Tuesday, August 30, 2011

The true face of corporate social responsibility

I have been critical of companies projecting themselves as socially concerned institutions by each creating a corporate social responsibility (CSR) department within their organization. Lately, CSR activities have received considerable publicity, helping companies to present themselves to the public as benevolent institutions concerned about social issues such as poverty alleviation, environmental protection and energy conservation.

In my several prior articles I have pointed out that CSR initiatives are simply marginal activities for a company, with little or no serious attention given to them by senior management. These activities take mainly two forms – funding NGOs for education, healthcare, arts and other social initiatives, and running their own projects that are being projected as contributing to social good.

The focus of CSR has mostly been on the positive publicity that could be obtained for the company and its top managers. The hypocrisy of the claims being made by many institutions is visible when these activities are carefully scrutinized for what they really are: who are the beneficiaries; how much of the co-funding is obtained from governments; what is the relative contribution toward CSR activities when compared to the company’s revenues and profits; and what are the real motivations for embarking on CSR projects.

Late Nobel Prize recipient in economics, Professor Milton Friedman, pointed out in an article in the New York Times magazine as early as 1970 that CSR functions are nothing more than “window dressing,” and companies can only be expected to make profits for their shareholders. Lately, two economists, Michael E. Porter and Mark R. Kramer, have been attempting to paint a different face to CSR through a concept they have defined by the word “shared-value.” They argue that companies may try to maximize their profits while opportunistically undertaking socially good ventures as part of their mainstream activities.

For example, GE is credited with helping consumers conserve energy by introducing products that require less electricity. Similarly, many major companies are credited with introducing consumer products such as toothpaste and soap at low prices that are affordable to some of the poor people.

By the same token, companies such as Wal-mart and Nike claim that they generate hundreds of thousands of new jobs, employing previously unskilled labor, in poor countries. New companies are springing up every other day offering technologies to harness solar and wind energy more efficiently, and to burn coal with less carbon pollution. All these industries offer products that serve social good, and yet their main focus is on generating revenues and profits. It is not difficult to argue that they all fit within the concept of shared-value.

Companies enter into business ventures with the goal of generating profits. If those ventures are addressing some of the pressing needs of the society, they are even better. However, even if a product is not recognized as having socially redeeming values, as it might be in the case of expensive cosmetics, it might still meet the needs and desires of some individuals. Further, companies engaged in creating and selling such products employ people, generating income for many families.

I am of the opinion that any discussion of social responsibility and shared values in the context of corporate goals is of very little practical use. Companies operate in areas of their competence and compete with each other to succeed financially to reward their investors. If there is a market opportunity to make profits in an area, whether it has direct social benefit or not, there will be investors and entrepreneurs who would want to exploit it. There is no need to set aside opportunities with superior risk-return tradeoff in favor of what might be called shared-value investments with lower probable returns and higher risks.

After all, investors haven’t asked their top managers to spend time or money on social projects that are unlikely to add value to the financial goals of the company. When investors and employees personally make money from their investments, they can decide for themselves what they want to contribute, and how they want those contributions to be best utilized. That is the model followed by true benefactors like Bill Gates, Warren Buffet and Ted Turner who first earned money for themselves, and then decided to spend a great part of it for social good. Companies that are privately held by few individuals also fall within this model (and also obtain corporate tax benefits).

Companies must recognize that it is in their long term interest to win the support of communities where they operate. Repressive local norms in compensation and treatment of labor must be replaced with fair practices that assist the poor in adequately caring for their families. Market forces of supply and demand and competition for gaining a dedicated labor force and loyal customers are powerful factors in motivating good behavior on the part of corporations.

These and other issues can be addressed through effective enforcement of laws and regulations concerning minimum wages, worker safety and benefits, prevention of non-competitive practices, and environmental protection. Governments must play their rightful role to promote responsible action on the part of companies, and leave the rest to market forces. Companies, on the other hand, should be expected to focus on rewarding their investors while operating in an ethically and legally correct fashion.

Let investors first make money fairly and then decide what their individual preferences are toward social contributions. This individual responsibility toward society cannot be delegated to faceless corporate entities. Ultimately, it is each individual's moral conscience and sense of social obligation/duty that will decide what they do for the society.  Brick and motor or virtual entities are just heartless creatures of human ingenuity, and nothing more, to generate money for themselves! 

Wealthy individuals who are unwilling to share a small but significant portion of their income with those who are helpless cannot hide behind the claim that their companies are doing meaningful social good.

Abraham M. George

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