Why Social Responsibility Produces More Resilient Organizations

Companies have more staying power when management decisions consider a diverse range of interests.

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Image courtesy of Ken Orvidas/theispot.com

In moments of crisis, companies quickly shift their attention to survival. The COVID-19 pandemic is no exception. Under these circumstances, businesses are scrambling to cope with employee safety and enforced shutdowns, among many other challenges. So it may seem misguided to focus on corporate social responsibility (CSR) now. But, in fact, there might be no better time.

To understand why, it’s important to consider what CSR involves, beyond “doing good.” Companies often view CSR as a set of charitable activities. They may support the arts, cancer research, and other deserving causes. But a more useful approach to social responsibility is one in which leaders account for the varied interests of the diverse stakeholders that surround the corporation — all the groups that influence and are influenced by its operations. (See also “How to Reconcile Your Shareholders With Other Stakeholders.”) We’re talking about workers, suppliers, local communities, environmental advocates, governments, and many others who are essential to the well-being of the business.

Yet many companies, to their detriment, take a narrow view of which stakeholders count. History is filled with examples: The residents of Bhopal, India, may not have seemed like salient stakeholders for Union Carbide until more than 500,000 people were poisoned and at least 3,700 died when the chemical maker’s pesticide plant leaked toxic gases in December 1984. BP may not have worried too much about Gulf Coast fisheries until its 2010 Deepwater Horizon oil spill disaster made their interests more prominent. Women may not have seemed like a distinct worker interest group at Nike, Uber, Walmart, or JPMorgan before these businesses faced lawsuits and viral blog posts about discrimination, harassment, and unequal pay. And so on.

In the throes of a crisis like COVID-19, companies are understandably concerned about finding new sources of revenue and cutting costs to stay afloat. But those aren’t the only risks they need to manage with vigilance. They must also consider the impact that their activities are likely to have on their myriad stakeholders. Those that don’t may end up hurting their performance, their reputations, or both as they sacrifice sustainable practices and a sense of stewardship for short-term relief. For instance:

  • In pre-COVID-19 days, when Amazon offered same-day delivery, customers might have been happy, but roads became more congested, pollution increased, and delivery workers operated in precarious jobs. When the crisis unfolded, the company strained to offer fast-as-possible deliveries to customers who were anxious about running out of household staples, putting warehouse and delivery workers at more risk in the process.
  • In some countries, like China and the U.S., governments have weakened environmental standards in an apparent effort to lessen burdens on companies while they are struggling. To the extent that companies take advantage of these regulatory changes, they will be causing greater environmental damage.
  • When companies undertake massive layoffs during economic crises, as Chevron, Uber, Airbnb, Boeing, Marriott, and many others have recently done, they risk draining their organizations of diversity because newer hires, part-time workers, and members of less-valued job classes are often highly represented by women and people of color.1

Every business model and every strategic choice has stakeholder trade-offs embedded within it. Some groups win (maybe consumers, bondholders, or shareholders), and other interests lose (the environment, vulnerable workers, or communities). Resilient companies manage those trade-offs carefully. To appreciate how they go about it, let’s look at how other businesses tend to get tripped up.

Four Common CSR Mistakes

We are at a turning point in our economy that started before the COVID-19 crisis — but has been amplified by it — in which social responsibility will now be seen as central to doing business. The August 2019 Business Roundtable announcement that repudiated shareholder primacy and promoted the creation of value for all stakeholders is one example. Or consider BlackRock CEO Larry Fink’s annual letter to CEOs, which, for the past few years, has advocated for inclusive capitalism and sustainability.

COVID-19 has accelerated these changes, making it harder for businesses to later revert to their old ways of operating. Governments that have bailed out companies will no longer tolerate shifting of profits offshore to reduce tax liabilities. Workers who have been put at risk are banding together for better work conditions. Pollution has decreased, and environmentalists will fight companies that resume generating toxic outputs.

Yet most companies are unprepared for these shifts because they have treated CSR as an addition to the business — something that was done on the side of the desk, or as a “nice to have,” once operating profits were assured. In the 2020s, that approach just won’t cut it.

To create high-performing and resilient organizations, leaders must think of managing conflicting stakeholder interests as a core competency that can be a source of transformation. In my own research and observations, I have seen even well-intentioned executives struggle to do this.2 They make four basic mistakes.

1. Not knowing how the business model creates stakeholder trade-offs. The first step in addressing stakeholder needs is identifying where the tensions are in business models — which groups’ interests are being sacrificed while others’ interests are served. These insights are the starting point for innovative exploration, because they help redefine the problems that need to be addressed.

But many managers don’t examine stakeholder trade-offs systematically, perhaps partly because economics has historically deemed such trade-offs externalities — byproducts of doing business that are not included in the cost of operations. Certain stakeholders may be considered in risk mitigation calculations or employee retention plans, but rarely do we see companies starting with a stakeholder analysis as part of their strategy-making, business planning, new product designs, or reorganization efforts.

In the examples above, companies such as Amazon, BP, and Union Carbide did not pay enough attention to stakeholders who ultimately were deeply affected by corporate actions. How might they have avoided this problem? If CEOs should create value for all stakeholders, as the Business Roundtable has said, then it is important to ask for whom value is being created and for whom it is being destroyed. Some stakeholders — say, the unionized workers at General Motors — may have a seat at the decision-making table. That is because they have a powerful advocate in the form of the United Auto Workers union. But what about other stakeholders? Whose views are being shut out of conversations because they don’t have power or access to make their voices heard? And how is their lack of input limiting the scope of threats and opportunities that are on executives’ radar?

Sometimes stakeholders get their points of view across in ad hoc ways. In the 1980s and 1990s, AIDS activist group ACT UP protested on the trading floor of the stock exchange and at major pharmaceutical companies’ headquarters to demand research and testing for more effective treatments. More recently, Greenpeace “kayaktivists” blocked waterways that Shell Oil was using to transport oil-drilling equipment to the Arctic. Former Uber engineer Susan Fowler published a (subsequently viral) blog post about sexual harassment and discrimination at the ride-hailing company that contributed to the founder’s ouster. When pushed to extremes, stakeholders will find a way to be heard.

Resilient companies will take steps to bring those voices to the table. As a result of AIDS activism, pharmaceutical companies did end up including patient advocates as advisers for drug development and clinical trials, leading to faster and more effective development of treatments — a template that has been replicated many times over for other disease categories. After Hurricane Katrina, Walmart moved toward greater social responsibility by inviting some of its harshest environmental critics to work with company leaders on stronger sustainability goals, including zero waste and 100% renewable energy. That collaborative planning has not only reduced negative impacts on the environment but also reduced the cost of shipping waste to landfills and has improved Walmart’s global reputation. Often, leaders think that disapproving stakeholders are groups to defend against or manage, but collaborating with them can lead to changes that benefit the business.

2. Starting with the business case for social responsibility. To the extent that social responsibility ends up on corporate agendas, it is often framed as a “shared value” model for addressing trade-offs, in which actions taken to benefit certain stakeholders must also benefit the bottom line. The discourse that has dominated for the past decade or so suggests that companies can (and must) always find win-win solutions. This creates the temptation to demand a business case for any socially responsible action.

Suppose a manager wants to install LED lights to reduce energy consumption, change production schedules to reduce excessive overtime in garment factories in the supply chain, reconfigure product design to eliminate toxic glues from high-performance sneakers, or revamp hiring and promotion processes to increase diversity. One question inevitably comes back: “What is the ROI?” And if there isn’t a satisfactory answer, the project is put on hold or canceled.

By starting with the business case, companies limit their scope of action to steps that can readily be imagined. Take the move toward technology-supported work-from-home practices that have emerged during the COVID-19 pandemic. As disability advocates were quick to point out, workers have been seeking such practices for years, but they were usually told that it was too expensive or complicated to make these accommodations available. In short, the business case wasn’t there. We are learning, however, that remote work is eminently possible. Organizations that had already provided that option for disabled people or for those who simply needed the flexibility were ahead of the game when COVID-19 stay-at-home orders took force. Everyone already knew how to use Zoom or Microsoft Teams and how to work with online collaboration tools.

You’ll get hundreds of thousands of hits if you search online for the phrases “business case for diversity,” “business case for sustainability,” or “business case for social responsibility.” Yet the general consensus is that companies have not made much progress in these areas over the past two decades in which the business case rhetoric has ruled. Take diversity: Less than 8% of the CEOs of large companies are women, even fewer are Black, and there are no Black women in those ranks.3 Less than 3% of venture capital goes to women-owned businesses.4 The (depressing) statistics are endless. It does appear that the business case is part of the problem.

Managers who don’t want to engage in the organizational change that real diversity or sustainability would require may, intentionally or not, be using the business case as an excuse not to act. Or the act of creating the business case may constrain ideas to those that can be attached to specific financial outcomes. Either way, the result is incremental change at best. And when a crisis hits, companies adept at just smoothing rough edges or making changes on the margin will not have the experience required to reorient quickly.

Resilient companies will start with a search for innovative solutions to tensions created by conflicts in stakeholder interests and work toward a business case later. Often, there is a business case to be had, but it won’t always be apparent at the outset.

3. Treating stakeholder interests as an “add-on” to the business. Companies tend to treat most stakeholder issues as side-of-the-desk projects, which means they rarely receive the attention or resources they need. At best, companies make minor improvements to what they are already doing. For instance, a bank might create a special team to support women-owned businesses, or a manufacturer might set up a schooling program for the children of their workers in Bangladesh or Vietnam.

In the COVID-19 crisis, this sort of thinking has led to laudable actions — Comcast executives donating their salaries to charity, Intel donating 1 million pieces of protective equipment — that don’t connect to a broader responsibility agenda. Resilient companies, however, see CSR not as an extra but as an integral part of their innovation and transformation efforts. That’s the kind of thinking that helps them through times of crisis.

Making stakeholders central to an organization’s strategies and activities is not a simple flip of a switch. Consider the move over the past decade toward “customer centricity.” The customer is indeed a key stakeholder — one that is clearly essential for financial performance. So one would think that customer centricity would be relatively easy to incorporate into a company’s product development, marketing, sales, and service. Yet it has actually required a tremendous reorganization of many activities and major shifts in organizational culture. Companies have struggled to align their organizations around the customer. Imagine how much harder it will be for them to accommodate stakeholder groups that have not historically been seen as so central to performance.

When Nike was assailed in the 1990s for the terrible working conditions in suppliers’ factories around the world, then-CEO Phil Knight first dismissed the concerns because the factories were not owned by Nike. (The economic idea of externalities resonates here: “It’s not our problem because it is outside the boundaries of our company.”)

But subsequently, the company did make a commitment to greater social and environmental responsibility, creating programs — such as its ecofriendly product line Nike Considered and its supplier engagement efforts — that led to significant changes in how it did business. It invented new materials with reduced toxicity, created new manufacturing processes to reduce waste, reconfigured the design and sourcing process to reduce overtime and pressures on manufacturers, and collaborated with factories to help develop more humane management and manufacturing methods. These innovations took time and financial investment, but they mitigated many of the trade-offs that Nike’s business model had created.

When stakeholder interests such as worker well-being and environmental safety become central to strategy-making, product design, production, and marketing, possibilities for transformation emerge. Not only did Nike go from pariah to gold standard in manufacturing practices; in the process, it introduced new products, such as Flyknit woven shoes and the Air Jordan 23, that drove sales and brand value.5

4. Giving up if leaders can’t find a solution. What’s particularly interesting about Nike is that its annual social responsibility report is not sugarcoated. Leaders call out some of the challenges they are having in addressing trade-offs. In the “FY16/17 Sustainable Business Report,” for example, CEO Mark Parker wrote the following:

It’s moments like these that offer the opportunity to hit the pause button and ask the big questions. Is it possible to grow the Nike brand into new markets while leaving a smaller footprint? As we transform our business model to move faster and be more consumer-centric, how does that affect a sophisticated value chain that employs over a million workers and delivers over a billion units a year? And how can we challenge ourselves to cultivate a company culture that is more inclusive and empowering? What policies and practices will accelerate the pace of change within our own teams?

Addressing stakeholder needs can be tricky. For example, investing in pollution reduction might reduce profits, creating more inclusive hiring practices might slow down recruiting, and eliminating toxic glues might reduce product performance. When faced with those trade-offs, many leaders will be tempted to give up, declaring the problems irresolvable and simply the costs of doing business. But adaptive companies keep going; they hold the trade-offs in tension as they work toward creative solutions.

Answering the kinds of questions that Parker asked requires a tolerance of ambiguity, a willingness to experiment, a learning mindset, and an acceptance of failure — all the characteristics we’ve come to associate with innovation. But it also requires persistence. Nike spent more than a decade trying to eliminate the greenhouse gases that made up the signature Nike Air in its shoes. Salesforce.com spent more than $3 million eliminating gender wage gaps in its company and then a year later spent another $3 million to do it again when new gaps opened up. Walmart set a goal of sourcing $20 billion in products from women-owned businesses but then discovered it would have to invest in helping these companies develop by offering business skills training. Because these companies lacked access to capital, Walmart had to offer new financing options, such as paying advances on outstanding invoices. Then it had to expand its training to men in the communities in order to gain their support for the businesses that their wives, daughters, and sisters were running. It was a multistage process of trial and error before Walmart was able to hit its $20 billion target.

Trade-offs do not resolve themselves quickly and easily. That is why they are trade-offs to begin with. Companies that persevere until they reconcile those tensions are developing an organizational capability for managing paradoxes that will help them persist in times of uncertainty and adversity.

Building Back Better

Even before the pandemic, many governments were requiring companies to file social responsibility reports annually. Investors, too, began to expect reports on social performance in addition to financial performance: As of 2018, more than one-third of all investments in companies were made with a social responsibility screen.6

Society’s expectations of companies have fundamentally changed. A crisis such as the 2020 pandemic raises them even higher: It makes people hyperaware of which organizations are pulling their weight in the world and serving all stakeholders, not just those with the most power.

A crisis also reveals which organizations are most likely to endure. Companies that routinely engage with a wide variety of stakeholders — including those with opposing interests — are at less risk than others when turbulence hits, because considering diverse views of the future is baked into their decision-making processes. They have already stress-tested their strategies.

And, crises aside, companies are increasingly finding that excellence in CSR is associated with excellence in overall operating and market performance. Those that implement codes of conduct based on International Labour Organization human rights standards, add provisions prohibiting discrimination based on gender identity, or report on the impact of climate change on their business, for example, tend to have higher-than-average employee retention, have above-average returns on investments, and are more attractive to consumers than companies that don’t do these things.7

Treating stakeholder interests as externalities is becoming risky business. Amazon has long been criticized for squeezing workers and suppliers and undermining local businesses — but society has largely tolerated that behavior. That will change. Even as Amazon’s sales skyrocketed in the pandemic, the company asked its Whole Foods employees to donate sick days to their colleagues rather than increasing worker benefits, and it fired employees who raised public concerns about safety in distribution facilities. This creates a fragile system that will be vulnerable to sudden shifts in power: Consumers may walk away once they can, and regulators may push for a breakup of what might be perceived as a monopoly.

COVID-19 makes the commitment by 181 CEOs of the Business Roundtable to serve all stakeholders even more salient than when it was announced in August 2019. Recovery and the creation of a newly resilient economy will require them, and others, to make good on those promises. This is the moment to build back better.

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References

1. T. Borden and A. Akhtar, “The Coronavirus Outbreak Has Triggered Unprecedented Mass Layoffs and Furloughs. Here Are the Major Companies That Have Announced They Are Downsizing Their Workforces,” Business Insider, May 28, 2020, www.businessinsider.com; and A. Kalev, “How You Downsize Is Who You Downsize: Biased Formalization, Accountability, and Managerial Diversity,” American Sociological Review 79, no. 1 (February 2014): 109-135.

2. S. Kaplan, “The 360° Corporation: From Stakeholder Trade-Offs to Transformation” (Stanford, California: Stanford University Press, 2019). Many of the examples in this article are drawn from research I did while writing this book.

3. E. Hinchliffe, “The Number of Female CEOs in the Fortune 500 Hits an All-Time Record,” Fortune, May 18, 2020, https://fortune.com; and P. Wahba, “The Number of Black CEOs in the Fortune 500 Remains Very Low,” Fortune, June 1, 2020, https://fortune.com.

4. K. Clark, “U.S. VC Investment in Female Founders Hits All-Time High,” TechCrunch, Dec. 9, 2019, https://techcrunch.com.

5. Note that these kinds of changes require constant vigilance; more recently, protests against factory conditions signaled new challenges. See M. Bain, “Nike Is Facing a New Wave of Anti-Sweatshop Protests,” Quartz, Aug. 1, 2017, https://qz.com.

6.Global Sustainable Investment Review 2018,” Global Sustainable Investment Alliance, 2018, www.gsi-alliance.org.

7. C. Flammer, “Does Corporate Social Responsibility Lead to Superior Financial Performance? A Regression Discontinuity Approach,” Management Science 61, no. 11 (November 2015): 2549-2568; and R.G. Eccles, I. Ioannou, and G. Serafeim, “The Impact of Corporate Sustainability on Organizational Processes and Performance,” Management Science 60, no. 11 (November 2014): 2835-2857.

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