The world is embroiled in a financial crisis, an economic downturn, the worst recession in decades.
The heart of the crisis, the spark that lit the blaze, is the sub-prime mortgage crisis. In oversimplified terms, banks bet on risky loans to make more money—and they lost the bet.
If this were a children's book, the next few pages would hold the moral of the story: The irresponsible banks would lose lots of money, and they would learn a lesson. Actions have consequences, they would now understand, and not just for the people who decided to take the actions, but for the broader community as well.
The real world, of course, seems quite a bit different. Instead of going bankrupt, banks are getting billions in government bailouts. Meanwhile, the world over, people are suffering the consequences of the poor economy.
What happened to corporate social responsibility?
Prakash Sethi, distinguished professor of management at New York's Baruch College, as right as it may seem to let the banks suffer the consequences of the toxic lending, “the cascading negative effect on everything else would kill society.” We need healthy banks, Sethi says, even if they acted irresponsibly, and we need a healthy corporate world, outside of the financial sector, too.
Furthermore, he says, it's too soon to know the true consequences of the financial crisis. It may be that the long-term aftermath of this financial crisis will mean greater responsibility from corporations—or at least better oversight from the government to ensure irresponsible risks aren't taken. And, it may be that this financial crisis is just one more moment in the long-term evolution of business, not an unimportant one, but not a pivotal moment either.
But the test is not in how government and business react now, he says, it's how they behave once the economy starts growing again. When corporations are no longer in crisis, they will have to weigh profits with socially responsible practices, and that, Sethi says, is when we will know if any lessons have stuck.
Corporate social responsibility can encompass a number of things, but at its core, says Sethi, it's “the things that companies ought to do to minimize the negative consequences, on society, of their normal business practices.”
For instance, a company runs a factory that causes air pollution or drains waste into a local water source. The socially responsible decision would be to invest in technology that would clean the emissions or dispose of the waste in an environmentally safe way. Or, in the case of a bank that earns money through loans, it would only take on as much risk as it can manage independently.
Often socially responsibly practices have an impact on the company's bottom line. It can cost more to incorporate environmentally friendly technology into your manufacturing plant. Your bank might miss opportunities for greater profit by taking on fewer high-risk loans.
If a corporation is primarily responsible to its shareholders—the people who make money when the company profits—then socially responsible practices can be at odds with good business strategy.
“Any cost that the company can avoid paying adds to their bottom line, and so is to their interest,” Sethi says.
But Sethi says there are other interests as well. “These are the things”—like pollution and toxic loans—“that affect the groups who are not necessarily benefiting from corporate activities. They may not be shareholders or employees,” Sethi says. “They are the community-at-large, and they are paying the cost of things the company should have paid the costs of to begin with.”
How to calculate the cost of CSR
Not every company calculates these costs the same way. Some companies have staked their reputation on their commitment to make good, while also making money. Starbucks, for example, has built a socially responsible reputation with practices like generous policies towards employees—earning it a place on lists around the world as one of the best companies to work for—and a commitment to what they call “ethical sourcing,” which includes building long-term relationships with their suppliers and paying higher prices for coffee beans.
Being seen as socially responsible can give a company a competitive edge, says Cynthia Figge, who co-founded a consulting company that specializes in helping companies integrate sustainable practices.
“Engaging employees and customer loyalty,” she says, “while considered somewhat intangible, are huge motivators for becoming sustainable.” In other words, price is not the only consideration when someone considers a purchase. Some customers may choose a socially responsible product over a less expensive one, which can help defray the costs of being sustainable. Likewise, attracting and retaining quality employees can be important to the overall well-being of the business.
Furthermore, Figge says, being socially responsible doesn't always result in increased costs. “Sustainable practices can mean greater efficiency,” she says, such as reducing energy or packaging costs.
Indeed, Business in the Community (BITC), an organization of 800 U.K. businesses striving for greater corporate responsibility says its research shows responsibility pays. It looked at the performance of the companies on London’s FTSE 350 stock index, 33 of which participated in the BITC corporate responsibility index program, which BITC says helps them “integrate and improve responsibility throughout their operations by providing a systematic approach to managing, measuring and reporting on business impacts in society and on the environment.” BITC found the 33 companies managing responsibility programs through the corporate responsibility index had between 3.3% and 7.7% higher shareholder return than the average for all 350 companies listed on the FTSE between 2002 and 2007. And, BITC says, overall, as the companies increased their measurements of environmental and social impacts, their stock prices stabilized.
Performing CSR’s social calculation
David Vogel, a business professor at University of California, Berkeley, says peer pressure can also be an important motivating factor towards social responsibility. “I think a lot of it is driven by media pressures, naming-and-shaming practices,” he says. So companies avoid socially irresponsible practices, like polluting the environment or using sweat shops, fearing that, he says, “if X gets exposed then maybe we will, too.”
Deena Murphy, a researcher at the Institute for Community-Based Research, says this factor will only increase in the internet-age. These days, she says, “there are so many more watchdog organizations out there. You can have a focus on profit, but your business is not going to be around if you don't adopt some of these (socially responsible) principles.”
“Shareholders are stakeholders,” she says, citing the ideas of R. Edward Freeman, a philosopher and business scholar, “but only one of many. “In an increasingly open and transparent society, it is critical for corporations to recognize that they are not operating in a vacuum and perception of their organizations and values can directly impact their economic bottom line.”
So, experts say, investing in socially responsible practices can and has paid off for some companies in the long-term. But when a company is fighting for its life, as many are in this recession, being socially responsible may be a luxury companies cannot afford.
For instance, Liz Brenna, of Ben and Jerry's Homemade, Inc., says they pay up to five times as much for ingredients for their “fair trade” ice cream line. Brenna says there are a number of positive impacts of paying a higher price. For instance, for their vanilla producers in Uganda, paying more “has allowed them to start having their babies in hospitals—decreasing the infant mortality rate—owning land, starting their own businesses, building brick houses instead of huts, and much more.”
But despite the higher cost for ingredients, prices for the fair trade ice creams remain the same, potentially cutting into the profit margin for the company.
Business professor Vogel says companies like Ben and Jerry's, that have already made serious commitments to certain socially responsible practices, are unlikely to stop because of the recession. “These higher costs are institutionalized—they have already absorbed the cost,” Vogel says. “I don't see a retreat for things like that.” But “companies having financial difficulty aren't likely to embark on expensive or risky initiatives,” he says, like paying five times more for essential ingredients. “I expect to see a slowdown in that arena.”
Management professor Sethi agrees. “We need to have a realistic outlook, right now,” he says. “Can you really ask GM right now to improve fuel economy? If you're looking at ‘do I survive tomorrow or not,’ the argument is somewhat weaker.”
Looking forward, however, management consultant Figge sees more room for optimism. She says over the past decade or two, she's seen key issues around sustainable business and development being raised and considered, and people in business asking questions like: “How do we develop the economy in ways that don't deprive future generations of leading sustainable lives?”
Moreover, Figge says, “I think that a lot of these (irresponsible) practices are being exposed, and as there is greater transparency and exposure, behavior changes. I am hopeful about it. I think there will continue to be practices that are wrong and greedy but I think the movement is against that."
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