For want of a $500,000 safety device, BP shareholders lost billions in monetary value.

A screaming page 1 headline proclaimed “The Case Against Corporate Social Responsibility” in a special section of the August 23 Wall Street Journal. The article under that headline, by Aneel Karnani, an associate professor of strategy at the University of Michigan, has elicited a flood of mostly negative comment from what seems to be just about everyone in or touched by the emerging practice of CSR.

And well it should raise a furor, as Karnani contends that any claimed contribution to corporate profitability from pursuing CSR is “an illusion, and a potentially dangerous one.” In some instances, “the idea of corporate social responsibility is irrelevant,” and in others it “will almost always be ineffective.”

But Prof. Karnani professes a view of corporate social responsibility that is at odds with just about everything I’ve learned about CSR (from sources prominently including The Wall Street Journal). Herewith, then, I offer my Top 10 flaws of Karnani’s case. Italic represents Karnani’s words; regular type is my response.

10

• … social activists urging [companies] to change their ways had little impact.
• … appeals to corporate social responsibility are not an effective way to strike a balance between profits and the public good.

A significant portion of Prof. Karnani’s case – as much as half of it – rails not against CSR but against those who call for companies to practice CSR. That would have been fine if his article had been headlined as “The Case Against the Case For Corporate Social Responsibility.”

9

• Large companies now routinely claim that they aren’t in business just for the profits, that they’re also intent on serving some larger social purpose.

Prof. Karnani, like most CSR commentators (whether pro- or anti-CSR), implicitly regards social responsibility as a corporate silo, apart from all other corporate units and departments. At companies that realize value (shareholder and otherwise) from CSR, social responsibility is woven through and inseparable from corporate culture.

8

• Self-regulation is another alternative, but it suffers from the same drawback as the concept of corporate social responsibility: Companies are unlikely to voluntarily act in the public interest at the expense of shareholder interests.

If Prof. Karnani were to have added “short-term” before “interests,” this statement would sometimes be accurate. But only once in his article does he differentiate between short and long term (… an executive might be averse to any risk … that might jeopardize the short-term financial performance, … even if [it] would improve the company’s longer-term prospects). Day traders and some hedge funds may want executives to maximize short-term results. But long-term profitability is most often the focus of pension funds, foundations, endowments, 401k holders, and (most famously) super-investor Warren Buffett.

7

• Companies that simply do everything they can to boost profits …
• … in those cases where profits and the public good are at odds.
• It is the relentless maximization of profits, not a commitment to social responsibility,…

Prof. Karnani – like just about everyone on both sides of debates about CSR and the so-called triple bottom line of social, environmental, and financial responsibility – thinks of profits as being solely monetary. But companies are composed of people, and people – including CEOs and shareholders – also pursue profit in the form of recognition, adulation, awards, legacy, and what psychologist Abraham Maslow famously called “self-actualization” – the highest of human needs.

6

• Even if executives wanted to forgo some profit to benefit society, they could expect to lose their jobs …

I wish Prof. Karnani had provided at least one example of an executive who did this. In all of the many cases I’m aware of, executives’ actions aimed at benefiting society have enhanced long-term monetary profits. Shareholders in fact are harmed when their companies neglect social responsibility, as is illustrated by the enormous – and even total – drops in market value suffered by those owning stock in Enron, Merck, and BP. Shareholders in BP saw the value of their holdings plummet by more than 33% after the Deepwater Horizon explosion. As the Wall Street Journal itself noted, the spill may have been averted by installing a safety device costing about $500,000; the lack of it has cost billions.

5

• In circumstances in which profits and social welfare are in direct opposition, …
• The danger is that a focus on social responsibility will delay or discourage more-effective measures to enhance social welfare in those cases where profits and the public good are at odds.

Of his dozens of statements attacking CSR as ineffective, inappropriate, and even illegal, Prof. Karnani fails to back any of them with even a single example. With no research, I can cite examples of companies that argue against Karnani’s assertions (among which are Enron, Lehman Brothers, Washington Mutual, AIG, General Motors, and BP on the minus side and Church & Dwight, Johnson & Johnson, Interface, GE, Patagonia, Ben & Jerry’s, and Seventh Generation on the plus side); what are the companies that support him?

4

• This is true for most of society’s pervasive and persistent problems; if it weren’t, those problems would have been solved long ago by companies seeking to maximize their profits.

Prof. Karnani seems to exclusively think globally, not locally, in arguing against CSR. This has the effect of making it silly for most companies to pursue CSR: How can even the biggest of today’s global enterprises even attempt to address global maladies that have been part of the human condition for centuries? He ignores CSR in the form of sponsoring a little league baseball team or giving employees a paid day off so they can help out in a neighborhood homeless shelter – actions that contribute to employee morale and public approval in ways that make firms more monetarily profitable.

3

• A prime example [of CSR leading to loss of monetary profits] is the pollution caused by manufacturing. Reducing that pollution is costly to the manufacturers, and that eats into profits.

Several statements like this one are true only because most countries and societies allow companies to privatize their monetary profits while socializing the costs of operation that produce those profits. The public at large pays for these so-called “externalities” – such as asthma aggravated by vehicle exhausts. If companies had to pay for their products’ and processes’ harmful impacts, and were thus reflected on corporate balance sheets, the monetary profits arguably gained by ignoring CSR would likely vanish.

2

• Consider the market for healthier food. Fast-food outlets have profited by expanding their offerings to include salads and other options designed to appeal to health-conscious consumers.
• Similarly, auto makers have profited from responding to consumer demand for more fuel-efficient vehicles, a plus for the environment.
• Managers who sacrifice profit for the common good also are in effect imposing a tax on their shareholders and arbitrarily deciding how that money should be spent.

Leaving aside nuance and implicit meanings, Prof. Karnani is often just plain wrong. Fast-food outlets do not profit from healthier offerings. Auto makers didn’t respond to consumer demand, they responded to government regulation, actual or threatened. Managers are just as arbitrarily deciding how money should be spent when they reject actions for the common good.

1

• Very simply, in cases where private profits and public interests are aligned, the idea of corporate social responsibility is irrelevant …

Many infamous corporate actions, most recently those of BP in decisions concerning the oil spill, indicate the opposite is more nearly true: that when private monetary profits and public interests are aligned – as they most often are – CSR is highly relevant – and ignoring it can amount to corporate suicide.