Stanford Business

MAY 2007


What Does Corporate Social Responsibility Mean to You?

How much should an oil company do to combat global warming? Does an investment bank, with a less direct connection to pollution, have a lesser responsibility? And if a company does take steps to reduce its energy consumption, is it acting as a responsible corporate citizen or in its own self-interest?

by Margaret Steen

In 1970, the late economist Milton Friedman famously said the goal of a company is to maximize profits, as long as it’s doing so legally and ethically. Although some experts still say that view offers the clearest picture of how businesses should make decisions, most business executives take a more expansive view. A 2006 survey by McKinsey & Co., for example, found that only 16 percent of worldwide business executives said companies should focus on getting the highest possible returns while obeying all laws and regulations. In contrast, 84 percent said large corporations should generate high returns to investors but balance this with contributions to the broader public good. This interest in doing good raises questions about what, exactly, corporate social responsibility is, how it can be reconciled with profit making, and whether “corporate social responsibility” is even the best term to use. “When executives talk about corporate social responsibility, they can mean a million different things by it,” said David Brady, a professor at the Graduate School of Business who teaches in the course Ethics and Corporate Social Responsibility. Some observers are troubled both by the lack of a clear definition and by the fact that corporate social responsibility has frequently been viewed as something separate from a company’s primary business. When some companies tout their efforts on behalf of the environment or the community, “it seems like they are writing a report to shareholders instead of making responsible business part of their company’s core strategy,” said second-year MBA student Sam Goldman, a former Peace Corps volunteer. He said he felt he was working on core strategy for Wal-Mart during an internship last summer with the group developing a material recovery strategy to promote the retailer’s long-term zero-waste goal.

Lenny Mendonca, MBA ’87 and a director at McKinsey, prefers the term “social contract” and says striking that agreement “is not a separate issue from your overall strategic focus.” Mendonca views the contract between business and society in three parts. The first is formal: laws and regulations. The second encompasses “semiformal expectations,” such as consumers’ expectations about privacy, which, if violated, could lead to increased regulation. Third and most challenging are what Mendonca calls “frontier issues”—those issues that have not previously been considered companies’ responsibility but may be in the future. The question of a financial institution’s responsibility to combat climate change is one example.

The concept of “sustainability,” which is often discussed in the same breath as corporate social responsibility, is similarly poorly defined. What some environmentalists mean is that “when we conduct our business activity, we don’t leave any footprint on the earth—the earth is as healthy as it would have been had we not been there,” said Professor David Baron. One way to tread more gently is to buy greenhouse gas emission credits from European companies who can sell their right to emit the gases through the European Union Greenhouse Gas Emission Trading Scheme. In the United States there is no such market, but businesses such as Menlo Park’s TerraPass sell “offsets,” which are investments in alternative energy development or supplies.

A more traditional view of sustainability is simply making sure that a business doesn’t use up all the natural resources it depends on: A timber company would replant trees to replace what it harvested. “From an economist’s point of view, this form of sustainability is driven by market forces,” Baron said. “The concern is with those negative externalities associated with a business’ operations that market forces cannot correct.”

It is, of course, in the timber company’s interest to not run out of trees. And this fact—that an activity can be billed as “sustainable” or an example of corporate social responsibility and also be in the best interests of the company—raises questions for some about whether the company is acting simply for its own benefit.

“Sometimes conduct that somehow acquires the label ‘corporate social responsibility’ is little other than self-interested behavior dressed up to look like something more than that,” said Professor Keith Krehbiel. “And while there are also instances of companies that do more for society than self-interest would require, it can be extremely difficult to know which type of company is which.”
Although motives can be difficult to discern, Brady said, they are important because “they predict future behavior.” Without knowing a company’s motives, it can be difficult to know if today’s community initiative will be continued tomorrow.

The difficulty of defining and identifying truly responsible corporate behavior—and the fact that one company’s definition of responsibility may be very different from another’s—can send some people back to Friedman’s position.

“It’s a really common criticism that social responsibility is ‘squishy’ and you can’t quantify it. That’s just not true,” said Nancy Katz, MBA ’93 and vice president of investor relations at American Infrastructure MLP Funds, a Foster City, Calif.–based private equity firm. “There are certainly ways that you can put boundaries around what you can or cannot do in pursuit of profit.”

It is possible, she said, to create principles that everyone at a company can follow. “You can choose how many layers you want to add to the basic layer of ‘Is it legal or not?’” she said. “The key is to be very clear, as a leader, about how your employees should operate under these additional layers. You can’t just say, ‘Don’t do things that make me, the leader, uncomfortable.’ People who work for you cannot make decisions like that.”

Today’s business leaders face an increasing number of activist groups who can get their message heard easily via the internet if they don’t approve of a company’s practices. Executives also face some decisions about corporate social responsibility, particularly with regard to their global supply chains, that are more complicated than they used to be. “I think companies tend to be held to a higher standard now than they were 10 to 20 years ago,” Krehbiel said.

The idea that business leaders have obligations to society is cyclical. Following World War II, with the Committee for Economic Development’s work on the Marshall Plan in the late 1940s, American business leaders “saw a collective need and obligation to engage in reconstruction of the country and the world,” Mendonca said.

But the global economy has brought new complications. More companies are involved in international trade, and the loss of American manufacturing jobs has increased public interest in working and environmental conditions abroad. Nonprofits also get criticized. The Los Angeles Times, for example, recently criticized the Bill and Melinda Gates Foundation for investing in oil companies responsible for spewing pollutants that cause childhood asthma into Africa’s Niger delta, where the foundation is fighting polio and measles.

Some companies act to forestall pressure from nongovernmental organizations, the press, or government.

“As our world became increasingly global, it became more difficult to say, ‘Hey, it’s not really our responsibility,’” said Amanda Tucker, general manager of Nike Vietnam, who also spent five years in the company’s labor practices department. She will enter the School’s Sloan Master’s Program this fall. Many consumers, she said, don’t realize or don’t care that Nike doesn’t own the factories that manufacture its products. “To them, as long as [a product] has the Swoosh on it, the distinction between ownership and nonownership means nothing.”

When Nike established a code of conduct for its suppliers in 1992, it was not common. Now that many companies use concepts of supply chain management to save money and deliver their products more efficiently, they “cannot cherry-pick only opportunities,” said Professor Seungjin Whang. Companies like Nike, Starbucks, and Gap are taking more responsibility for the labor and environmental practices of their suppliers and their suppliers’ suppliers.

Still, several questions remain. The first is the precise definition of an unethical practice. Sometimes nongovernmental organizations, the government, or the press “go overboard,” Whang said, in condemning a company for a problem in its supply chain. Is it always appropriate, for example, to impose American or Western European ideas of what constitutes a fair wage or good working conditions on a country where the tradition and practice are much different? “It is not that crystal clear,” Whang said.

Second, although there is widespread agreement that companies bear some responsibility for suppliers’ behavior, it’s not clear how much they can control. This leads to another question: How can companies efficiently audit and monitor the practices of all the companies in their supply chain? Whang said one Hong Kong company that supplies multiple companies was audited 35 times last year. On the other end, he said, a U.S. apparel maker has nearly 100 employees devoted to ensuring compliance with its code of vendor conduct.

Applying ideas about social responsibility to the supply chain involves risk management, corporate reputation and regulatory issues, and industry-level collaboration—one reason many companies are integrating issues of responsibility into their overall business strategy rather than confining it to one department. “When they’re disparate activities that aren’t aligned with overall corporate direction, they’re not going to be very effective,” Mendonca said.

For leaders of publicly held companies, whose shareholders expect them to make money, the idea of acting in a way that benefits society presents an inherent conflict. Even the caveat about acting ethically attached to Friedman’s seemingly clear goal—to make as much money as possible—opens up a “huge loophole,” Krehbiel said. “The argument is logically tight, and Friedman’s advice is often embraced by business students and business leaders. But who is to say what basic rules are embodied in ethical custom?”

Here are three of the ways advocates of corporate social responsibility seek to reconcile profits with responsibility:

1. COMPANIES HAVE MANY STAKEHOLDERS

This view looks not only at a company’s shareholders but more broadly at its employees, its customers, its partners, nongovernmental organizations, and anyone else who is concerned about how it operates. Making sure they are satisfied is partly a public relations issue.

But it “goes beyond PR,” said Laura Commike, MBA ’05 and manager of advisory services for Business for Social Responsibility, a San Francisco nonprofit. Corporate reputation affects real business issues, including whether consumers will buy your products and who will want to work for you. “There’s more and more evidence that employees are actually a really important stakeholder.”

But if Friedman’s view—essentially that shareholders are the only stakeholders who matter—is complicated by globalization and questions about whose ethics and laws to uphold, then adding more stakeholders, with often conflicting desires, to the equation can make it very difficult to decide what to do. “You can decide anything. It doesn’t constrain you in the slightest,” Brady said.

2. IT'S GOOD FOR BUSINESS

Student Goldman wants to find business activities where “the better I do, the more it helps my target—whether that is a social or environmental cause.” He cites examples such as the recycling industry, where the more revenue businesses generate by diverting waste to alternate uses, the better it is for the environment. “So it’s not a trade off.”

Investor relations VP Katz cites Whole Foods Market, a grocery chain that sells high-priced natural and organic food, as an example of a business whose model depends on attracting customers who are willing to pay more for these products.

“People tend to think of the conflicts that arise from being socially responsible: ‘Do I source this responsibly or do I pay the lowest price?’” Katz said. “I think what often gets overlooked is the ways in which they’re actually symbiotic.”

“Some of this just markets well,” Baron said. “Some companies use it as part of their advertising; customers like the good things that you do.” Professor William Barnett, who is leading an executive education program at Stanford in September on “Business Strategies for Environmental Sustainability” cites recycling and energy conservation as two examples of ways in which “many businesses find that they can actually do business better by thinking about the environmental impact of their activities.” When businesses reduce the amount of packaging they use in their products, “this ends up being a cost driver that improves the bottom line of the business on the commercial side at the same time it improves environmental sustainability,” he said.

Still, “not all business practices can be understood this way,” he said. “Sometimes there are straight tradeoffs.” Reducing the pollutants emitted by a factory, for example, may cost the company more.

3. SOCIETY IS THE ULTIMATE SHAREHOLDER

David Pitt-Watson, MBA ’80 and co-author of The New Capitalists, argues that the “ultimate shareholder” ends up being “millions of people invested through things such as pension funds.” This creates “enormous overlap” between what’s good for shareholders and society.

“We’re saying social and private interests go together,” said Pitt-Watson, director and former chief executive of Hermes Focus Asset Management, the largest shareholder activist fund in the United Kingdom. “Companies should be really profitable in the long term. They’re not going to solve all our social problems. But the theoretical problem that we had 40 years ago about how to reconcile corporate social responsibility with shareholder value—that shouldn’t worry us any longer.”

Not everyone sees it this way. “All decisions will be weighed against profitability,” Brady said. If a company is considering drilling for oil in a location where residents are concerned about the effects, the company may decide to take less profit in order to mitigate the impact. “But if it gets too expensive, they won’t do it.” Pitt-Watson agrees that “competitive forces can encourage companies to do things that are not sustainable or socially responsible. If everybody else is putting waste in the river, will you spend money not to?” One solution, he said, is for companies to lobby for a change in regulations so that no one is allowed to dump waste in the river and the playing field is level.

In the end, it’s probably not realistic to expect every company to score well on a long checklist of social goals, Katz said. “It’s hard to create a profitable company. It’s even harder to create a profitable company where people enjoy coming to work, and add layers of social responsibility on top of that.” Still, she said, “to the extent that companies are aware of all the stakeholders when they’re making their decisions, they’re going to make better decisions. I think there are clearly more companies thinking more broadly about the stakeholders they affect than there were 20 years ago.”

As the issues have become more complex, so has the thinking about them. “I think we’re really at a threshold of a time where we might start coming up with solutions to some of the problems that have been vexing us,” Barnett said.

“Environmental awareness has become sophisticated enough not to boil down to mere contradiction,” he said. “You would be hard pressed today to find a business executive who doesn’t feel that environmental sustainability is important. You’d be hard pressed to find an environmental activist who wouldn’t be willing to have a conversation with a developer about how to achieve their objectives.”

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FEATURES IN THIS ISSUE

corporate social responsibility AT THE gsb

The Center for Social Innovation at the Business School provides individuals and organizations with insights on corporate social responsibility by supporting collaborative research, teaching, and community engagement.

Research includes current dissertation support for a Business School doctoral student working on the political dimensions of corporate social responsibility and work by a faculty member in the School of Humanities and Sciences on the social transformations resulting from sustainable tourism efforts in Argentina and Chile. Case studies are also prepared on topics such as corporate philanthropy and managing in nonmarket environments.

MBA students learn about corporate responsibility as part of the Center’s popular Public Management Program, which offers academic courses, experiential learning, and community involvement opportunities in the United States and abroad.

Community engagement occurs through the Center’s quarterly journal, Stanford Social Innovation Review; its podcast channel; and a new book series. A new Social Innovation Partners Program provides organizations and their executives with access to special events and publications. An April conference cosponsored with the Stanford Global Supply Chain Management Forum, for instance, allowed leaders to share best practices for creating environmentally sustainable supply chains.