Extract from his forthcoming book The Age of Responsibility: CSR 2.0 and the New DNA of Business (published by Wiley in February 2011)
One of the current failures of CSR is that the much touted ?business case? for CSR is not nearly as obvious, certain or practiced as many assume. Let?s start with the rhetoric. The World Business Council for Sustainable Development (WBCSD), which is the strongest proponent of the business case, suggests that it is predicated on five ?returns?: operational efficiency, risk reduction, recruitment and retention of talent, protecting the resource base of raw materials, and creation of new markets, products and services. And it is certainly not hard to find ad-hoc examples of each of these ?win-wins?. But is there always a business case?
To answer this, we must look beyond the rhetoric and turn to academic research. The findings vary. For example, Griffen & Mahon (1997) reviewed 25 years of studies and found that a majority showed a positive link between CSR and financial performance, while Margolis & Walsh (2001) reviewed 80 studies, of which 42 show a positive relationship, 19 demonstrate no relationship and four find a negative one. Orlitzky, Schmidt & Rynes (2003) reviewed 52 studies and in most cases, the studies suggest a positive association between CSR and profitability.
Two reports by Sustainability ? Buried Treasure and Developing Value ? also suggest mixed results. Some relationships between sustainability factors and business success factors are stronger than others, and in many cases, no relationship exists. Laffer (2004), on the other hand, in a review of Business Ethics magazine?s 100 Best Corporate Citizens found ‘no significant positive correlation between CSR and business profitability as determined by standard measures’.
Academic and author of The Market for Virtue, David Vogel, concluded that ‘there is no definitive answer to the question of a financial link. It depends on an individual company?s circumstances.
Academics searching for a definitive corporate responsibility-financial performance link are barking up the wrong tree.’ I tend to agree. There are far too many variables to isolate the impact of CSR on financial performance, except through very specific examples like eco-efficiency. What?s more, are typical measures of CSR a reliable proxy for sustainability and responsibility? After all, if we had correlated Enron?s CSR and financial performance prior to its demise, it would have pointed to a strong positive relationship, which makes a nonsense of the whole exercise.
I have a more fundamental problem with the misdirection of CSR business case rhetoric however. The real question we should be asking is: Does the market consistently reward sustainable and responsible performance by companies? Even without checking the data, we know intuitively from what we see going on in the world that the answer is an unequivocal no. With very few exceptions, the global markets today reward the externalisation of social, environmental and ethical costs over the short term. New York Times journalist and author Thomas Friedman calls this the privatization of benefits and the socialisation of costs, while activist writers like Naomi Klein call it ‘the race to the bottom?, referring to tendency for companies to locate their production in places with the lowest labour or environmental standards, and hence the lowest costs.
To underscore the point, the Vice Fund (VICEX) in the U.S., which only invests in the so-called ‘sin’ industries like tobacco, alcohol, gambling and armaments consistently outperforms the market over the long term, including socially responsible funds like the Domini Social Equity Mutual Fund (DSEFX). However, we don’t need to go to extremes to prove the uneconomic nature of responsibility. Why are fairtrade and organic products, or renewable energy, more expensive than more generic products? Why does Exxon remain one of the largest and most profitable companies in the world? The fact of the matter is that, beyond basic legal
compliance, the markets are designed to serve the financial and economic interests of the powerful, not the idealistic dreams of CSR advocates or the angry demands of civil society activists.
What’s more, business leaders agree. The 2010 survey of 766 CEOs by the UN Global Compact and Accenture found that 34% cited lack of recognition from the financial markets as a barrier to achieving their sustainability goals. Nestle’s Jose Lopez is candid : ‘At the same time that we are coming out with a lot of discussions regarding the importance of sustainability, the market continues. I had hoped that after the world lost 5 trillion dollars in market capitalisation out of this nonsense financial crisis that companies would start to be measured by something else other than market capitalisation. But the world doesn’t seem to be going anywhere other than to measure companies by their market capitalisation.’
