MARKETING-WSJ Executive Adviser (A Special Report): The Case Against Corporate Social Responsibility

| January 31, 2017

Question
WSJ Executive Adviser (A Special Report): The Case Against Corporate Social Responsibility: The
idea that companies have a duty to address social ills is not just flawed, argues Aneel Karnani; It
also makes it more likely that we’ll ignore the real solutions to these problems
By Aneel Karnani
1,869 words
23 August 2010
The Wall Street Journal
J
R1
English
(Copyright (c) 2010, Dow Jones & Company, Inc.)
Can companies do well by doing good? Yes — sometimes.
But the idea that companies have a responsibility to act in the public interest and will profit from doing so is
fundamentally flawed.
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. They trumpet their efforts to produce healthier foods or more fuelefficient vehicles, conserve energy and other resources in their operations, or otherwise make the world a
better place. Influential institutions like the Academy of Management and the United Nations, among many
others, encourage companies to pursue such strategies.
It’s not surprising that this idea has won over so many people — it’s a very appealing proposition. You can
have your cake and eat it too!
But it’s an illusion, and a potentially dangerous one.
Very simply, in cases where private profits and public interests are aligned, the idea of corporate social
responsibility is irrelevant: Companies that simply do everything they can to boost profits will end up
increasing social welfare. In circumstances in which profits and social welfare are in direct opposition, an
appeal to corporate social responsibility will almost always be ineffective, because executives are unlikely to
act voluntarily in the public interest and against shareholder interests.
Irrelevant or ineffective, take your pick. But it’s worse than that. 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. As society looks to companies to address these problems, the
real solutions may be ignored.
To get a better fix on the irrelevance or ineffectiveness of corporate social responsibility efforts, let’s first look
at situations where profits and social welfare are in synch.
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. Other companies have found
new sources of revenue in low-fat, whole-grain and other types of foods that have grown in popularity. Social
welfare is improved. Everybody wins.
Similarly, auto makers have profited from responding to consumer demand for more fuel-efficient vehicles, a
plus for the environment. And many companies have boosted profits while enhancing social welfare by
reducing their energy consumption and thus their costs.
But social welfare isn’t the driving force behind these trends. Healthier foods and more fuel-efficient vehicles
didn’t become so common until they became profitable for their makers. Energy conservation didn’t become
so important to many companies until energy became more costly. These companies are benefiting society
while acting in their own interests; social activists urging them to change their ways had little impact. It is the
relentless maximization of profits, not a commitment to social responsibility, that has proved to be a boon to
the public in these cases.
Unfortunately, not all companies take advantage of such opportunities, and in those cases both social
welfare and profits suffer. These companies have one of two problems: Their executives are either
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incompetent or are putting their own interests ahead of the company’s long-term financial interests. For
instance, an executive might be averse to any risk, including the development of new products, that might
jeopardize the short-term financial performance of the company and thereby affect his compensation, even if
taking that risk would improve the company’s longer-term prospects.
An appeal to social responsibility won’t solve either of those problems. Pressure from shareholders for
sustainable growth in profitability can. It can lead to incompetent managers being replaced and to a
realignment of incentives for executives, so that their compensation is tied more directly to the company’s
long-term success.
Still, the fact is that while companies sometimes can do well by doing good, more often they can’t. Because
in most cases, doing what’s best for society means sacrificing profits.
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. A prime example is the pollution
caused by manufacturing. Reducing that pollution is costly to the manufacturers, and that eats into profits.
Poverty is another obvious example. Companies could pay their workers more and charge less for their
products, but their profits would suffer.
So now what? Should executives in these situations heed the call for corporate social responsibility even
without the allure of profiting from it?
You can argue that they should. But you shouldn’t expect that they will.
Executives are hired to maximize profits; that is their responsibility to their company’s shareholders. Even if
executives wanted to forgo some profit to benefit society, they could expect to lose their jobs if they tried -and be replaced by managers who would restore profit as the top priority. The movement for corporate social
responsibility is in direct opposition, in such cases, to the movement for better corporate governance, which
demands that managers fulfill their fiduciary duty to act in the shareholders’ interest or be relieved of their
responsibilities. That’s one reason so many companies talk a great deal about social responsibility but do
nothing — a tactic known as greenwashing.
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. In that sense they are usurping the role of elected
government officials, if only on a small scale.
Privately owned companies are a different story. If an owner-operated business chooses to accept
diminished profit in order to enhance social welfare, that decision isn’t being imposed on shareholders. And,
of course, it is admirable and desirable for the leaders of successful public companies to use some of their
personal fortune for charitable purposes, as many have throughout history and many do now. But those
leaders shouldn’t presume to pursue their philanthropic goals with shareholder money. Indeed, many
shareholders themselves use significant amounts of the money they make from their investments to help
fund charities or otherwise improve social welfare.
This is not to say, of course, that companies should be left free to pursue the greatest possible profits
without regard for the social consequences. But, appeals to corporate social responsibility are not an
effective way to strike a balance between profits and the public good.
So how can that balance best be struck?
The ultimate solution is government regulation. Its greatest appeal is that it is binding. Government has the
power to enforce regulation. No need to rely on anyone’s best intentions.
But government regulation isn’t perfect, and it can even end up reducing public welfare because of its cost or
inefficiency. The government also may lack the resources and competence to design and administer
appropriate regulations, particularly for complex industries requiring much specialized knowledge. And
industry groups might find ways to influence regulation to the point where it is ineffective or even ends up
benefiting the industry at the expense of the general population.
Outright corruption can make the situation even worse. What’s more, all the problems of government failure
are exacerbated in developing countries with weak and often corrupt governments.
Still, with all their faults, governments are a far more effective protector of the public good than any
campaign for corporate social responsibility.
Civil society also plays a role in constraining corporate behavior that reduces social welfare, acting as a
watchdog and advocate. Various nonprofit organizations and movements provide a voice for a wide variety
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of social, political, environmental, ethnic, cultural and community interests.
The Rainforest Action Network, for example, is an organization that agitates, often quite effectively, for
environmental protection and sustainability. Its website states, "Our campaigns leverage public opinion and
consumer pressure to turn the public stigma of environmental destruction into a business nightmare for any
American company that refuses to adopt responsible environmental policies." That’s quite a different
approach from trying to convince executives that they should do what’s best for society because it’s the right
thing to do and won’t hurt their bottom line.
Overall, though, such activism has a mixed track record, and it can’t be relied on as the primary mechanism
for imposing constraints on corporate behavior — especially in most developing countries, where civil society
lacks adequate resources to exert much influence and there is insufficient awareness of public issues among
the population.
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.
But self-regulation can be useful. It tends to promote good practices and target specific problems within
industries, impose lower compliance costs on businesses than government regulation, and offer quick, lowcost dispute-resolution procedures. Self-regulation can also be more flexible than government regulation,
allowing it to respond more effectively to changing circumstances.
The challenge is to design self-regulation in a manner that emphasizes transparency and accountability,
consistent with what the public expects from government regulation. It is up to the government to ensure that
any self-regulation meets that standard. And the government must be prepared to step in and impose its own
regulations if the industry fails to police itself effectively.
In the end, social responsibility is a financial calculation for executives, just like any other aspect of their
business. The only sure way to influence corporate decision making is to impose an unacceptable cost -regulatory mandates, taxes, punitive fines, pubic embarrassment — on socially unacceptable behavior.
Pleas for corporate social responsibility will be truly embraced only by those executives who are smart
enough to see that doing the right thing is a byproduct of their pursuit of profit. And that renders such pleas
pointless.
–Dr. Karnani is an associate professor of strategy at the University of Michigan’s Stephen M. Ross School of
Business. He can be reached at reports@wsj.com.
–For Further Reading
Articles from MIT Sloan Management Review with other views on this topic can be accessed online at
sloanreview.mit.edu/wsj
Does It Pay To Be Good?
By Remi Trudel and June Cotte (Winter 2009)
In surveys, customers say they’ll pay more for ethically produced goods. But is that what happens when they
actually buy things?
How to Do Well and Do Good
By Rosabeth Moss Kanter (Fall 2010)
The key to achieving both of those goals together? Integrate societal benefits with company strategy.
Beyond Selfishness
By Henry Mintzberg, Robert Simons and Kunal Basu (Fall 2002)
A syndrome selfishness has taken rights reserved.
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