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James Walsh
  James Walsh

Misery Loves Companies: Rethinking Social Initiatives by Business

6/15/2004 --

Managers must learn to juggle societal and financial demands without disrupting business operations.

ANN ARBOR, Mich. – Companies are coming under increasing pressure to help redress social ills while at the same time they are under the gun to improve their financial performance. The seeming incompatibility of these two objectives can put corporate managers in a real dilemma.

Although there may be no simple way to resolve the tension between societal and shareholder demands, professors from the University of Michigan Business School and the Harvard Business School suggest in an article in Administrative Science Quarterly that formulating a "framework for action" can help managers use their corporate resources wisely and move closer to actual fulfillment of their dueling responsibilities.

"The challenge facing those who advocate corporate social initiatives is to find a way to promote what they see as social justice in a world where maximizing shareholder wealth is the paramount objective," says James Walsh, the Gerald and Esther Carey Professor of Management and Organizations at the Michigan Business School.

Walsh and Harvard colleague Joshua Margolis caution against making hasty decisions, however.

"Before rushing off to find the missing link between a firm's social and financial performance, all in hopes of advancing the cause of social performance, managers need to understand the conditions under which a corporation's efforts benefit society," Walsh says. "Just as we cannot assume that a social investment will yield handsome financial returns, we also cannot be certain that it will actually help the intended beneficiary."

As an important first step, business organizations need to identify and probe the objectives, duties and concerns that arise when they confront the question of whether to help redress human misery. Typically, concerns may revolve around whether a firm's resources should be used for purposes for which they are not well-suited or compensated. Of course, the company needs to examine if it either contributes to or benefits from the social malady. In either instance, the firm has a special duty to respond, albeit a strong response if the company has contributed to the malady.

Few would claim that a company should walk away from its product liabilities, but the question of whether a firm (and its customers) should benefit, for example, from the lower wage rates available in the developing world is a much knottier issue. In some cases, a company may consciously decide to take a benevolent stance in promoting the well-being of others, regardless of whether the company itself caused or benefits from an unjust situation. At times, firms may take such stands even if the financial returns are not obvious.

It is important, the authors suggest, to fix a careful eye on both sets of vying responsibilities rather than to try to dismiss reasons for or against responding to social maladies.

"The aim is to understand the compelling grounds that exist for taking alternative courses of action and to refine those grounds in light of one another," Margolis says. "For example, companies may be poorly suited to respond to illiteracy or contaminated water–problems to which they have not contributed–but corporate efforts to improve these conditions may be permissible, if not obligatory."

This might be so, for example, when no other institutions are as well-positioned as companies to redress illiteracy or water pollution.

A second step in developing a suitable framework is to work out how competing considerations can be integrated into a course of action. As a company formulates its response to social maladies, it can consider three factors: 1) the problem itself, notably its magnitude and severity; 2) the company's relationship to the problem, particularly its contribution to or special knowledge of the unjust situation; and 3) the impact a corporate response might have on the problem, larger society and the company itself.

In addition, boundaries must be established to protect the recipients of the aid from any negative consequences of the assistance provided (such as increased dependency) and to protect the firm's capacity to perform its central business functions.

"Even as business organizations may be instruments for creating wealth, they also may be the entities of last resort for achieving social objectives of all stripes," Margolis says. "Manifest human misery and undeniable corporate ingenuity should remind us that our central challenge may lie in blending the two."

For more information, contact:
Bernie DeGroat
Phone: (734) 936-1015 or 647-1847