil and replacing worn parts would just cut into profits from the resale. Likewise I am reluctant to buy this used, worn arguement.
Awful, awful article. Dr. Karnani has been spending too much time in his ivory tower.
A group of people will always have more than enough creative talent to pursue and realize both profit and social good. Do managers become robots while at work only to return to their human form upon leaving the office? Of course not, yet this author’s destructive, academic view removes all human creativity – indeed all humanity – from the issue. Does he think so little of the people actually running these businesses?
Executives are hired to maximize the efficiency of a system – not only to maximize profits. Maximize profits for the day? The week? The year? What does this mean? Maximize profits for the day, fire all your employees. Certainly this is not the job of the executive.
“None of our institutions exists by itself and is an end in itself. Every one is an organ of society and exists for the sake of society. Business is no exception. Free enterprise cannot be justified as being good for business; it can be justified only as being good for society.”
We are not cogs, we are people. We are multifaceted. We are creative. I feel sorry for the author, he thinks so little of our abilities to be more, to do more. There are millions of examples in every industrialized country in the world that prove the author’s dangerous view incorrect.
I recall this question being posed to Peter Drucker: That the executive should only be concerned with profits, not the community. Drucker curtly responded that “without out a community there would be no profits.”
The terms profit and shareholders have become rather vacuous. Would individual BP shareholders really prefer taking a risk of a catastrophic oil spill for a marginal operational cost reduction and profitability knowing that it has huge economic and environmental implications for the community? It seems disingenuous to imply short-term profits and compensation-driven executive decisions benefits common shareholders.
Shareholders have no idea of these decision factors because there is little transparency or accountability with the executives or the corporate boards. There are so many recent examples where pure profit incentives drove malignant executive behavior: The executive got a huge severance and pension, the boards have liability coverage, institutional brokers get their money up-front – meanwhile the individual shareholder and taxpayer gets stuck with the long-term toxic bill.
Karmani might want to insert some discussion of leadership responsibility in his article.
So, we are told (in the 4th paragraph), “You can have your cake and eat it too!” as though that were a newly discovered, special state of nature.
It turns out we have ALWAYS been able to do so.
The impossible trick, as it always has been, is to “Eat your cake and have it too.”
Appealing to our atavistic instincts does not change the fact that the author is systems blind, and unless you are looking at the relationships between things, you cannot predict what will happen next.
It amazes me how these arguments are still being put forward in spite of the overwhelming amount of data to the opposite. Simple statistic: only 9.5% of American businesses last over 40 years. That is a dismal record. Oddly enough, the longest lasting American business, EJ Rhoades and company, a family business from 1704 to 1992, had as its mission the Golden Rule.
Read “It’s the EconoMe Stupid!” by Greg Gull, available on Amazon. It goes to the heart of the mistaken assumptions made in Adam Smith’s the Wealth of Nations, and clearly shows what the experience of the last 150 years has really shown: there is a difference between progress and growth.
Thanks for a thoughtful article. I found it reasonably well-balanced, though obviously some other commentators found it useful to attach to particular ideologies. The doing good /doing well issue, as you note, has been difficult to solve for some time.
May I suggest one clarifying dimension: time. The longer the time frame, the more it is true that social and corporate interests are aligned. As Mr. Blass says above, issues like child labor, racist hiring, toxic dumping and poisonous ‘medicines’ were the issues du jour not all that long ago. The companies who are out in front of social trends probably tend to do better over time than those troglodytic firms who insist on clining to the last decade.
The long term also favors customer loyalty and brand image, both of which are demonstrably correlated with profitability–over a long enough time frame.
One last piece of the puzzle; I think you’re assuming that it’s ‘obvious’ that a corporations sole responsibilities lie to its shareholders. That is simply not true; legally, it is not true. Read The Myth of Shareholder Capitalism in HBR this March:
http://hbr.org/2010/04/the-myth-of-shareholder-capitalism/ar/1
To continue to phrase the good/well argument in shareholder vs. the rest terms is not necessary, and simply spreads falsehoods. Legally, corporate boards of directors are required not to enhance only shareholder value, but a wider set of stakeholders.
And when you look at it that way, much of the drama goes away; it’s far easier to say that corporations do, in fact, have social responsibilities–legally.
Professor Karnani’s entire argument here is inherently flawed because it is premised upon assumptions and projections that, in fact, either no longer exist or are rapidly being dismantled (discredited) by the realities of the new global order.
He refers to CSR as disconnected; an external notion that is incongruent and incompatible with the traditional imperatives of business: market share, profitability, shareholder value and valuation.
However, he fails to recognize the result of a steady series of transformational occurrences over the past 20 years that includes, but is not limited to, the proliferation of personal technology, new forms of individualism, and consumer/stakeholder empowerment. And of course it all has been exacerbated by the economic crisis.
We are in a permanent recalibration of the power base across markets – transitioning from a shareholder-driven society to a stakeholder-driven society.
Companies no longer solely control their destiny out of concentrated power (and wealth). Power and wealth can be fleeting. Public trust and confidence is the foundation for sustainable competitiveness and must be earned everyday.
Empowerment of the individual has brought about a new resiliency and intelligence in consumers who are better networked and dramatically more resourceful. They are reshaping the context in which companies operate and now bestow confidence as a ‘license’ to operate and pursue profitability more than ever.
The funny thing in all of this is that the professor fails to see the great promise of opportunity in this redistributed power base: Companies who pursue profitability aligned and compatible with stakeholder values are actually enhancing demand for their products and services – which results in sales growth. What’s wrong with that picture?
The fact is that companies are becoming more responsible. Who cares about the intentions. So they profit from it – big deal. They are doing something favorable to all of us and you somehow care about where there heart is?
If a company can profit from cleaning up its act – I am all for it. Even if that company doesn’t care about anything other than profits. Why should it matter.
We need strong regulation – but market pressure from consumers and shareholders is best (Sarbanes Oxley also helps).
Sustainability has four distinct facets. People (the social impact of a company), planet (environmental impact), profits (fiduciary responsibility) and finally peril or risk. Smart companies are now realizing that all of these things are tied into how the company will perform.
Jetblue and Southwest know this – where United, Delta and others focused on profits these guys focused on people and the experience people had with their brands. By doing so profits followed. Zappos has proven this time and time again.
BP has taught us that cutting corners and focusing solely on profits will eventually affect your bottom line. Do you think BP executives and managers have met their fiduciary responsibility to shareholders? Certainly not – they did in the short term but now have tanked because they forgot about the people and planet putting them in peril.
Today the risk of not becoming sustainable jeopardizes contracts, customers, consumers, and brand value all of which come with a price tag.
Corporate social responsibility is about long term responsibility obtained sustained profits. Fail to achieve any element and consumers, regulators, customers, karma, mother nature or Murphy is gonna get you.
I’ve been in the environmental world for quite awhile (in government, industry, and consulting). One overwhelming observation across all industries and all time is that companies routinely ignore “socially good” opportunities to improve their profits such as continuously improving energy efficiency and cutting waste. Sometimes it’s a matter of accounting systems that don’t give executives a very good picture of where capital can be used appropriately. But sometimes it’s pure inertia–we’re making money, so why should I change. And sometimes it hubris–we’ve done everything possible to reduce energy, waste, etc. Mostly, in my view, it’s a matter of considering environmental (and social) responsibility as being trivial and not indicative of how the organization is run.
Karnani states “…Executives are hired to maximize profits; that is their responsibility to their company’s shareholders…” I have a number of problems with this basic statement even before going into the CSR side of things.
Corporate purpose is the reason why any organization was formed and why it continues to exist. Corporate purpose is the vindication for all its strategies, all its actions, indeed, everything it ever does in its entire life history. It is the justification for its very existence, its raison d’être. It is the sole criterion by which one may judge whether an organization is a success or a failure. It is the ends as opposed to the means.
The purpose of a company certainly has to do with earning returns for shareholders. There are two problems with the corporate purpose stated by Karnani – such objectives as, ‘We aim to maximize profits’ or, ‘We aim to optimise return on capital’. How do you verify that the profits made last year were ‘maximized? Do you call in a firm of accountants to sign a certificate: ‘I certify this company maximized its profits last year? If you cannot tell whether you have achieved a certain objective or not there is no point whatever in setting it.
Secondly, I am not sure that many companies really do hire their CEO’s and give them a single responsibility such as ‘to maximize profits’. Do many companies wish to strain every fibre of their being to earn more profits even though they know that these are already way above industry averages? Would they really ignore all risks, deny all morality just to extract the last cent? No. Profit ‘maximisation’, even if it is a responsibility that a CEO could be held accountable for, is not the only responsibility, they also have under board policies and within the law responsibilities related to how the company behaves while pursuing profits.
Rather than CSR I would suggest a simpler old fashioned description of “corporate conduct”. I mean any action taken, or deliberately not taken, because it is thought to be morally, aesthetically, socially or personally desirable, or repugnant. Actions taken for this reason would be taken regardless of whether they increased or decreased the organization’s ability to achieve its corporate purpose, or even if they made it impossible; they are taken because they are the right thing to do. Conduct is largely independent of purpose. Companies and NPOs would have aspects of corporate conduct in common even if they had very different corporate purposes. Corporate conduct is also referred to as ethos, values, culture, code of ethics, standards of behaviour, and more often recently “corporate social responsibilities, etc. However, this latter has become enlarged to cover a range of things that are perceived by a range of interest groups other than shareholders as being ‘the right things to do’. If these things are seen to be ‘right’ by having a strong consensus in moral terms, or enshrined in law, or set out on professional codes of conduct relevant to the practice of the business then fine. However, when they derive from the political clout of a particular interest group, without such moral or legal support, then they fall outside of what can be expected in the code of conduct of the business. The issues raised by the interest group may be worthwhile, and if so they should be seeking to incorporate it in the law or professional code of practice or whatever other appropriate vehicle for legitimising it for that industry of society in general, not trying to take over the corporation as a vehicle of social change. A fuller explanation of this view is in the work of John Argenti, whose books are in libraries or available second hand.
The truth hurts.
Having said that, there is another dimension I’d like to add to the mix: staff engagement. If the employees truly believe in the organisation’s greater purpose, then that will almost certainly improve the bottom line.
Social responsibility and employee loyalty. Employee loyalty died during the greatest recession in modern times. An in its place….Business and the public sector are into a phase of creative disassembly where reinvention and adjustments are constant. Hundreds of thousands of jobs are being shed by United Technologies, GE, Chevron, Sam’s Club, Wells Fargo Bank, HP, Starbucks etc. and the state, counties and cities. Even solid world class institutions like the University of California Berkeley under the leadership of Chancellor Birgeneau & Provost Breslauer are firing staff, faculty and part-time lecturers. Yet many employees, professionals and faculty cling to old assumptions about one of the most critical relationship of all: the implied, unwritten contract between employer and employee.
Until recently, loyalty was the cornerstone of that relationship. Employers promised job security and a steady progress up the hierarchy in return for employees fitting in, performing in prescribed ways and sticking around. Longevity was a sign of employeer-employee relations; turnover was a sign of dysfunction. None of these assumptions apply today. Organizations can no longer guarantee employment and lifetime careers, even if they want to.
Organizations that paralyzed themselves with an attachment to “success brings success’ rather than “success brings failure’ are now forced to break the implied contract with employees – a contract nurtured by management that the future can be controlled.
Jettisoned employees are finding that the hard won knowledge, skills and capabilities earned while being loyal are no longer valuable in the employment market place.
What kind of a contract can employers and employees make with each other? The central idea is both simple and powerful: the job or position is a shared situation. Employers and employees face market and financial conditions together, and the longevity of the partnership depends on how well the for-profit or not-for-profit continues to meet the needs of customers and constituencies. Neither employer nor employee has a future obligation to the other. Organizations train people. Employees develop the kind of security they really need – skills, knowledge and capabilities that enhance future employability.
The partnership can be dissolved without either party considering the other a traitor..
Thanks for sharing these ideologies. I cannot find a single argument that is not new and not neoclassical. This is far behind the debatte in a serious field of research–about 40 years behind it.
I have little understanding to read this in MIT Sloan MR.
On the whole, I disagree with the thesis of Dr. Karnani’s article. The job of the executive is to balance the interests of multiple stakeholders – the J&J Credo states this beautifully.
The problem of being solely focussed on long-term profit is the definition of “long-term”. Executives who think about quarterly or annual earnings would clearly make different decisions than those who look at a 5 or 10 year window. And, for complex problems that our planet faces, even that horizon is too small. Unfortunately, focus on longer horizons can result in decisions that are less profitable in the short term, resulting in replacement of executives, takeover of corporations, etc.
A fundamental cause for the focus on relatively short term focus is the need for annual reporting – there is no logic to why financial results should be linked to the speed with which the earth revolves around the sun! If the window were larger, executives would at least make more balanced decisions than they do now. Of course, this assumes that we, as shareholders, are willing to be more patient, and there is no evidence of that!
In summary, we are looking at a systemic problem and it is naive to state that focussing on profits (or any other single parameter) will solve the issues.
CSR as it is fondly called is mere a marketing stint to build firm’s brand image. If the corporations follow good governance principles that is more than enough than to take some CSR activity exclusively. As per my opinion, if a corporation wants to do some CSR, let them distribute 10% of its shares to poor public and let them increase number independent directors sitting on the boards.
If Dr. Kamani bridles at corporations voluntarily assuming responsibility for the social consequences of their actions, would he mind if the democratically elected leaders of home and host nations imposed some requirements of their own? Because that is the alternative. Laissez faire is long gone.
Interestingly, private companies in the nation with the strongest economic recovery and sustained recent economic growth in Europe, Sweden, are typically constrained by what we would call “CSR.” So are pension funds, investment banks, and public enterprises. All the cant in the world about “capitalism answers all needs” sounds flat and fishy when reality intrudes. Maybe capitalism with a social-democratic bent has a future — but isn’t that what CSR is all about, even if it is very weak tea as currently practiced?
Some companies go for self insurance as it may be more cost effective. If governments implement the idea of self regulation and impose heavy sanctions to those companies that don’t abide, then self regulation would potentially be a cost cutting measure too…
Cost cutting reduces costs and increases profit…
So ofthe above is true, we haven’t changed much.
The other point I’d like to make is that whilst your point of view is very interesting, and companies do tend to be reactive sometimes, it sometimes helps judging the action more so than the intent behind it – especially when the action leads to a positive outcome… I would say that it’s probably better to have something positive than have nothing at all…
Points to consider.
I have been in the “thought leadership” biz for 15 years, and I’m pretty sure that this is the first article I’ve ever read that doesn’t tout the miraculous qualities of CSR. Thanks, Aneel, for having the guts to write it, and thanks too to the editors of WSJ and SMR for running it.
While this article is logical, it does seem to be rehashing the old narrative of why and how we do business. This has gotten us to where we are today and will not move us forward. I believe capitalism has more to fofer. Never does the author mention the trade-off or consideration between optimizing short term vs. long term profits. For an enterprise to be truly sustainable and responsible to all its constituents (including shareowners) an appropriate view toward optimizing financial success over the long term must be held.
There are three main problems with your argument:
1> Market Demand Can Be Built: You discuss the market demand for social responsibility as if it were a weather pattern: wait for it to happen, then respond with a profitable business model. But in fact, companies have a lot of influence over market demand patterns. A socially responsible business might invest in building socially responsible market demand from scratch. This may delay profits, but doesn’t necessarily act against them in the long term.
2> Activist Shareholders: Today’s market demand that is creating profitable opportunities for socially responsible business models is also creating shareholder demand for socially responsible management. You state this but you don’t seem to see this shareholder demand as a counterweight to demands for profit. Over the next few years expect shareholder demands to be systemized into KPIs that will be monitored in financial statements and will have an affect on stock prices.
3> Irrelevant Regulations: When demand grows so much that business interests become aligned with social interests, what becomes “irrelevant” is, if anything, all the costly government regulation you were so anxious to implement. The social responsibility efforts of the company may become “sustainable” or “efficient,” but certainly not “irrelevant.” Government regulation is often a useful stopgap but it’s not the best long-term solution. In fact, it’s dangerous because it shifts focus from social responsibility (where creativity is channeled to building market demand) to compliance (where creativity is channeled to finding loopholes).
The best recipe for socially responsible business is to follow the three steps above: build demand for it (with the possible help of government regulation in the beginning), empower activist shareholders (with tools for responsible valuation), and get rid of regulations once they become irrelevant.
The last thing I heard is that Corporations were still a nexus of contracts. Nobody is suggesting that management forego shareholder value by engaging in philanthropic adventures. It is not a marketing issue either, it is an issue of making sure that those contracts that makeup the corporation are well cared for in the long term to ensure that corporate valuation will include a valuable perpetuity. Ignoring CSR on behalf of short term profits is myopic and contrary to shareholder value. I am sure all of us can name a few of these, once darling companies, whose value has simply evaporated.
This is a fantastic argument against CSR. Please i need a copy of this article for discussion with my A-Level students in class.
Thanks
Uwakwe, Sunday Emmanuel
I am sure that Mrs. Kamani is a student of Prahalad, C.K. who tirelessly has advocated the plight of bottom of pyramids consumers and who has preached corporate responsibility to address their needs. of course, the fiduciary responsibility of an organization’s dominant coalition is to maximize shareholders profits, at the same time, an ethical and virtuous corporate governance ensures that all stakeholders issues are considered. It is obsurd to assume that societal changes and shift in consumers’ taste and preferences have anything to do with organizations’ strategic change, market adaptation, and new products development. It’s not a malpractice to earn profit while providing goods and services that also sustain society. On the contrary, executives who are unwilling to adapt to their external environments in the name of disturbing their profits streams create liability for their organizations, thus losing competitive advantage over rivals. Unless organizations become socially responsible and start treating society as one of their functions or profit centers by investing in it, There will not be shareholders profits to maximize.
Professor Karnani seems to consider that there’s, on one side, “companies” and their shareholders/executives, and, on the other side, society in general. Note also that Employees are not even mentioned in his analysis. It’s a reductive and theoretical vision of the economy, quite old-fashioned indeed, that doesn’t bring any value or fresh ideas on the debate around how we can collectively face new challenges and today’s reality, in a complex world where shareholders are also consumers, consumers are employees, executives are parents, etc…, and people are more informed in general. The old approach about companies being entities on their own, programmed to make money thank to the blind cooperation of brainless executives is Sci-Fi to me, and very far from what I, as a Business Consultant, experience every day.
Uwakwe, article reprints and permissions can be purchased; email smrpermissions@mit.edu for more information.
This paper is quite catastrophic for the MIT Sloan.
Copy-pasting Friedman doesn’t bring any real contribution except filling three pages in the Wall Street Journal.
By ignoring new B2B clients’ expectations, severe reputation risks and some other crucial strategic aspects, this paper looks more like an undergraduate PPT than a substantive academic research.
Trying to be “provocative” can lead you very far from being relevant!
Wake up and meet real business men, MIT Slaon folks!
Dr. Karnani posted a response to the online conversation at the WSJ website, which we repost here with his permission:
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As the author of this article, I am grateful for the amount of interest and commentary it has attracted. The world faces many social problems such as climate change, resource depletion, disease epidemics, and pervasive poverty. While there are no easy solutions, a good starting point is a widespread public debate on the appropriate approach to tackling these challenges. A critical element of that debate focuses on the roles that business, government, and civil society should play in solving these problems. I hope my article has helped stimulate this debate by challenging some widely held views.
I strongly believe in social justice and that companies should not be left free to pursue the greatest possible profits without regard for social consequences. So, how can we get companies to act to increase social welfare? Whether companies will do so voluntarily or have to be compelled to take such actions depends on whether private profits and public interests are aligned or in conflict.
Many of my critics have pointed out that CSR can and does drive profitability. That is absolutely true when private profits and public interests are in harmony — the invisible hand at work. That is exactly why the capitalistic system is so good. In these instances, firms driven by the profit motive will also achieve social objectives. Equivalently, firms acting to increase social welfare will simultaneously increase profits. In these cases, the profit motive is the driving force, even though companies might trumpet CSR.
However, the ‘invisible hand’ argument depends on markets being efficient. We must also be aware of the limitations of markets. Market failures occur due to three causes: externalities (such as pollution), asymmetric information (such as in pharmaceuticals), and market power (such as in electricity distribution). Many of the social problems confronting the world are linked to market failures. In these instances, private profits and public interests are fundamentally in conflict. CSR, a voluntary mechanism, will not be effective in these cases. Then it is the role of government and citizen activism to compel companies to act to achieve social objectives.
It is true, of course, that much government intervention has not been effective either. A practical challenge is to weigh the costs of market failure against those of government failure. However, there is a big difference between market failures and government failures. For example, the externality of pollution is inherent in the nature of gasoline cars. But, incompetence is not inherent in the nature of government, and the costs of government failure can be reduced with improved management. The challenge is to design and implement an effective blend of government regulation, citizen activism and self-regulation that strikes the right balance between private profits and public interests. Government regulation, or at least the threat of such regulation, is a critical element of this blend. It is very unlikely that large social problems linked to market failures will be solved only through voluntary CSR.
Finally, a red herring of an argument is to claim that the conflict between profits and social welfare is caused by companies being short-term oriented. The shareholders collectively want the managers of companies to maximize long-term profits, not short-term profits. In cases of market failure, long-term private profits and long-term public interests are in conflict. In practice, there is, of course, much uncertainty about the long-term impact on both profits and social welfare. But, that does not change the conceptual argument about the role of business in society.
I agree that civil society should not rely on voluntary corporate efforts for binding and large-scale change, though I think in practice corporate adoption of CSR will help the transition to more sustainable practices.
The area where we definitely DO need CSR policies is regarding questions of how business will influence government regulation. In that case, the profit motive is too low a bar and risks perpetuating very harmful practices that impoverish the societies that support the businesses.
Thanks for a provocative article.
Company after company stands as testimony to the bottom-line benefits of social responsibility In my eighth book, Guerrilla Marketing Goes Green: Winning Strategies to Improve Your Profits and Your Planet (Wiley, 2010, co-authored with Jay Conrad Levinson), I spend significant time documenting that not only can going Green and socially responsible be extremely affordable (often cheaper than not doing so), but there are many marketing and profitability advantages along that road.
Is there a case against corporate social responsibility?:
http://socialfunds.com/news/article.cgi/3028.html
Writing from a south ( developing world?) perspective i am sharply aware that this is a question of power. Corporates are very powerful.In general the powerfull do what they will to consolidated and expand their power – or they will lose it.
Governments are very powerful. However our experience shows that this power is easily captured by a political elite for purposes of personal accumulation ( power of office and capital)
The powerfull when they are confronted by an opposing force will seek to dominate this force and when they are not able to dominate they will wisely negotiate their survival.
Our challenge is to build the power of local communities to engage both the power of corporates and government.
CSR has by large become a “spin” which confuses, coopts and de-politicises indpendannt communities and short circutes their growth into large networks of local and global community power.
Professor Karnani , thanks, your article clear the space for a more creative dialogue.
This is an old and tired argument. What a cliche article.
Shame on you SMR for publishing this without a counter-point article.
The modern model of the Corporation as an organizational form has only been around for about 150 years – maybe 200 if we really stretched it. That’s not very much time.
In his book “The Corporation: The Pathological Pursuit of Profit and Power,” Joel Bakan makes the case that if Corporations were actually treated legally as individuals, many of them would be in jail. He details the crimes of companies such as GE and how the relentless, flawed and single minded pursuit of profit over everything else has gotten us to where we are today. Corporations often can get away with doing bad things for quite a while – and make money – so they do until they get caught.
It seems that a day does not go by where we hear of Corporate greed or excess causing some major or minor catastrophe from the BP Oil spill to pharmaceutical companies tampering with clinical trial results or just advertising falsely, to the greed that brought our economy to its knees.
In my view the organizational model of the Corporation is dying – slowly – but still dying. It isn’t fast enough.
This doesn’t mean the end of capitalism or entrepreneurship – not at all.
I am part of a franchise business called Mathnasium. I am in this business to make a profit, but also, and more importantly to help kids learn math and become lifelong problem solvers. Power is not concentrated. The company as an organizational form functions more like a club or university than a corporation. We are growing very rapidly. We have in our ranks graduates from Sloan, Stanford, Cornell and West Point – and backgrounds including biomechanical engineering, electrical engineering and finance.
I think this hybrid model will be the wave of the future – local ownership and control combined with a socially responsible mission. We are linked to an international community through the web, conferences and conference calls. It is an incredible model of dispersed and shared knowledge, wealth and power.
Society has become increasingly frustrated and distrustful of corporations. I’m as entrepreneurial as anyone I know, and I think – again – that dispersed power combined with an activist socially responsible model is the future.
Dr. Karnani missed the mark here. Has he ever started a company of his own?
Shortly after this article was posted, I penned this rebuttal which was published by Chronicle of Philanthropy. The full article can be found here:
http://philanthropy.com/blogs/profit-and-purpose/in-a-connected-society-corporations-must-focus-on-the-social-good/26469
My main point can be illustrated thru this passage:
“Earnest concern for the common good is not a dangerous illusion; it is the cost of doing business in a connected society.
In the broadcast era, the distance between the boardroom and the kitchen table was much greater and shielded managers from the scrutiny of the community. In a connected society, how a corporation makes its profit and how it helps address wider social problems matter. The more connected we become, the more aware those who make profit possible are aware of who is adding to the social burden, who is ignoring community problems, and who is working to create solutions for them. ”
Scott Henderson
Managing Director, CauseShift
http://www.causeshift.com
I am relieved to see others have commented on the limitations of the authors thesis given his assumptions. Most importantly that shareholders are only interested in monetary wealth creation, and that prospective investors and shareholders have perfect information to make decisions. C’mon now!
My company, which is a plastic injection molding one, recently was able to do some very real community service during the hurricane and consequent flooding here in Vermont.
In a small place like this, such actions stand out and are easily recognized.
Very good article…btw to the person who wrote the first comment..its “GOLDMAN SACHS”…clearly your very uninformed about corporate america if you cant even spell the name of the biggest US investment bank