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Corporate Social Responsibility: Boon or Boondoggle?

10/25/2010 --

Ross professors debate the effectiveness and importance of corporate social responsibility.

ANN ARBOR, Mich. — Professors Aneel Karnani and Tom Lyon take divergent views when it comes to the concept of corporate social responsibility (CSR). Karnani, associate professor of strategy, says the idea that companies have a responsibility to act in the public interest — and will profit from doing so — is fundamentally flawed. Firms only can be expected to embrace CSR when the market naturally marries profits to social interests, or when government regulation forces such a union. Lyon, Dow Professor of Sustainable Science and director of the Erb Institute for Global Sustainable Enterprise refutes the idea that markets and governments alone can shape responsible corporate behavior; he makes the case that CSR is essential in the real world of business. Ross Net Impact and the International Policy Center brought them together Oct. 20 for a lively debate moderated by Jan Svejnar, Everett E. Berg Professor of Business Administration and director of the International Policy Center. Below are edited highlights from the transcript.

Karnani: ... In my view, CSR is either irrelevant or ineffective and dangerous. So I have very little good to say about CSR. What's wrong with it? First, we have to take two different types of situations. One is where the interest of the company and the interest of society are aligned together — they're congruent. If they're congruent, a company can increase its profits and increase its social welfare simultaneously. This is exactly what capitalism is about. The system, by the invisible hand, works.

The more interesting situation is with a market failure and when the interest of the company and the interest of society diverge from each other. When they diverge from each other, it's not realistic to expect companies, who have a fiduciary responsibility to their shareholders, to sacrifice profits for the sake of social welfare. ... In this situation, we need some external force to make the company behave in a responsible manner to achieve the social objectives. What is this external force going to be? Well, there are two possibilities. Either the government or some sort of social activism that puts pressure on companies to actually achieve the social welfare. And I think government is the ultimate binding constraint here.

The counterargument is often that the government doesn't work. Well, that is clearly true. The government often doesn't work. But that's not a reason to get away from the government. That's a reason to make the government work better. And we all as citizens have to be politically engaged and make the government function better. ... If you are going to be a social activist, rather than telling the companies to please be nice, you're much better off telling the government to make the companies behave nice. That's the role of regulation.

To go one step further, not only is CSR not effective, it's dangerous. Why is it dangerous? ... When there is a conflict between business and social interests, CSR serves the purpose of greenwashing. Companies say they do things, but they don't actually do very much. This is much worse. This is CSR being hijacked by companies to hide the fact that they're not socially responsible and they're not achieving social objectives. I think there are many instances of greenwash. If you had been talking a few years ago and asking which is the most socially responsible oil company, the answer would have been BP. They were Beyond Petroleum. Well, now we know that petroleum is beyond BP, and they were getting all sorts of awards, they're a member the United Nations Global Contract and so on. This hides the fact that their safety record was miserable, they had an explosion at a refinery in Texas, their pipeline in Alaska was leaking. But they sound socially responsible. ... If we de-emphasize CSR, we can focus on the real conflict and the real issues, and get away from this PR stance.

Lyon: ... You've heard that CSR is bad; you haven't heard what it is. Professor Karnani has artfully failed to define the thing he's attacked. So let's define it before we move forward. I generally define it, in my work, as corporate actions that go beyond compliance with the law. Typically, we're talking about reducing externalities, so it's a voluntary action by a company to internalize externalities and go beyond what's required by law. I'm not sure what Aneel's definition is. It sounds sometimes like it's doing well by doing good; sometimes it sounds like it needs to be shooting yourself in the foot to do good. I think we need to come back and spend a little time on the definitions.

So first of all let's just ask, can companies do well by doing good? I think it's absolutely clear that they can. Many large multinationals establish what's called a global common standard. They use the same technology in every country around the world. That often serves two functions. Take Dow Chemical moving into China or Brazil. They're using top-quality, American technology that's probably better than what most domestic firms are using in those countries. It serves to elevate the expectations for technology in those countries. It may create a strategic advantage for Dow as it moves into Brazil because it forces the other guys to raise their costs and meet its requirements, but it's doing well by doing good. ... There are lots of examples of companies that have reduced their greenhouse gas emissions substantially and made money in the process.

... Aneel's argument in this situation is, 'Ah, that's easy. It's simplistic. We don't need to worry about that because free markets are efficient, and if you're making money and doing good then it doesn't count.' I think that is just too simple. It's way too simple because the frontier of what's profitable is constantly shifting. And it's not easy to identify where you can do well by doing good. What we try to teach students, at least within the Erb Program here, is how to look ahead and anticipate where those frontiers are going to be five to 10 years down the road so that your company can be on the cutting edge and ahead of the rest of the pack.

... Can companies do harm by doing CSR? Absolutely, and I totally agree with Aneel that greenwash is a serious concern and quite a lot of CSR initiatives are shallow, cosmetic dressing. So we want to push hard on companies to make sure they're doing something substantial. But I don't agree that all of them fall into that category.

... Finally, I think we need to raise the question: Do we need CSR? Obviously, Aneel thinks we don't. And in a simple world where markets are efficient and government does what it's supposed to do, of course we don't need CSR. But the thing that concerns me is that we don't live in that world. We have market failures; we have plenty of government failures as well. The thing that really bugs me is that many companies cynically undermine the effectiveness of government regulation while proceeding to profit from that lack of regulation. To me that's the height of corporate irresponsibility. ... So to me, we ought to be refocusing the demand for CSR into the political arena and we ought to be demanding that corporations behave responsibly in their political behavior so that what they say and what they do are actually consistent with one another.

Karnani: ... I disagree with Tom that this is simplistic. ... I think the more interesting issue is the last point that Tom raises, which is that companies often undermine the government and regulation. In my view, Tom and the other side work themselves into a black hole, so to say. On one hand, he says that companies are undermining the government and then is telling companies, 'Please don't undermine the government.' Well, that's not going to work. The only thing that's going to work is if you put enough pressure on companies through transparency and other mechanisms so that they don't undermine the government, so that we have government regulation that says what you can contribute to, what you cannot contribute to, which sort of lobbying you can do, which sort of lobbying is out of bounds. In fact, I would go a step further. I think companies should not be able to play a political role, period. That's it. Companies are given a wonderful privilege in society, which is limited liability. And I think society should say to companies the quid pro quo for limited liability is that you will not play a political role at all. Citizens play a political role; companies should just obey political laws, and that's it. ...But the least we can do — and I agree totally with Tom — is have much more transparency and pressure on companies to make their lobbying transparent.

Lyon: I really like Aneel's last comments ... I think that's right at the heart of things. I think this issue of the corporate role in politics is really central. I do think the issue of government failure is central, and in a lot of ways I agree with Aneel that government regulation is often what we require in order to make companies do anything that is costly and difficult, because otherwise they'll just stall. But because government doesn't always take action, we just have to plunge into the swamp of what happens when there's no government response. And then we get into looking at the network of civil society and how does it influence companies. In some sense I think what Aneel is saying, and again I'm going to agree with this, is it's not sufficient for NGOs or civil society to politely ask corporations to do the right thing. We should definitely not expect them to respond to that.

:::

Question from audience: You argued for more transparency. I would argue, again, that's a government role and our role as political citizens to demand that, and I'm not sure how this has anything to do with the corporate responsibility part of it. It's our responsibility rather than the corporations'.

Lyon: So what happens when corporations work behind the scenes to prevent the passage of meaningful legislation that will require transparency? The role of CSR in that situation is to hold companies' feet to the fire. There have been a lot of movements to press for greater disclosure of all kinds of things that have not come through government but have come through NGO pressure. And I think that's what's going to be required in this case. Assuming that the best thing for NGOs is to go pressure government to take action is, to me, not correct.

Karnani: But saying NGOs should put pressure, we shouldn't call that CSR. I think one of the central tenants of CSR is voluntary action and not action under duress.

Lyon: I understand what you're saying, but this fundamentally breaks down into the dichotomy between free will and determinism, and that's a paradox like so many things. In the end we can't really tell what was voluntary and what was deterministic. So I end up thinking that's a red herring.

Karnani: No, I don't think it's that philosophical. Do companies do things without external intervention? And if there is Greenpeace putting duress on the company, I think it's silly for the company to say, 'We did this voluntarily through CSR.' Greenpeace forced Shell to change how it got rid of the oil rig. That was Greenpeace putting duress on Shell, not Shell's CSR.

Lyon: OK, but we've got pressure against the use of sticks, and then we've got carrots to induce movement forward. If you are looking for situations in which there are absolutely no sticks or carrots, I defy you to find one.

Karnani: That's when a company claims we are doing good and doing well. That's totally voluntary.

Lyon: There's typically a carrot hanging out there.

Karnani: But it's a market carrot, not a carrot from an external agent like a NGO or a government.

Lyon: And why is that a relevant distinction?

Karnani: I think it's very critical because we have two alternative mechanisms for resource allocation — markets and politics. Companies are designed to respond to markets through capitalism. But when markets fail, we need some other intervention — social activism, government, and so on. But that's external, interfering with the market in some sense.

Lyon: I guess my view is that the distinctions between these things are not nearly as sharp and clean as you're portraying, and that they're eroding even as we speak and the boundaries between politics and markets are very hard to find. As you said before, corporations are created by politics, so their very existence is political and their activities day to day are political. So distinction between markets and politics is really ...

Karnani: But the rhetoric is relevant. Look at the rhetoric of CSR. I think you and I agree a lot more in that sense. My disagreement is with lots of other people who talk about CSR. If you look at the rhetoric of CSR, it uses words like voluntary, partnerships, public/private partnerships and so on. Whereas my rhetoric is that the role of the government is to be a watchdog, social activism is to be a watchdog, insist on transparency, and change the carrot and the stick to make companies behave in a responsible manner. So I think there is a new sort of movement these days about corporate social accountability rather than corporate social responsibility. We should hold companies accountable, that I agree with, totally. But it's not going to happen because of companies doing it because they're good guys. They want to portray themselves as good guys. There are a number of examples of these companies pretending they're doing this because they're good guys. GE talks a lot about 'Ecomaignation.' I think it's an empty slogan. When GE sells wind turbines, that's a good thing and we're done. But GE is not going to voluntarily lose money to sell a technology that is not profitable. I think we need to draw this distinction.

:::

Karnani: Another problem I have with CSR is that CSR is, at a fundamental level, an undemocratic process. I think a lot of these big issues should be resolved in a democratic arena, not in a nondemocratic arena between a few social activists and a few CEOs talking to each other. For example, today the U.S. would like energy independence. One way to get energy independence in the U.S. would be to burn lots of coal because we have lots of coal in this country. But that poses a tradeoff, because that's not very good for climate change. Now who should make this tradeoff? I don't think it should be an oil company that makes that tradeoff, not a coal company, and not Greenpeace that makes the tradeoff. We all as citizens should figure out that tradeoff between climate change and energy independence or if you have either of these, this might imply a tax on the economy today and therefore less employment in the short term. These are complex tradeoffs, and they should be resolved in a broader arena. That's exactly what the political system is designed for. Bad as it may be, it is better than a few people sitting in a room together.

Lyon: Yeah, but then we come back to the question of when the political system resolutely fails to address issues over and over and over and over again.

:::

Question from audience: I see regulation having two parts. We have the rule on the book and the enforcement of that rule ... The Clean Air Act and the Clean Water Act in the United States. aAre actually not that bad, but how do you guys think CSR affects the enforcement of that? Can CSR be leveraged to enforce the rules that we actually do have, and would things work better if we enforced some of the rules we do have? Or does CSR undermine the enforcement and creation of new rules?

Lyon: There's actually a fair amount of empirical literature on this. Not huge, but there's some. My sense is that the general findings are that we have compliments between CSR and better enforcement. Part of what happens is that government enforcement agencies leverage information about CSR in deciding who to target. Typically, government enforcement agencies are woefully underfunded; they can't go after everybody, so they have to figure out who are the bad guys and really go after them. There's evidence that suggests they will go after the firms that are not undertaking CSR actions. That research looks specifically at real actions that we're counting as CSR. Typically, the variable used in those studies is actual reductions in toxic chemical emissions. So it's not somebody talking about 'we're a good company.' It was 'did corporate reductions in emissions change enforcement behavior?' The answer is yes, and in the ways that are probably good ways.

Karnani: I agree with that, totally. I think the challenge in practice, and in fact that is the challenge in much of our discussion here, is how to separate CSR actions from CSR rhetoric. The trouble is that CSR is often hijacked. I think the danger of it being hijacked outweighs the positives that it brings in place because it is hijacked most of the time.

Lyon: I think Aneel is putting his finger right on the central issue. It's 'when is it real and when is it fake?' One of the things I learned only fairly recently is there's a whole literature in the strategy area that I hadn't known about that went under the heading of symbolic vs. substantive action. Jim Westphal [the Robert G. Rodkey Collegiate Professor of Business Administration] is one of the leaders in doing this. It's not just CSR that fools people. It's just ordinary corporate action. Jim's original paper in this area looked at corporate announcements of whether they had instituted an incentive pay scheme for their CEO and what happens to the stock market when they make the announcement. They announce they put in incentive pay, the stock price goes up. All well and good. Jim's research then asks the question, 'Well, does it make any difference whether they followed through and actually did it?' And the answer was no. ... So it's not just CSR that can befuddle people, it's all kinds of actions that none of us are monitoring adequately.

:::

Question from the audience: As consumers who are specifically worried about labor conditions, working conditions, and corporate responsibility with that, would you say that ... the best option is for them to do the dollar vote and just buy the fair-trade bananas, or is it to try to push for more regulations?

Lyon: Well, if you're trying to affect what happens in foreign countries, you have very little hope of influencing regulations there. So I think these supply chain verification systems are far and away the best option that we have.

Karnani: I think that's true but we have to be careful not to be bought out too cheap here. If you look at any of these countries, third-world countries, exports account for a pretty small fraction of the total economy. If you are going to buy Nike, yes it does better, but most of Bangladesh is not making shoes for Nike. If you want to improve conditions in Bangladesh, the only way is to support an NGO in Bangladesh that wants to change conditions at large there. I think the danger is that too many people in the U.S. ... get bought out too cheap. They buy Nike shoes, they think they have saved the world, and Bangladesh hasn't changed at all yet.

—Terry Kosdrosky



For more information, contact:
Terry Kosdrosky, (734) 936-2502, terrykos@umich.edu