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Making the Case for Corporate Social Responsibilty (Part II)

December 1, 2010

read the article here

Last August, the Wall St. Journal ran an article titled The Case Against Corporate Responsibility, which has since provoked much debate. In the article, University of Michigan professor Aneel Karnani warns that campaigns for corporate social responsibility (CSR) are irrelevant, ineffective, or outright harmful– a dangerous distraction from more substantive systemic regulation. Karnani’s primary message, that CSR must not be expected to supplant formal regulation, is commendable. However, his first two arguments are deeply flawed. Both depend upon frameworks in which the landscape of choice is more extreme and more simplistic than that which corporations, shareholders, and consumers frequently face.

These frameworks present a false dichotomy. They imply that firms operate in a world where social welfare and profit creation are either perfectly aligned or directly opposed. Karnani avoids a more complex and relevant debate: the influence of CSR in circumstances that fall between these rare extremes. This over simplification undermines the accuracy and relevance of both arguments, but the second one – that campaigns for CSR are ineffective when private and public interests are opposed – suffers from a more fundamental flaw. Karnani fails to consider how new tools of media and information exchange are redefining the traditional relationship between private firms and their markets. This oversight places his entire framework, and the argument it supports, on very shaky ground.

Karnani’s first claims that CSR campaigns are irrelevant when private interests and social welfare are aligned, since companies will naturally increase social welfare while striving to maximize profits. Indeed if social welfare is enhanced as a direct and inevitable result of a firm’s revenue model, let’s call this “perfect alignment,” then this argument is valid. The presence or absence of organized campaigns for CSR will make no difference in such cases. But this point only holds when the universe of possibilities firms face is limited to perfect alignment or direct opposition between profit creation and the public good. What about cases of imperfect alignment, in which executives face choice in value creation and the socially optimal decision is one possibility among several? Do campaigns for CSR remain irrelevant when alignment is simply a possibility and not a given?

Such instances of imperfect alignment are not hypothetical; they are ubiquitous. Karnani cites energy conservation, fuel-efficient vehicles, and healthy food as “opportunities” that some companies have chosen to seize as they become increasingly profitable. Certainly, companies can still make a good buck selling unhealthy food and gas guzzling sports cars – the explosion of cupcake specialty shops and the perpetual cache of the Escalade are evidence of this. But some companies are choosing alternate paths to profit. This discussion demonstrates that executives face choice in value creation; that profit maximization is not a problem with a single set of solutions. Rather, multiple solution sets often exist, and while certain variables in the profit equation may generate comparable returns, their secondary impact on net social welfare can vary drastically. So how does Karnani’s argument hold up when applied to this broader reality of choice in value creation, and possibilities of imperfect alignment? Not very well.

In order for Karnani to be correct that CSR campaigns are irrelevant in cases of alignment (perfect and imperfect), the following assumption must be true: Any variables within firm’s profit maximization strategy that produce functionally equal returns will be self-evident. No additional resources will be necessary to identify them or analyze their secondary impact on social welfare. If this assumption were valid, then Karnani’s irrelevance argument would hold. Executives would be free to make the rational choice – maximize profits in a way that minimizes social welfare loss. Presumably they would select the optimal strategy that was also most beneficial (or least harmful) to the public good. Unfortunately, this assumption is unrealistic. Companies face myriad operational decisions, and while some opportunities to align social welfare with profit creation will be obvious (i.e. energy efficiency efforts), many will require research, innovation, and creative thinking to uncover and assess. If resource are not dedicated to identifying these “equivalent variables” and analyzing their secondary impacts, they will be missed.

In cases of imperfect alignment, the opportunity exists to align profit creation and the public good. As Tim Mohin notes, alignment doesn’t just happen, it isn’t a given. And it is in these circumstances that campaigns for corporate social responsibility are extremely relevant. Public calls for CSR create both negative pressure and positive opportunity for firms: respond to the pressure or risk being labeled a poor corporate citizen; lead the pack in CSR and gain positive publicity, an enhanced brand image, and maybe even some cost-saving innovations in the process. Without these dual incentives – negative and positive, how would executives justify the expense of establishing a CSR department or team in first place?

Karnani states that only incompetent, short-sighted, or self-interested CEOs will forgo opportunities to align profit creation with social welfare. In such cases, he claims that only internal pressure from shareholders and boards will alter this behavior – not outside “appeals for greater CSR.” But this distinction is a false one – shareholders are also the public. Their perspectives and priorities may be (and must be) impacted by norms and values emanating from outside of the private sector. Public campaigns for CSR have built awareness, interest, and receptivity to CSR among the shareholders and board members who influence corporations. Without this residual pressure, companies would have no justification to divert resources away from short-term profits and towards long-term sustainability of profit. But that is precisely what CSR programs represent. Thus, even though Kanrani’s first argument is accurate within rare cases of perfect alignment, it is inapplicable to the more common reality that firms face: executive choice in profit creation.

What about Karnani’s second charge, how does that hold up? The next post will examine the claim that campaigns for CSR are ineffective where private interests and social welfare conflict.

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