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Thursday, December 14, 2006

Overcoming "Corporate Social Irresponsibility"

From Democracy: A Journal of Ideas, why corporate social responsibility campaigns have failed, and the effect these programs have had in delaying more substantive reform efforts.

I don't agree with each and every goal of corporate social responsibility (CSR) advocates, but I do agree with the conclusion that it is wishful thinking to believe that firms will take individual voluntary actions to demonstrate social responsibility when those actions reduce profit. Thus, I also agree with the conclusion that the correction of market failures and the pursuit of social justice requires government intervention, pressure from interest groups is not enough.

The article distinguishes between two types of actions that firms can take in pursuit of corporate responsibility, strategic and non-strategic. Simply put, strategic actions increase profit (e.g. attract a customer base that prefers green policies so that the increase in demand more than compensates for the cost of the environmentally friendly production techniques), while non-strategic actions reduce profit. If a factory reduces carbon emissions on its own out of concern for the environment even though its competitors are not required to do so, and when it cannot expect an increase in demand from consumers or any other benefit sufficient to cover the costs of reducing emissions, then that would be a non-strategic action.

While the market ought to take care of strategic actions on its own since it is in the firm's best interest to put them in place, government action is needed to overcome non-strategic market failures. And in both cases the firm's incentive will be to create the illusion of doing as much as possible, while in fact doing as little as it can so as to maximize profit:

Corporate Social Irresponsibility, by Aaron Chatterji and Siona Listokin, Democracy Journal: After years spent fruitlessly attempting to organize Wal-Mart, unions and other liberal activist groups have taken a new tack: a public campaign to force the Bentonville behemoth to become more socially responsible. In 2005, Andrew Stern ... created Wal-Mart Watch, with an annual budget of $5 million, devoted exclusively to making Wal-Mart "a better employer, neighbor, and corporate citizen." At almost the exact same time, a parallel group called Wake Up Wal-Mart launched, with much the same goal.

In the nearly two years since, both Wal-Mart and its new opponents have spent millions dueling in the public and legislative spheres. The labor-backed groups have managed to stop Wal-Mart from opening stores in a number of communities and won isolated victories in court to force the company to increase benefit expenditures. Yet they have not fundamentally altered Wal-Mart’s behavior: Its wages are unchanged, its benefits are still restrictive, and its workers are still non-unionized. All of which raises an important question: Can progressives really change Wal-Mart–or any other company, for that matter? ...

A generation of activists has been raised on the idea of corporate social responsibility (CSR)–that large corporations can be cajoled into paying employees better, being more environmentally responsible, improving labor conditions in developing countries, retaining more American workers, embracing diversity, and donating money to fix inner-city schools. Where firms cannot be enticed, the strategy goes, they can be bullied. ... In 1999, a series of protests convinced Home Depot to sell more lumber from sustainable logging operations. More recently, campaigns against the fast-food industry have included a full barrage of boycotts, lawsuits, movies, and books to pressure companies like McDonald’s and Wendy’s to stop advertising to children and to serve healthier food.

In pursuit of similar success, enormous resources have been directed away from lobbying for regulatory regimes and toward recruiting powerful corporations into voluntary battle against a variety of injustices. Yet CSR campaigns have had limited success in actually changing corporate behavior in a meaningful way. More often than not, CSR crusades result in companies allocating a relatively small portion of their profits for public affairs advertising, community donations, and token changes...

At the root of the problem is an inconvenient but implacable fact: Corporations care about profits. Corporations will not–and their shareholders do not expect them to–engage in behaviors that do not maximize profit. Indeed, shareholders would punish them if they did. In concept and in practice, therefore, CSR is at best a partial solution to solving social injustices and correcting for market externalities. ... It is time to recognize that most market failures can only be solved by governments and multilateral agreements...

The Origins of Socially Responsible Business

...The modern CSR movement ... did not begin in earnest until the 1990s, the result of a confluence of globalization, neoliberal governments, and opportunistic corporations and nongovernmental organizations (NGOs). As more firms became multinational, national governments were less effective at correcting negative business externalities–a company could always move its operations or headquarters to avoid regulation–and negotiating multi-country agreements proved to be significantly more difficult than domestic bargaining.

Moreover, trade globalization discouraged national governments from insisting on strong, controversial international regulation. Developed nations had much to gain from access to new consumer and labor markets and did not want to jeopardize this access...

In response, pressure groups ... began to shift part of their focus from public regulation via the World Trade Organization (WTO) or multinational binding agreements to private, non-sovereign regulation like codes and standards. Public interest activists and NGOs also capitalized on the technological advances in communication, which eased the spread of information to consumers and helped to create demand-side incentives for private regulation. This shift in focus resulted in an explosion of voluntary codes, business roundtables, and standard-making boards to address issues as diverse as sustainable-lumber harvesting, gay rights in the workplace, the living wage, and diamond-mining in developing nations. By giving corporations a seat at the table and making compliance a voluntary, market-driven norm, pressure groups believed they could reach their goals without controversial regulation and reduce their dependence on national governments. ...

Corporations welcomed this approach and saw a clear advantage to adopting such voluntary codes. Instead of fighting social-movement organizations in shaping legislation, firms could sit down with these groups to create and monitor less-stringent private regulation. ... By the end of the decade, a new kind of relationship between public interest groups and private business had been created. Whereas earlier the two groups frequently stood on opposite sides of regulatory battles, activists and corporations now communicated directly—circumventing government whenever possible–and collaboration was considered an optimal (if not always attained) solution.

Today, the proliferation of responsible investing, voluntary codes, public pressure groups, and corporations with "social values" shows just how dominant CSR has become. And while environmental and human rights issues have been the most prominent focus, the amorphous movement is expanding to include more domestic issues, such as child obesity and middle-class employment benefits. Business schools are creating classes and centers for corporate social responsibility, companies are hiring CSR executives, and new codes are constantly being created in practically every industry. One could be forgiven for thinking that CSR has been a resounding success. The reality, however, is very different.

CSR’s Dubious Achievements

Imagine a world with one voluntary code of conduct governing the operation of apparel factories. Let’s call it the Golden Code of Conduct (GCC). This is a strong code that calls for the provision of a living wage, recognition of unions, and limits on working hours. Now suppose another set of companies who do not want to abide by the code, but still care about consumer perceptions, creates their own code, called the Super Code of Conduct (SCC). Their code lacks many of detailed provisions of the GCC, but it has some vague language about treating workers with respect. Companies must decide which code to adopt, and the SCC is clearly cheaper to institute. For high-minded companies that want to live by the more stringent code, the high costs could make them uncompetitive in supplying retailers. Meanwhile, the benefits are only significant if consumers can tell the difference between the two codes. ... The end result can be a race to the bottom as most companies decide to choose the weak code, which is often a far cry from the progressive ideal.

Reexamining the Nike battle over labor standards in the 1990s–viewed as one of the premier successes of the CSR movement–offers a concrete example of this dilemma. As a result of that mobilization, there are several codes of conduct for apparel factories, including codes created by the Workers’ Rights Consortium (WRC), the Fair Labor Association (FLA), and the Worldwide Responsible Apparel Production (WRAP) accord. The differences between these codes are significant... But do consumers know the difference? Probably not. ... As long as the company can claim that it is complying with some pleasantly named code of conduct, most consumers are likely to be pacified...

Or consider a variant on the CSR model, socially responsible investing, which, despite some favorable publicity, has fared little better than voluntary codes. SRI aims to direct money toward responsible companies and away from those that pollute, treat their employees badly, have poor corporate governance, or operate in "dirty" industries. ... While some SRI advocates appreciate the simple pleasure of not buying shares in the next Enron, many others argue that firms that "do good" will also "do well." Companies that treat their workers better might experience increased productivity, firms that invest in community relations may be buying themselves "reputation insurance" against future scandals, and corporations that invest in clean technologies may be saving themselves fines and expensive upgrades in the future.

But does it really work that way? Over 100 academic studies have examined the relationship between CSR and financial performance, and while most find some link, they come with an important caveat: It is very difficult to know whether CSR causes good financial performance or whether successful companies just have more money to spend on "doing good." It is likewise hard to tell if smart and capable management might be driving both CSR and superior financial performance. ...

When progressives put their trust into CSR-type ratings to identify corporate leaders and laggards, they must be wary of incorrect metrics, greenwashing (the corporate practice of highlighting small environmental improvements and achievements to mask more serious environmental problems), and even simple media hype. ...

Strategic vs. Nonstrategic CSR

...Corporate social responsibility initiatives can be roughly divided into two categories: strategic and nonstrategic CSR. In private management, strategic behavior is the set of actions that promotes long-term profit for the firm given its competition, consumers, suppliers, and market environment. When a company engages in socially conscious activities that improve its bottom line in the short or long run, it is behaving strategically. ...

Strategic CSR is often connected to marketing or branding activities–think of Ben and Jerry’s friendly image and its three-tiered product/economic/social mission statement... In other cases, strategic CSR improves worker productivity, as in the case of some apparel factories that have improved air-quality and lighting. In cases where publicized socially responsible behavior creates a brand niche, everyone wins. The company’s strategic CSR has differentiated itself from competitors, and a social good is created without the need for government intervention.

Still, many other CSR efforts and demands made by activists fall under the category of nonstrategic corporate social responsibility: business behavior that is at direct odds with short- and (reasonably) long-term profit maximization. And good management demands that nonstrategic actions be avoided or run out of the market, regardless of the social good they may produce. When critics ask Wal-Mart to pay their workers more and provide better benefits, they are essentially asking Wal-Mart to make less profit to improve society. ... After all, one of Wal-Mart’s competitive advantages is selling at low prices, and low labor costs are part of what sustains its edge. Pressuring Wal-Mart to weaken its own competitive advantage is likely to be exceedingly difficult...

The prevalence of nonstrategic CSR demands is partly to blame for the meaningless voluntary codes that define the private regulatory sphere. It is hard for a well-managed company to voluntarily agree to nonstrategic behavior, so there is a natural drift to costless standards that do not address the relevant social issue. The upshot is that while progressives might believe that they are improving corporate behavior and advancing social justice, they have in fact left behind a patchwork of confusing codes, voluntary standards, and weak or nonexistent monitoring. Indeed, the abundance of ineffective private regulation even has the potential to "crowd out" the demand for government regulation that could truly bring about the changes progressives seek.

A Better CSR Paradigm

Moving forward, progressives need to return to their roots: For especially large market failures, government action simply may be the only way to comprehensively address the problem. Thus, instead of pressuring the private sector to deliver social justice, progressives should focus their efforts on lobbying for government action to address issues like low wages at home and minimal labor standards in the developing world. ...

The first element of that strategy–to stop most nonstrategic CSR activities–might seem to many activists the equivalent of unilateral disarmament in the war for social justice. But it is in fact a matter of allocating progressives’ efforts more efficiently. Imagine what would happen if those activists who currently spend their time and money railing against Wal-Mart instead directed their complete and undivided attention toward fighting for a higher national minimum wage or national health care. ...

[M]uch of corporate America’s resistance to substantive CSR comes from the fact that their competition will likely avoid making the same costly decision; lobbying for government action that affects all firms equally changes this equation, in some cases turning nonstrategic CSR into strategic CSR. ...

[P]rogressives need to recognize how they have been misguided by the attractive branding of the corporate social responsibility movement into being overly optimistic about its benefits. The challenges created by the global economy will require progressives to be innovative and thoughtful in their policy recommendations. A return to their intellectual roots, coupled with pragmatism ..., is a good place to start.

    Posted by on Thursday, December 14, 2006 at 03:15 AM in Economics, Market Failure, Policy, Politics | Permalink  TrackBack (1)  Comments (21)


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    Mark Thoma at Economist’s View links to an essay from the journal Democracy that asks a related question: “Can progressives really change Wal-Mart–or any other company, for that matter?” Authors Aaron Chatterji and Siona Listokin argue that working to ... [Read More]

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