CSR, Value and the Future of Business

This website has previously discussed Milton Friedman’s position on corporate social responsibility (CSR) and what he considered to be the true social responsibility of business: namely, to increase its profits. His analysis is largely spot-on — because a business manager (as an agent) is beholden to the business owner (as principal), he is legally obligated to do everything he can to maximize his return to the owner. Therefore, knowingly doing anything that decreases this return, without the explicit permission of the owner, is tantamount to fraud. Because of this, managers should avoid secondary activities such as CSR, as any efforts to solve social problems with company money will undoubtedly decrease the return realized by that company.

But is this really the case? Does CSR always hurt a company’s bottom line? Or is it possible that CSR, properly targeted, may actually improve business performance?

Friedman makes a common assumption in his argument. Basically, if a firm’s only responsibility is to increase its own profits (and therefore returns), then any activity that distracts from this goal, and by extension the bottom line, is an abdication of that responsibility. By arguing that CSR is always detrimental to a firm’s bottom line, Friedman is saying that CSR programs are essentially giving money away. In other words, CSR is charity — charity that is capable of making a difference in the world, but charity nonetheless. This is a common thought, and it is one that has guided CSR programs for many years.

But this doesn’t necessarily have to be the case. In the last several years, many companies have begun to revisit what CSR actually means and whether it can be taken further than simple philanthropy. For many companies, the answer turns out to be a resounding “yes.” They are finding that CSR can serve as a critical value driver; in some cases, it may even be the basis of the company’s entire competitive strategy. In these situations, CSR may actually be the primary driver of bottom-line success.

The traditional approach to business seeks to directly maximize profit and shareholder return. The approach benefits from the simple paradigm it has created, but it also leads to situations in which companies actively ignore the potential social impact of their business practices, for good or ill. In the case of any negative externalities, it is generally assumed that the public sector will step in to address the issue, providing services and support for those impacted.

However, the current economic climate has rendered this approach moot. Companies can no longer afford to ignore the social impact of their activities (investors, outside interest groups and increasingly aggressive regulators have seen to that), and the public sector, constrained by global austerity, is increasingly unable to address the myriad social issues impacting citizens. Driven by these two factors, corporations are increasingly being asked to step in and directly address social issues in the communities in which they operate.

Forward-looking companies, those best positioned for success in the coming years and decades, recognize this fact and are quickly moving to act on it. For these companies, CSR means much more than philanthropy, though it may still be a component of their approach. These companies embrace CSR in a much more holistic manner that includes both a traditional defensive approach as well as more active components.

For these companies, the first rule of CSR is “do no harm.” As already stated, companies are expected to behave as good corporate citizens, and those that fail to do so are punished with increasing severity by investors, regulators and public interest groups. Traditionally, corporations found themselves playing defense on this front; a company would suffer a misstep, become the focus of one or more pressure groups and belatedly seek to improve its image through some form of CSR initiative.

This is no longer good enough for many high-performing companies, however. The top performers take proactive steps to ensure that, in pursuit of profit margins and return on equity, they are not actively stepping on the toes of their communities. With varying degrees of success, companies like Citgo, GE and Wal-Mart have used cutting edge CSR to bolster their market dominance, using it as risk control if not an outright value creator.

More importantly, however, leading companies today are playing “offense” with their CSR programs, moving beyond simple charity or community engagement to actually build and drive value creation throughout the business as a whole. For these companies, CSR is not a bolt-on marketing ploy but an essential part of their organizational DNA, informing every action they take.

This should not come as much of a surprise. As Friedman says, companies exist to maximize their own value. Successful companies do this by recognizing and meeting customers’ needs, whether they be ready-made hamburgers, SUVs, or low-interest mortgages. Why should social needs be any different? As Rosabeth Moss Kantor notes in the Harvard Business Review, truly great companies start by identifying an unmet societal need, such as clean water, low-cost loans or cheap clean energy. As Kantor says:

Those firms believe that business is an intrinsic part of society, and they acknowledge that, like family, government, and religion, it has been one of society’s pillars since the dawn of the industrial era. Great companies work to make money, of course, but in their choices of how to do so, they think about building enduring institutions. They invest in the future while being aware of the need to build people and society.

In other words, high performing businesses are aware of the fact that they do not operate in a vacuum; rather, they are major players in the societies and communities in which they operate, and their operations have the potential to create tremendous good for those involved. More importantly, they realize that they need not separate social good from their own bottom line. The best companies target unmet social needs and meet them, then reap the rewards. Increased profit flows naturally from an effective pursuit of this strategy.

The very best performers combine these two approaches. By targeting unmet social needs, companies can help build the communities in which they operate while simultaneously improving their bottom lines and delivering value to shareholders. By ensuring that they do no harm, they can ensure that the value created stays in the community and company, while avoiding fights with outside interest groups. This new logic is infiltrating corporate circles, and it is a transition to be embraced. The only question is how quickly it will spread, and who will capture the value from arriving first.