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.”

Sources:

• The Case Against Corporate Social Responsibility by Aneel Karnani in the Wall Street Journal
• The WSJ’s Case Against Corporate Social Responsibility from Professor Bainbridge .com

globe image is by Jackl under the Creative Commons Attribution ShareAlike 3.0 in Wikimedia.

After many people slapped Toyota with the unethical label over its unintended acceleration problem, it appears that Toyota may be vindicated.

The Wall Street Journal is reporting some early results form the U.S. Department of Transportation’s analysis of data recorders. They found that throttles were wide open and brakes not engaged on Toyotas involved in accidents blamed on sudden acceleration.

Back in March, I pointed out that we saw the same situation with Audi back in the late 1980s. People claimed that the car suddenly accelerated when they applied the brakes. It turns out they were stepping on the gas pedal, not the brake pedal.

It’s hard to pin blame on your customers for failing to use the product correctly. Audi was never able to deal with the same issue. Steve Jobs failed to find much support in telling people they are holding the new iPhone 4 incorrectly.

Toyota has experienced quality issues since they began their quest to become the biggest car company, instead of staying with being the best car company. By looking at the sticky accelerators and stuck floor mats Toyota was cognizant that their cars had flaws. Those flaws seem to have distracted them from realizing that the fault may not have been not their own.

I continue to think that the Toyota saga is one of a failure of crisis management, and not one of ethics or compliance.  Toyota has also benefited from BP’s bigger crisis. BP’s failure seems to be one both of quality, ethics, compliance, ineffectual leadership, and crisis management.

I’m also still troubled by the conflict of interest the US government has with Toyota.  General Motors is one of Toyota’s  biggest competitors. The US government own almost 61% of General Motors after having invested about $50 billion to keep the company alive. It would be good for General Motors if Toyota was found at fault and lost market share as a result. Therefore, it would be good for the US government for Toyota to be found at fault.

I don’t mean to imply that the Department of Transportation is being biased in its investigation. There is just an inherent conflict in the marketplace when the government starts owning private enterprises.

Sources:

• Early Tests Pin Toyota Accidents on Drivers by Mike Ramsey and Kate Linebaugh in the Wall Street Journal
• Toyota, Ethics and Compliance – prior post
• Steve Jobs On iPhone 4: “There Is No Reception Issue. Stay Tuned.” in Gizmodo

With Toyota’s problems all over the news, I started to think about whether compliance and ethics professionals could learn anything from these problems.

To begin, I don’t think there is a systemic problem with their vehicles or with the company. I think the sudden acceleration problem is bunk.

Yes, I own a Toyota, but my Tundra has not been implicated.

Numbers

It is unfortunate that people have died in Toyotas. About 56 people have died in accidents involving Toyotas that allegedly accelerated out of control. That anyone has died or been hurt is difficult to face.

But lets put that number in perspective.  Over 34,000 people died in car crashes in 2008 and over 2 million people were injured.

Over 10,000 of those deadly crashes in 2008 involved alcohol impaired driving. That means you were at least 100 times more likely to be killed by a drunk driver than sudden acceleration.

From an ethics perspective, you obviously don’t want to sell a product that is defective or even a little more likely to injure your customers. Of course, that assumes there is a defect in the product and it’s not just a big pile of media hype.

Look back at Audi

We have seen this situation before. Twenty years ago it was Audi. The reports on Audi suffering from sudden acceleration nearly destroyed the automaker in the late 80s.

They never did find a problem with the Audi cars. Audi was never able to counter the outcry against their cars.

Is there really a problem with the cars?

Surely, the throttle of a car could get stuck open and cause the car to accelerate. Cars are increasingly run through electronics that control the fuel levels and throttle of the car. Floor mats can get stuck on the gas pedals. Cruise controls can malfunction. For any number of reasons, a car could accelerate without the driver’s input. (With Audi, the assumption is that the driver stepped on the gas pedal instead of  the brake pedal.)

But what about the brakes?

Car and Driver ran some tests for unintended acceleration. Even with the throttle held wide open, if you stepped on the brakes your car would stop in roughly the same distance.  In a normal situation, they stopped a Toyota Camry from 70 mph to 0 in 174 feet. With the throttle held open it took 190 feet to stop from 70 mph.

The brakes were not as successful for the hugely powerful Roush Stage 3 Mustang with 540 horsepower. It required an extra 80 feet to stop with all extra horsepower was fighting the brakes.

Even if the engine in most cars suddenly accelerates, the brakes should stop in it roughly the same distance.

However, if you pump the brakes, you may lose the vacuum boost needed for the power assist and have a hard time stopping the car. Prior to anti-lock braking systems, we were taught to pump the brakes in slippery conditions.

Another possibility is that the car could have suffered a brake failure at the same time the throttle failed.

Driver error

One way to deal with sudden acceleration is to disconnect the engine. With a manual transmission you step on the clutch and with an automatic you shift into neutral. (I’m not sure that I would have thought to do that if my throttle got stuck.  I would now.)

With Audi, they main theory was that people were stepping on the gas when they thought they were stepping on the brake.

As for the runaway Prius a few days ago, he could have pumped the brakes and lost the power assist needed to stop the car, or had a simultaneous failure of the brakes and the throttle. (Or he could have faked it.)

Systemic failure

What Toyota needs is a way to avoid systemic failure. It’s really bad to have the throttle and the brakes fail at the same time.

What Toyota needs is a throttle kill switch. When you step on the brakes, the electronic throttle control will cut the throttle and cut the power. In the Car and Driver test, they tried an Infiniti G37 that had the throttle kill and its braking distance barely changed. Many cars have this throttle kill mechanism, but not all.

Having a safeguard for a systemic failure is good thing from a compliance and risk management perspective. By having a throttle kill, it’s easier to point to operator error. (“If you had stepped on the brakes, the engine throttle would have released.”)

What about the conflict of interest?

One problem with a government investigation of Toyota is the inherent conflict of interest the United States government and the taxpayers have in the automobile industry. We own a competitor to Toyota. It would be good for the U.S. ownership in General Motors for Toyota vehicles to be less popular.

I was very disappointed to see Mr. Toyoda flogged in front of a Congressional panel. To some extent, he was being yelled at by the board of directors of GM.

Lessons

In the end, I believe the Toyota story is one of a failure of crisis management and not one of ethics or compliance. It seems like Toyota was not able to quickly gather the facts and act on the facts. They keep announcing recalls, without explaining the problem or the fix.

Every company action made in error is magnified under the white hot lights of the media looking for stories. We the taxpayers and our government has a big conflict of interest in attacking the company without a good set of facts.

The failure of crisis management is going to cost them. There will be shareholder class action lawsuits, driver lawsuits, owner class action lawsuits, the cost of recalls and the long term damage to the company’s image.

See Cartoons by Cartoon by John Trever – Courtesy of Politicalcartoons.com – Email this Cartoon

Sources:

• How To Deal With Unintended Acceleration from Car and Driver
• GM tests Pontiac Vibe brakes against unintended acceleration in wake of Matrix recall from AutoBlog
• Toyotas Are Safe (Enough) by Robert Wright in The New York Times Opinions
• Unintended Acceleration Not Limited To Toyotas from NPR
• Toyota by the Numbers by Leon DeWinter
• Traffic Safety Facts 2008 (pdf) from the U.S. Department of Transportation
• Feds investigate runaway Prius case as Toyota says it’s ‘mystified’ about cause in the Los Angeles Times
• Toyotas, Death and Sudden Acceleration in the Los Angeles Times

Last week, the Securities and Exchange Commission voted to provide public companies with interpretive guidance on existing disclosure requirements as they apply to business or legal developments relating to the issue of climate change. The SEC has now released the text of the guidance:
Guidance Regarding Disclosure Related to Climate Change

Those who are fired up about global warming will be quickly underwhelmed by the guidance. At its most basic it merely reminds public companies that they need “to consider climate change and its consequences as they prepare disclosure documents to be filed with us and provided to investors.”

The guidance claims that it will does not create any new disclosure requirements. Given the increased regulation of emissions, cap and trade, and insurance company adjustments, companies need to disclose the potential impact of these changes on the future prospects of the company.

I expect we will see a new section in the annual filings this spring, some interesting reading and some inflammatory news reports.

The globe image is by Jackl under the Creative Commons Attribution ShareAlike 3.0 in Wikimedia: http://commons.wikimedia.org/wiki/File:Global_warming_ubx.svg.png

Last week, the Securities and Exchange Commission voted to provide public companies with interpretive guidance on existing disclosure requirements as they apply to business or legal developments relating to the issue of climate change.

Chairman Mary Schapiro pointed out in her speech that the SEC is not commenting or opining on the issue of climate change; rather the guidance is intend to “provide clarity and enhance consistency” to help companies decide what does and does not need to be disclosed.

There has been a fair amount of discussion, mostly because climate change is such a lightning rod issue. I think most people, even Republicans, have agreed that the planet is going through some fairly rapid climate change. The debate has shifted to how much of it is caused by man and what we can do to slow climate change. But not the SEC: “We are not opining on whether the world’s climate is changing, at what pace it might be changing, or due to what causes.” If they are going to regulate, they should at least admit that there is climate change.

Maybe they should take a trip to McCarty Glacier in Alaska.

Image from Global Warming Art under CC-BY-SA

As with most SEC rules, the press release was short on details and we are still waiting for the actual interpretive notice to see what will be required.

Sources:

• SEC Press Release: SEC Issues Interpretive Guidance on Disclosure Related to Business or Legal Developments Regarding Climate Change
• Speech by SEC Chairman Mary Schapiro: Statement Before the Open Commission Meeting on Disclosure Related to Business or Legislative Events on the Issue of Climate Change
• The SEC, global warming and the First Amendment by Larry Ribstein in the Ideoblog
• The SEC Calls for Climate-Related Disclosures by Jonathan H. Adler in The Volokh Conspiracy
• SEC to Issue Interpretive Release on Climate Change by Jaclyn Jaeger
• SEC Requires More Climate Change Data By Jilian Mincer in WSJ.com’s Financial Adviser
• SEC’s “Interpretive Guidance…Regarding Climate Change” Leaves Many Scratching Their Heads in Corporate Compliance Insights

The globe image is by Jackl under the Creative Commons Attribution ShareAlike 3.0 in Wikimedia: http://commons.wikimedia.org/wiki/File:Global_warming_ubx.svg.png

The Boston College Center for Corporate Citizenship released their findings in the 2009 State of Corporate Citizenship in the United States.

Despite the upheaval in the economy, a majority of U.S. companies are not making major changes in their corporate citizenship practices. Of those who made changes: 38% reduced philanthropy/giving, 27% increased layoffs, and 19% reduced R&D for sustainable products.

The State of Corporate Citizenship in the United States 2009 is a joint project of the Boston College Center and The Hitachi Foundation. The report is free, but requires registration.

Organizations or all types and sizes are adopting policies to provide standards for environmental responsibility and sustainability initiatives.  But adopting green policies may impose risks on your organization if the policies are not properly followed.

Perkins Coie published a piece on these risks and issues: Green Policies – Understanding and Addressing Compliance Risks.

False Advertising.

Your company can be held liable for making a false statement about your sustainability efforts. Just ask Nike. There is also the Lanham Act and the ability of competitors to sue your company for false or misleading representations in advertising of goods, services or commercial activities.

FTC Regulations.

The FTC has published its Guide for the Use of Environmental Marketing Claims. These have teeth. The FTC sued Kmart, claiming that Kmart had made false and unsubstantiated claims that its private-label paper products were biodegradable.

Investor Risk.

Corporate  environmental practices have attracted increased attention from shareholders of public companies. Just ask Exxon-Mobil. I have not yet seen a meaningful shareholder suit for failing to follow a sustainability policy. But it may happen.

Contract Misrepresentation.

You need to know what you are. If you make a contractual obligation that a property is LEED certified or meet some other environmental standard, that obviously needs to be true. Otherwise you are exposing yourself for breach of contract.

References:

• Green Policies – Understanding and Addressing Compliance Risks by Perkins Coie
• Kasky v. Nike California Supreme Court case
• Nike v. Kasky Supreme Court denial of certiorari
• Nike and the Free-Speech Knot by Eugen Volokh
• FTC’s Guide for the Use of Environmental Marketing Claims.
• In the Matter of Kmart Corporation, a corporation. FTC File No. 082 3186

Disclosure: Perkins Coie just signed a big lease renewal in one of my company’s properties. Perkins Coie renews huge downtown Seattle lease.

Ted Nunez, Ph.D. Director, Ethics & Corporate Compliance at Kaplan EduNeering gave the presentation on this webinar. Compliance already has a lot on its plate, does sustainability also belong there?

These are my notes:

To start, what is corporate social responsibility? It depends on who’s asking. Different companies have different views and different needs. It’s not just about the environment.

Ted set out three meanings of sustainability:

1. Environmental sustainability
2. Sustainable business practice
3. Sustainability – synonymous with CSR (or CR)

The shift in sustainability is moving from a mere public relations ploy to a strategic position.

Ted pointed out that consumers drive demand and offered up a “Green Gauge” (from a IBM Global 2008 CEO Study):

• True-blue greens – 30%
• Greenback greens – 11%
• Sprouts – 26%
• Grousers – 15%
• Apathetics – 18%

Another driver is reputation and brand. A Fortune Magazine study found that a company’s intangible assets account for 75% of a company’s total value.

Another driver is to attract and retain employees.  Ted offered up these four factors related to greater employee happiness:

• Contributing to something bigger than ourselves
• Experiencing “flow,” or full engagement, regularly
• Expressing our gratitude to others
• Being emotionally connected

Ted went on to espouse some principles of sustainable business performance:

• Redesign Processes, Products and Facilities
• Measure Environmental and Social Impacts
• Build a Culture of Sustainability

Today is the 39th celebration of Earth Day, celebrated in the U.S. each April 22 since 1970. Senator Gaylord Nelson from Wisconsin called for an environmental teach-in, or Earth Day, to be held on April 22, 1970. In that same year, the Environmental Protection Agency was formed to consolidate federal research, monitoring, and enforcement. About 20 million people celebrated that first Earth Day.

How is your compliance program addressing sustainability?

See:

• Boston.com’s Earth Day page – A guide to events and resources around Boston
• Earth Day New York
• EarthDay.gov – A cooperative effort across the U.S. government
• EPA’s Earth Day
• Earth Day: What It Meant – Senator Nelson reflecting back on the origins of the day.

Image is from NASA (part of the public domain) and is available on Wikimedia: Earth Western Hemisphere white background.jpg

Compliance is not just about complying with legal requirements. After all, legal requirements are just a minimum standard of behavior. Your company can (and probably should) operate at a higher level.

Sustainability and ethically produced products are are areas that some companies are spending extra resources. At some point you run into a business ethics conundrum. Are you losing too much in the way of profits for your company to justify spending the extra funds on these initiatives?

It would be great to be in the sweet spot where there is extra revenue to be made from customers willing to pay a premium for ethically produced goods. The company does good AND generates more revenue. That takes the ethical issues off the table.

Remi Trudel and June Cotte conducted some research on this topic and published the results in an article in the Winter 2009 edition of the MIT Sloan Management Review: Does It Pay To Be Good?

They ran two experiments: one on coffee purchasers and a second on t-shirts purchasers. For the coffee experiment, coffee-drinking adult consumers were divided into three groups with different ethical information manipulations.

Our results showed that the premium consumers would pay as a reward for fair trade practices was $1.40 per pound, while the punishment/discount for unfair trade practices was $2.40 per pound. Thus, negative information concerning trade practices had almost twice the impact of positive information on the coffee consumer’s willingness to pay.

For the t-shirt experiment, potential consumers of cotton T-shirts were divided at random into five groups.

The first (100% Ethical) read the following: “Conventionally grown cotton uses more insecticides than any other single crop and epitomizes the worst effects of chemically dependent agriculture. Each year cotton producers around the world use nearly $2.6 billion worth of pesticides — more than 10% of the world’s pesticides and nearly 25% of the world’s insecticides. Danisky is the leading textile and clothing company based in the European Union specializing in organic cotton outdoor wear for active people. Growing cotton organically entails using cultural practices, natural fertilizers, and biological controls rather than synthetic fertilizers and pesticides. Danisky has been recognized for its outstanding environmental record. All of Danisky’s products are 100% organic.”

The second group (50% Ethical) had the same information, except that: “All of Danisky’s products are 50% organic.”

The third group (25% Ethical) had the same information, except that: “All of Danisky’s products are 25% organic.”

The control group was given no ethical information at all.

The results?

Consumers perceived (and rewarded) all levels of ethical production similarly. They did not reward increasing levels of ethical production with increasing price premiums. Our results suggest that once a certain threshold is attained, additional ethical acts or increased ethicalness simply affirms the target company’s position within that category and will not change consumers’ willingness to pay.

So in the end it pays to be good. I am sure that is a message that all companies should hear.

These are the authors conclusions:

Consumers are willing to pay substantially more for ethically produced goods than for unethically produced goods, suggesting that there is a financial reward for socially responsible behavior. The managerial implications of these findings are clear: Act in a socially responsible manner and you may be able to charge more for your products. Perhaps it is even more important to note that consumers will punish the producer of unethically produced goods to a greater extent than they will reward a company that offers ethically produced products. The negative effects of unethical behavior have a substantially greater impact on consumer willingness to pay than the positive effects of ethical behavior. Consumers may still purchase your products if they are unethically produced, but they will only do so at a substantial discount.

So, not only does it pay to be good, you may be punished if you are bad.

See:

• Winter 2009 edition of the MIT Sloan Management Review
• Does It Pay To Be Good? by Remi Trudel and June Cotte (free registration required)