Can Companies Do Well by Doing Good?

Yesterday’s Wall Street Journal published a story by Aneel Karnani, Professor of Strategy at the University of Michigan’s Stephen M Ross School of Business with a controversial headline: The Case Against Corporate Social Responsibility.

He manages to pull in some corporate governance arguments: “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.” He points out that managers who want to forgo profit to benefit society should expect to lose their jobs. “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.”

Karnani does draw a distinction with private companies, which I find artificial. Most private companies are not owned by a single individual. They likely have given equity interests to many people, just not as many as a public company. Unlike public company shareholders, they have little ability to liquidate their investment if they don’t like the decisions.

That is not to say that companies should be allowed to pursue profits with out regard for social consequences. He just thinks the argument that companies will profit from acting in the public interest.

Obviously, there are some examples where a company has directly increased its profits by acting in a more social responsible manner. I would argue that if you can show a direct increase in profits or revenue, that is not acting more socially responsible. That is acting more fiscally responsible.

Take the case of energy conservation. Many commercial buildings have switched over to more energy efficient lighting. Its more expensive to buy and install. On the other hand, it has lower operating costs. If you put pencil to paper you can calculate the energy savings tied to the investment. Then it’s just a matter of the energy costs being high enough to justify the investment.

Karnani makes an argument for government regulation. Not that the government is perfect, but they are intended to protect the public good. We can see that working with the upcoming ban on incandescent bulbs. (You do know about the phase-out of traditional light bulbs beginning in 2012.)

“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, public 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.”

Related articles from MIT Sloan Management Review:

Does It Pay To Be Good?
By Remi Trudel and June Cotte (Winter 2009)
In surveys, customers have long claimed that they’d pay more for ethically produced goods. But is that what happens when they actually buy things? New experiments offer answers.

What Every CEO Needs to Know About Nonmarket Strategy
By David Bach and David Bruce Allen (Spring 2010)
In a global economy, sustained competitive advantage arises from tackling social, political and environmental issues as part of a corporate strategy—not just pursuing business as usual.

Beyond Selfishness
By Henry Mintzberg, Robert Simons and Kunal Basu (Fall 2002)
A syndrome of selfishness, built on a series of half-truths, has taken hold of our corporations and our societies, as well as our minds. This calculus of glorified self-interest and the fabrications upon which it is based must be challenged.

How to Do Well and Do Good
By Rosabeth Moss Kanter (Fall 2010)
The key to achieving both of those goals together? Integrate societal benefits with company strategy.

Using Corporate Social Responsibility to Win the War for Talent
By C.B. Bhattacharya, Sankar Sen and Daniel Korschun (Winter 2008)
Research indicates that there are five steps that can help business leaders increase CSR’s effectiveness as a lever for talent management.


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