Corporate social responsibility: Doing Good or Wasting Shareholders’ Money?

by Baruch Lev New York University blev@stern.nyu.edu Corporate social responsibility:Doing Good or Wasting Shareholders’ Money? July 2013

At a Glance • For and against CSR • What exactly is CSR? • My approach to CSR: What should, and shouldn’t be done • Finally, a lesson for you

Two Opposing Views • “There is one, and only one social responsibility of business—to use its resources and engage in activities designed to increase its profits.” (Milton Friedman, Nobel Laureate economist.) • “In a survey by the Economist Intelligence Unity, only 4% of respondents thought that CSR was ‘a waste of time and money.’ Clearly, CSR has arrived.” (The Economist, January 19, 2008).

I Bet Most of you Think CSR is a Great Idea. But do you Really Know What CSR is? • Are the following cases CSR? • Is Toyota’s highly successful Prius hybrid car a business response to GHG emissions (Global Warming), or a clever business innovation creating huge profits? • Is Whole Foods, a very successful and profitable food chain, good business for shareholders, or a social initiative improving people’s health and the environment? • Walmart, the world’s larges retailer, announced that it will eliminate 5% of its packaging material by 2013, saving trees and energy (and lots of money). Is this CSR?

Continued… • Is KPMG, a Big-4 accounting firm, allowing its U.K. employees to spend half-a-day a month on community work, a valuable CSR, or a smart strategy to attract high-quality employees? • Is U.S. corporations’ $15 Billion a year philanthropic contributions to civic, health and education purposes CSR, or, as my research shows, a smart advertising creating sales and profit growth? • Is Chevron, a major oil company, spending large amounts of money on health improvement in Africa (where they don’t have oil operations) CSR, or a business insurance against public outrage for oil spills and damage in other parts of the world?

So, What is CSR? • Is it primarily a good business idea, a la Milton Friedman, which also has some social benefits on the side? OR • A socially beneficial corporate activity that does not create profits, perhaps even decreases them, while benefitting communities, health, or the environment? The former is a no-brainer, but should companies do the latter?

Let’s Look Closely at Friedman’s Argument • “Other people’s money.” Corporate resources don’t belong to managers. They are shareholders’ money. If shareholders want to do good, they can spend the dividends they receive on any purpose they wish. Managers shouldn’t spend shareholders’ money on social purposes. • No expertise. Corporate managers have no training or expertise in ranking social targets. How can they rationally choose among fighting diseases, enhancing education, improving the environment, serving communities, etc.? Aren’t managers mainly interested in enhancing their own prestige and political influence through CSR?

Hard to Argue with Friedman’s Logic, so my Approach to CSR is: • If CSR activities enhance sales and earnings (Prius, Whoel Foods, etc.) (“cause-related philanthropy”)—just do it. • Money donations unrelated to the business (AT&T’s $100 million to decrease high school dropout, or Freddie Mac’s—a failed government sponsored mortgage company—donations to strengthen families) should better be left to shareholders. • The really beneficial CSR: using the company’s specialized resources to serve society and the environment. This cannot be done by shareholders.

Examples of CSR Using Corporate Specialized Capabilities • Cisco systems, the world’s largest internet equipment producer, initiated in 1997 the Networking Academy project. • Web-based, distance learning free program to train and certify students world-wide in networking administration • About a million students a year in more than 160 countries are trained by this program, creating high-paying, highly demanded jobs. • Cisco’s shareholders could not develop and administer such a program.

Continued… • Home Depot, a large retail chain of construction material and houseware, partnered with KaBOOM!, a nonprofit outfit that builds playgrounds in inner cities. • Home Depot contributes funds, products and employee volunteers, as well as the assistance of the firm’s accounting and legal staff. • KaBOOM! provides expertise in community relations, and identifying locations for playgrounds.

Finally, Flying under the Radar: CSR as Insurance • The business upside (potential gain) from CSR is modest at best. The downside from damage to communities (Union Carbide in Bhupal, India, 1984) or the environment (BP in the U.S., 2010) can be huge. • Smart CSR can provide protection—insurance—against such damages. • Companies that routinely engage in CSR generally consider the social and environmental impact of their activities more carefully than other companies. • CSR activities create social capital—trusted relationships with government and NGOs—that mitigate the reputational damage from mishaps.

Lessons for You Dear Students • The claims of the benefits of CSR by its highly-paid advocates (consultants, NGOs) are so exaggerated (“CSR is the best investment you ever made”) and often unfounded (“high correlation between CSR and profits”) that most executives view CSR with great suspicion. • So, when you enter the business world, don’t run around advocating CSR to everyone. Focus on your job first. • In your spare time, think very carefully about opportunities to leverage the specialized capabilities of your company to enhance every specific social or environmental goals at low costs.

Lessons for You Dear Students • Once you identify such an opportunity, build a comprehensive case—like a business plan—quantifying the costs and benefits of your proposal. • Share the plan first with your direct boss. If he/she approves, send it to the CEO. Be prepared that if they like it, they will ask you to do it. • But before you set out to “correct the world,” make sure that you positively contribute to your own small “world” (family, friends).

“If you save one person you save the world.” - The Jewish Talmud

Corporate social responsibility: Doing Good or Wasting Shareholders’ Money?