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An Open Letter to Dr. Aneel Karmani: Why CSR Is Good For Shareholders and Society

August 24, 2010

This article originally appears on the Forbes.com CSR Blog. Click here to read the article on that site.

Dear Dr. Karmani,

I read with interest your opinion piece in yesterday’s Wall Street Journal entitled “The Case Against Corporate Social Responsibility.”  I applaud your effort to continue to challenge this emerging field in business. In the spirit of continued and friendly academic debate, however, there are a few very important pieces of information you didn’t include in your article.

Most notably, Milton Friedman’s nearly forty-year old article “The Social Responsibility of Business is to Increase Profits” raised many of the same issues in your piece, making many of your points seem familiar to me.  The arguments he presented in his famous New York Times Magazine article were strikingly similar to the points you wrote about; namely:  an executive’s sole responsibility is the return of profits to shareholders, that he or she shouldn’t use shareholder money to promote a personal interest in philanthropy, and that executive-owners of private firms are free to make their own decisions since they are usually the sole or primary shareholders.

In addition, from the context of your article, you implied that CSR looks to use philanthropic dollars and shareholder money to solve society’s ills. This is actually an “Old Guard” and misguided view of CSR.  Actually, I define CSR as “a set of actions that a company takes to change business operations in order to improve, maintain, or mitigate that company’s impact on society or the environment.” This is far different than donating to a local Little League team.

Also, contrary to what you stated, CSR doesn’t aim to usurp the fiduciary responsibility of managers to wisely spend shareholder money. It is not a guised effort by neo-hippies to get CEOs to sing Kumbaya around the campfire. Rather, CSR is a discipline deeply rooted in capitalism under the rigorous eyes that are intently focused on increasing shareholder value. The professionals promoting CSR as a valuable business tool are very much interested in profit, but profit based upon principles.

Moreover, in your article you outlined a false dichotomy: a choice between CSR and profits. Any social responsibility activity that is profitable must not be CSR, but just good business – you argued. Indeed, there is a lot of overlap between solid CSR initiatives and a sound, market-oriented business philosophy. And yes, it is true that there are some CSR programs that may incur higher costs associated with making changes to business operations. However, CSR typically looks at ways in which the company can identify and take advantage of opportunities in the marketplace and decrease threats to a company’s profitability. CSR is fundamentally a mature, long-term based approached to business. It is not, as you say, an effort by an executive to impose a “tax” on shareholders.

Since you took a principled stance against CSR, as a friendly rebuttal, I would like to offer a few facts for you to consider:

  • One out of every nine investor dollars is screened for social and environmental concerns. This amounts to $2.71 trillion in assets under management, according to the Social Investment Forum.
  • As just one example of the investment success of socially responsible companies, the FTSE KLD 400 (the first Socially Responsible Index) has an average annualized return of 9.54 through December of 2009 compared to 8.66 percent return of the S&P 500. This as well according to the Social Investment Forum.
  • According to a Kelly Services, Inc. survey, ninety percent of respondents said they are more likely to work for an organization perceived as socially and ethically responsible.
  • A 2007 Tower Workforce study found CSR as the third most important factor in employee engagement.

Looking at these numbers indicates that CSR strategies can help companies turn profits and promote principles based on improving society and the environment. CSR can also help attract and retain employees as well as maintain or improve engagement – a key component of productivity.

In addition, CSR helps companies differentiate themselves from their competitors, engage with stakeholders (including regulators), protect future profits, increase customer loyalty, and potentially avoid reputational risks; including fines and lawsuits (e.g. BP and Massey Energy Company). Rather than be a defensive and reactionary approach to these legitimate business concerns, CSR is proactive. And that is very smart business – something that is very much in the fiduciary responsibility of elected officers of a public company.

Contrary to what you implied, no one in their right mind is saying that CSR is the answer to world peace. CSR strategies are not a panacea, but rather a patchwork set of initiatives that address the gaps between the expectations of the marketplace, government regulations, and a company’s values.

In fact, business has long been at the cutting edge of changes in society. On September 21, 1953, IBM CEO Tom Watson, Jr. sent a letter to his management team stating that the company will hire the best people for positions – regardless of their race.  He then made the management document public – all in the midst of negotiations with two southern governors to build a manufacturing plant. The result was IBM opened an integrated plant in Lexington, Kentucky five years before the state officially integrated.

In more modern times, Walmart – long thought of as the bastion of the return-profits-to-shareholder-capitalism mentality – is now a clear leader in environmental sustainability. The Arkansas-based company is the primary funder behind the Sustainability Consortium, a multi-stakeholder initiative that is developing a sustainability index at the product level.  Mark my words, if successful, this will be a game-changing effort.

Would it have been easier – short-term – for IBM to not take a stand against segregation in order to win the best possible employment incentives with a state bent on resisting integration? Probably. But they didn’t.

Is Walmart investing heavy resources– shareholder’s money, I might add – into the Sustainability Consortium despite the fact that consumers have not specifically demanded such information? Yes.

But there is something to be said for taking a principled stance on an important issue and being a leader. That’s the type of company I want to invest in, work for, and buy from at the end of the day.

And I am not alone.

Sincerely,

James Epstein-Reeves

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2 Comments leave one →
  1. September 2, 2010 6:13 am

    Awesome response James.

    You do a terrific job of distinguishing between old-fashioned “nice to do” corporate philanthropy and today’s approach — strategic management decisionmaking that seeks opportunities to improve a business while enhancing its impact on society.

    Keep up the thought leadership!

  2. Billy Joe Mills permalink
    September 24, 2010 12:45 am

    Hey James, this is a terrific response. Great to meet you tonight at the Net Impact event.

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