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How CSR works in a market economy
Simon London

          Corporate social responsibility (CSR) is one of those topics -- like Manchester United and the New York Yankees -- that raises passions both for and against. To CSR's proponents, encouraging companies to do more than the law demands to create a better workplace and society is a powerful force for good. To its opponents, this is dangerous thinking because it distracts companies from their true role in a market economy maximising profits while staying within the law.
Personally, I think both sides are nuts. There is no harm in companies spending a little time and money on CSR projects. Corporate chiefs have always splashed shareholders' cash on things that had nothing to do with maximising profits, such as building marble-clad headquarters and buying abstract impressionist art. Shareholders are happy as long as the amounts involved are moderate and earnings per share keep on rising. On balance, I would rather see this marginal investment devoted to CSR.
But neither do I buy the argument that socially responsible companies can have a real impact on the world's big social and environmental problems. Yes, Ikea. is to be applauded for, discouraging Indian rug makers from using child workers. BP deserves credit for taking action to reduce its greenhouse gas emissions.
Starbucks is right to support Fair Trade, a scheme guaranteeing coffee farmers a fair price for their produce. These are sincere efforts to do the right thing. Just do not expect them to address the underlying causes of child labour, global warming or agrarian poverty.
Defeatism? No, just realism. Companies are constrained by shareholders, customers and employees alike. Market forces prevent chief executives from doing anything that might noticeably dent earnings, push up prices at the checkout or constrain their ability to pay market rates to attract qualified workers. Corporations can be virtuous in a market economy -- but only within some firm constraints.
To be sure, some companies have gone further and made CSR central to their corporate identity. Examples include Seventh Generation, purveyor of chlorine-free toilet tissue, and Ben & Jerry's, the eco-friendly ice-cream maker. But it seems that only a minority of customers is willing to pay premium prices for responsible products. Unless or until this changes, most companies will be forced to limit their commitment to CSR activities.
It would be different if good behaviour always made good business sense. Sadly, however, there is scant evidence to support the claim. For every CSR-conscious company that is thriving (BP, Starbucks, Ikea) another is down on its luck (Levi Strauss, Marks and Spencer, Hewlett-Packard). Studies purporting to find a causal relationship between exemplary behaviour and exemplary financial returns have not, in general, stood up to academic scrutiny.
Similarly, the performance of socially responsible investment funds -- which invest only in "responsible" companies -- has been mixed.
When such funds do outperform the wider stockmarket, the explanation is usually to be found in their relatively high exposure to "clean" industry sectors such as software. Within sectors, ethical criteria do not appear to help fund managers pick winners.
For a level-headed survey of the evidence, I recommend The Market for Virtue: The Potential and Limits of Corporate Social Responsibility, (published by Brookings Institution Press) by David Vogel, a political-scientist-turned-professor of business ethics at the University of California Berkeley's Haas School of Business. In a world filled with hot air on the subject, it is refreshing to find such a clear -- and, at less than 200 pages, concise -- assessment of CSR's pros and cons. Prof Vogel's view is that we should think of CSR not as a precondition for business success (plainly, it is not) but as a dimension of corporate strategy: "Just as firms that spend more on marketing are not necessarily more profitable than those that spend less, there is no reason to expect more responsible firms to outperform less responsible ones. In other words, the risks associated with CSR are not different from those associated with any other business strategy; sometimes investments in CSR make business sense and sometimes they do not."
This seemingly prosaic conclusion has profound implications. First, while there is a place in the market economy for responsible companies, there is also a place for their less responsible competitors. Do not expect market forces to make all companies more ethical through a process of Darwinian selection.
Second, even companies that do place CSR high on their list of strategic priorities are limited in what they can do. Someone (shareholders, customers, employees) must be willing to foot the bill. As Prof Vogel says: "The supply of virtue is both made possible and constrained by the market." This being so, the role of government remains vital. CSR initiatives by individual companies or industry codes of conduct cannot be relied upon because there will always be laggards and backsliders. If society really wants to change things for the better it should legislate.
This is where even the most CSR-aware CEO gets twitchy. No business leader likes to be seen to be encouraging government rules and regulations. This, however, is the acid test of how much they really care about the workplace and society. Ask of your CEO not "what are we doing to reduce our greenhouse gas emissions?" but "what are we doing to promote legislation to curb greenhouse gas emissions in general?" Then stand back and watch them squirm.
Under syndication arrangement with FT


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