Poor practices can be expensive
Of course, a company doesn’t have to be dedicated to CR to seek to improve workplace safety, be transparent or build a good brand. But these figures do highlight a negative point: a company that pays no attention to CR is not necessarily going to have lower costs and be more profitable than one that does. In other words, while the bottom-line benefits of CR may be hard to quantify, the reverse is also true: the lack of CR doesn’t guarantee higher profits for a company, all other things being equal.
“Companies that pollute often have tremendous inefficiencies in manufacturing. For example, coalfired plants with a dirty burn aren’t efficient,” says Ms Brown. Companies that lack CR may gain some short term advantages over those that have it, she says, but over time it is not clear that they remain competitive. Poor labour relations, high pollution and similar CR problems will erode the performance of a factory, not help it, she says.
The same is also true for issues such as corruption. “Bribery is an expensive business model,” she says. Whenever companies begin to globalize, they tend to embrace CR faster than those who stay at home, in her view. “You tend to look for sustainable models as soon as you go” abroad, she says, since an outsider entering a new market will be forced to depend on rules to succeed, as it has fewer local connections than entrenched domestic players.
This is where some companies can gain an edge by utilizing CR to build a clean image. “We have a competitive advantage because the reputation of Chinese companies is so low in the global market,” says Jack Ma of an online trading company, Alibaba.com, based in Hangzhou. Mr Ma emphasizes what he calls the “three trusts” in his company: the first between the company and customers, the second between the company and employees, and the final one between the company and investors. “We want to be known as the best employer in China, also the company with the best CR,” he says.
It is Alibaba’s strong brand image that helps drive the business. Because Alibaba has gained the trust of traders outside China, it can be a bridge to bring small Chinese companies to the world market. Mr Ma has reinforced the company’s image by certifying Chinese suppliers as being trustworthy partners for Western buyers. These days, dozens of companies are willing to pay Alibaba thousands of dollars a year to be certified as a trusted Alibaba supplier. Obviously, this business model requires Alibaba to maintain its credibility with Western buyers; otherwise the entire company’s future would be threatened.
“Three years ago, some salespeople were accepting kickbacks from companies to list them as our trusted suppliers,” says Mr Ma. “I had a clear message: no kickbacks. I would rather go bankrupt than do this. We had to fire the salespeople who were doing this. Therefore everyone knows that when you do business with Alibaba it is clean.”
But some companies go too far in burnishing their credentials. Excessive corporate chest-beating about their CR practices can backfire, when, for example, companies over-publicize their charitable works, Mr. Gerald gets upset when he sees a company engaged in what is called “cause-related marketing.” “I don’t like it when a company spends a thousand dollars on a charity and then spends a million dollars advertising the fact,” says Mr Gerald.
Indeed, advertising and public-relations companies have developed sophisticated cause-related marketing strategies for companies, on the premise that it is one of the cheapest and most effective forms of building brand loyalty. It’s a tactic used by dozens of companies, from Starbucks to the Body Shop. Mr. Gerald suggests that there is a more open way to address the issue. “Boards have no mandate to give to charities. If they want to do that, then they should put the money aside in a trust and put it to a shareholder vote,” he says. Mr Gerald argues that it is always better to give the money back to investors and let them be philanthropic. “Charity begins at home,” he says.
It’s a sentiment echoed by Mr Verghese: “Companies don’t have the skills or assets to do social good, there are others who can do it much better than the company. Let shareholders decide on contributions to charity.” Chiquita is also aware of the risk of overselling CR. “We are not doing CR just to sell more bananas,” claims Mr. Aquirre.
Some corporate executives argue that the best form of CR is actually one that uses the company’s expertise and has a business purpose. The survey supports this, since 87% of executives believe that good corporate citizenship helps the bottom line.
For example, Olam is helping cocoa farmers in Ghana to improve their yields and quality. Even though Olam is the world’s second-largest trader of cocoa beans, and buys from these same farms, Mr. Verghese
argues that this business-minded approach leads to improvements in CR. “We have helped 250,000 farmers,” he says. As these farmers get better, they make more money, helping the entire rural economy— and, Mr Verghese points out, they have no obligation to sell their better beans only to Olam.
“We don’t have the skills to cure AIDS,” says Mr Verghese, “but we can find where our CR and economic interests meet. Then you have an incentive to do it right. And it is sustainable.” Mr Ma makes a similar case for his business. “Our CR is to help the small and mid-sized businesses of China to grow. We have to help create jobs,” he says. He mentions a visit to an impoverished part of northern China, where he claims a village of 50 people were making a living by selling goods over Alibaba. “You have kept us alive,” he recalls a woman saying.
Even those who operate in developed markets, such as the founder of the Easy Group in Europe, Stelios Haji-Ioannou, make the same argument. He sees Easy Group’s main contribution to CR as a social one, wiping out the high costs and bureaucracy of one bloated industry after another. “Our mission statement says that whatever we do has to be low-cost, has to be fun, has to be innovative and has to be the underdog fighting for the little guy,” he says. “We are the consumer’s champion.”
Corporate responsibility: a false notion?
Indeed, the arguments of Olam, Alibaba and the Easy Group are a variation of what critics of CR have said for years: that the best, and only, business of a company is its business. Left alone, a company will maximize profits (done within a legal framework), resulting in the maximum happiness for all stakeholders.
The advocates of CR, say these critics, imply there is something shameful in companies making profits by providing goods and services to consumers. So, CR implies that redemption can only be found through being “responsible” as a good “corporate citizen”.
But critics say that CR distracts companies from being successful, throwing sand into the gears of global capitalism by increasing the burden of regulations and other costs, and thus ultimately eroding the benefits that accrue to global stakeholders. One of the clearest critiques has come from an economist, David Henderson, the former head of the economics department of the OECD, and currently a visiting professor at the Westminster School of Business. In a 2001 treatise entitled, “Misguided Virtue: False Notions of Corporate Social Responsibility” (published by the New Zealand Business Roundtable), Mr Henderson wrote:
“CSR is flawed in its prescription, as well as its diagnosis. What it proposes for individual businesses, through ‘stakeholder engagement’ and giving effect to the ‘triple bottom line,’ would bring far-reaching changes in corporate philosophy and practice, for purposes that are open to question and with worrying implications for the efficient conduct of enterprises. Across economic systems and political boundaries, it would strengthen existing tendencies to regulate transactions, and to limit competition, in ways that would further restrict the opportunities and freedom of choice of people and enterprises.”
The same sentiment was summed up by a management thinker, Peter Drucker, who says in the Canadian movie documentary “The Corporation” released in 2004: “If you find an executive who wants to take on social responsibilities, fire him. Fast.”
Yet respondents to the survey appear to disagree. Eighty-eight percent of executives believe that it is now an important consideration in most corporate decisions. There seems no hint of remorse for this, because 87% believe good CR helps the bottom line.
Conclusion
CR is a difficult and elusive topic for companies to deal with. It can often be very costly and yield benefits that are hard to quantify. Perhaps this is one reason why companies, according to the survey, have put so much focus on the internal improvements that can be made, such as improving corporate governance and transparency. This could also explain why the most important stakeholders, after customers, are the traditionally important employees and shareholders.
There’s also the issue of just what standard of CR should companies use and how far companies should go to perform their responsibilities beyond what the laws call for. The issue of what is the “responsibility” of a corporation is far from being settled, and there is an unresolved argument over what CR means. Companies face a plethora of options among the various standards, guidelines, benchmarks and other proposed measures of CR.
One point that all can agree on is that CR is not a neutral topic. There is a persistent debate about whether the CR “movement” represents an unjustified intrusion into corporate affairs, and whether companies should invest profits in their own CR projects or return the money to shareholders to let them invest as they see fit. But there is no denying that CR has become an important issue facing the global business community and one that promises to grow in importance in the coming years.
