Corporate social responsibility (CSR) is hot. Some mutual funds screen for it, while various indices and rankings establish criteria related to CSR. The Global 100, for example, tracks performance of what it calls the “most sustainable corporations in the world”.
The Kellogg School, meanwhile, has established courses to teach leaders how to excel in the hyper competitive world of market and non-market forces, and offers frameworks to manage a host of issues around practices that aim to “do well and do good”.
Illustration: Malay Karmakar / Mint
That business should care about a diverse set of community stakeholders in addition to its shareholders’ profits is an appealing notion—one whose merits seem unassailable, even if the supporting details can be vague. What, after all, does it mean to be “environmentally sustainable”? How does the definition change if you are an oil company?
It is easy to get swept up by the pull of CSR, an idea that elevates business to heroic problem-solver, tackling challenges—from poverty to pollution—that formerly were the domain of the government to redress.
This concept is not entirely new: A century ago, business leaders were just as eager to be pillars of the community—the Protestant Christian “Social Gospel” and the political progressive movements influenced executives and educators, including those at Northwestern University’s School of Commerce, a predecessor to the Kellogg School.
Scratch beneath the surface, though, and CSR becomes more complex. Which is why Kellogg offers a curriculum—social enterprise at Kellogg—to teach students how to navigate the rapids of consumer activism and regulatory pressure. Doing so includes strategically deploying philanthropy or adopting sustainable practices that signal one’s standing as a good corporate citizen. Years ago, this approach seemed easier to dismiss, and some influential thinkers did just that.
Like it or not, the competitive landscape has shifted dramatically today, requiring most leaders to harness the power of any and all tools, including CSR.
It is this strategic utility of CSR that Daniel Diermeier, the IBM professor of regulation and competitive practice, researches and teaches. He says non-market forces, including regulation and consumer boycotts, can significantly shape a company’s success.
Diermeier says that information technology, the global supply chain and a shift in values among many “post-materialist” consumers (those affluent enough to enjoy the luxury of fulfilling needs beyond mere necessity) are forcing firms to pay more attention to how they conduct their business at all levels of the value chain—from the suppliers with whom they work, to how they treat employees, to their corporate presence in the community.
Just ask Wal-Mart Stores Inc., Diermeier says. Its stock price fell some 27% as a result of recent sustained non-market activism, much of which was disseminated via the Internet and in response to the company’s labour and management practices. Its sales growth has also slowed to an average of 3.5%, and its proposed new urban stores have run up against community resistance. The retail giant even went from being lauded as one of the US’ most admired companies in the Fortune magazine to being the subject of a scathing documentary, Wal-Mart: The High Cost of Low Price.
It becomes much more important for businesses to do things the right way as the Internet makes firms ever more transparent to consumers who care about social responsibility and sustainability, says Diermeier, who is also director of the Ford Motor Company Center for Global Citizenship at Kellogg. One bad supplier, a poorly managed retail store or an unhappy customer on video can spell years of disaster for a company the instant the news hits the Internet.
“Once it is on YouTube, it lives forever,” he adds, citing the power of communications technology to move markets. As an example, he notes the pressure that the Rainforest Action Network put on Citigroup Inc. in 2004 to adopt a comprehensive environmental policy on logging. “Twelve people exploited the flattened, integrated economy to force change,” says the Kellogg professor, pointing out that these efforts, instead of going after the main company, can target critical links in that firm’s value chain that may be vulnerable, ultimately producing the desired change at the top of the chain. “As a manager, you have got to deal with this, even if you think the claims behind the attack are wrong.”
But, under the best of circumstances, customers are still demanding more from businesses. “They want more than a car, they want a Prius, something that signals, ‘I care about the environment!’” says Diermeier. As a result, for these consumers, a firm’s environmental or labour practices can matter as much as its products. For the company, he adds, this shift in values offers an opportunity to “market to the moral self”.
Whether CSR as a competitive or a non-market strategy can increase profits depends— the majority of recent studies indicate that CSR has a positive impact on the company’s financial performance, though these studies pertain mostly to environmental issues.
Diermeier notes that the pay-off will vary based on industry, company and product line, with “lifestyle” brands (think Starbucks) and well-known consumer brands enjoying the most potential benefit. Not all firms may find it worthwhile to sink resources into CSR but, clearly, some cannot afford not to do so.
Equating CSR to a level of product quality, Diermeier uses an analogy to explain how, for a hotel chain, the investment can be essential, optional or just minimal, depending on the market space. A premium brand such as Four Seasons will approach value investment rather differently from a more standard brand such as Holiday Inn. But, for businesses in the accounting or health care space, it may be impossible to skimp on superior value.
“There is no market for a low-quality auditor. There is no market for a low-quality heart pump that works some of the time,” Diermeier says.
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