Profitability has to come first for firms

Profitability has to come first for firms
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First Published: Mon, May 25 2009. 12 53 AM IST

Updated: Mon, May 25 2009. 12 53 AM IST
What do you think about companies being socially responsible during these difficult competitive times? Is it a necessity or a luxury?
—Trifon Manolov, Sandanski, Bulgaria
Whether times are good or bad, companies must be socially responsible. That’s a given. But the current tough economic conditions are surfacing the underlying reality that—to put it bluntly—a company’s foremost responsibility is to do well. Some might consider that statement to be politically incorrect, but the facts are inexorable. Winning companies create jobs, pay taxes, and expand and strengthen the overall economy. Winning companies, in other words, enable corporate social responsibility, not the other way around. So companies should be putting profitability first right now. It’s the one requirement that makes all else possible.
Now, before you dash off a missive about our cruel capitalistic ways, please understand that we’re not suggesting that companies abandon philanthropy and other charitable initiatives, and return to them only when the economic skies are clear and blue again. We’re only saying that corporate social responsibility, or CSR, as it has come to be known, needs to be adapted to the circumstances. It hasn’t become a luxury, but leaders today do need to clarify for themselves and for their employees CSR’s place on the company’s list of priorities.
Here’s what we mean. CSR initiatives come in three different forms. First, companies can contribute to society by donating money, goods or services to schools, homeless shelters, hospitals and the like.
Second, companies can focus their CSR efforts on community involvement through employee activities such as mentoring students or volunteer work.
And third, companies can structure their product and service strategies in terms of CSR: focusing on green initiatives, for instance, or factoring environmental concerns into manufacturing processes.
When the economic tide is high, of course, many companies practise at least the first two forms of CSR to some degree, and some, all three. And again, they should. Not only is it the right thing to do, but CSR practices can play a powerful part in recruitment, retention and overall employee morale.
But how should companies think about the three forms of CSR now, with margins narrowing, layoffs rampant and consumers embracing frugality?
To start with, contributions of cash and goods will most likely have to decrease. In troubled times, cash flow is critical to the company’s survival. Moreover, when you’re letting people go with one hand, it’s very hard to rationalize to those left behind the doling out of cheques to “worthy causes” with the other. It’s left to managers, then, to decide how to distribute the smaller pot. The company can sprinkle the money evenly, giving a little money to a lot of causes, or the list of charities can be pruned and the company can give somewhat larger amounts to fewer organizations. Neither choice is bad, in our view, but we favour the latter because the donations tend to have more impact.
As for community activities, companies should by all means continue to encourage their employees to stay involved, facilitating their efforts if and when possible with transportation and scheduling allowances. But managers should also understand if employees recoil from their previous commitments. It’s only human to hunker down and commit your full energies to your job when you feel it might be vulnerable.
And then there’s CSR as a strategy. Look, when gas costs $4 per gallon, a hybrid Toyota Prius is an attractive value proposition. When gas is $2 per gallon, that’s no longer the case. When most consumers have good jobs and feel secure in them, it makes sense to expect them to pay more for a product that’s environmentally friendly. When bank accounts have been drained, that more expensive product is a very tough sell.
Our point: The bar for strategic CSR is now higher than ever. Consumers are increasingly unable (or unwilling) to pay more for something simply because it makes them feel good about themselves. Today, it has to make them feel good financially as well. That doesn’t mean the era of "socially responsible" products is over. It just means there are increasingly intense cost pressures on the companies selling those products, and any manager who ignores that fact is ignoring the competition’s oncoming locomotive.
Not to sound anti-CSR. Even in these uncertain times, every company should practise good corporate citizenship. But they also need to face the reality that you first have to make money before you can give it away.
Write to Jack & Suzy
Jack and Suzy are eager to hear about your career dilemmas and challenges at work, and look forward to answering some of your questions in future columns. Jack and Suzy Welch are the authors of the international best-seller, Winning. Their latest book is Winning: The Answers: Confronting 74 of the Toughest Questions in Business Today. Mint readers can email them questions at winning@livemint.comPlease include your name, occupation and city. Only select questions will be answered.
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First Published: Mon, May 25 2009. 12 53 AM IST