Yung Terd Lu
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CSR: Redefining Milton and Adaptability for Global Success
Yung Terd Lu
1. Introduction In ancient China, the philosopher Confucius, noted that intrinsic motivations that arise from the culture of a society are often of greater importance to the society's moral character, than the extrinsic motivations, such as rules and law. In relation to the theme of Corporate Social Responsibility (CSR), the society (or in this case, corporate) with the foundation in social responsibility best suited to meet the demands of global competition, will prosper and survive in this modern age. This essay will explore the problem of misconception behind the resistance to CSR, and the benefits available from CSR as a possible incentive to attract more participation from corporates.
2. Redefining Milton: The Changing Field of Business “The proper business of business is business. No apology required” - or so claimed by survey by the Economist published in January 2005. One can imagine the picture, which Chicago school economists worldwide rushing for their handkerchiefs, teary eyes upon reading the survey. It may be wise not to be haste. A quick reality check will reveal that such a view had lost the battle for the support of citizens worldwide. A twin survey by McKinsey revealed that 84 percent of executives and 89 percent of consumers believe that corporate obligations to shareholders must be balanced by contributions to the broader public good (McKinsey). Perhaps, the most surprising find is that most executives agree too. Henry Ford had already observed that; “A business that makes nothing but money is a poor kind of business”. What is new here though,
Yung Terd Lu
is the eagerness of companies to act – or be seen to act – on this front. It has been almost forty years since the late Milton Friedman published his influential article about the business responsibility in the New York Times. The article, published in September 1970, stressed the essence of business operation, was to maximize profit for its shareholder. Many CSR critics took this article to heart and regard him as an early advocate against CSR. In my opinion, I believe that Milton Friedman's idea is partially right, but I will take a different interpretation contrary to the usual view CSR critics took.
“There is one and only one social responsibility of business - to use its resources and engage in activities designed to increase its profits, so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.” Milton Friedman, New York Times, September 30, 1970 (Friedman 17) His view was for businesses to engage in any profit making activities, as long as they stay within the rules of the game (as indicated in italic above). However, the definition of the rules of the game is no longer as simpler as those during the 1970's. The rules of the game had changed. No longer did the society expect business to only respond for its shareholders, it must also adhere to the welfare of its stakeholders, the population in general.
3. The Need for CSR GROWTH OPPORTUNITIES Comparison of American Performance Indexes, such as S&P 500, and the Domini 400, show that the benchmark performance of Domini 400 are slightly better at 7.88% compared to 7.24% since inception of the Domini Index on May 1, 1990 (KLD). The recent economic
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downturn did dampened the growth performances shown by these companies, which resulted in the less-then-spectacular returns usually shown by such companies. However, as global economy is shrinking from the recent credit crisis, the commitment towards CSR by many companies did not waver. Most companies regard CSR as an integral part of their business plan and abandoning it in the short term is to abandon the trust they gained from the society (Holstein). In 1962, Nestle decided to venture its dairy industry into the Indian market, and the company was given permission to set up operation in Moga, a district in Northern India. However, the conditions there was less than satisfactory. There was no electricity, and lack of refrigeration and transportation means the milk could not travel far, and was often contaminated or diluted. Nestle was there to do business, not CSR. But Nestle's operation requires milk from local farmers and hence, Nestle needed to transform the Moga region to be competitive to add value for the production line. The company built refrigerated dairies as collection point in each town and provide experts to help with the locals vet needs. Medicine and nutritional supplements were distributed for the sick animals, and training provided for the farmers. The farmers learned that the cows' diet are important for quality milk production and thus with financial aid from Nestle, dig up previously unaffordable deep bore wells and improved the irrigation. The improved irrigation not only fed the cows through better grass, but also improved crop yields, producing surplus wheat and rice and raising the standard of living. Nestle commitment to working with small farmers is central to its strategy. It enables the company to obtain a supply of high quality commodities without paying for the middleman (Porter & Kramer 11). Although unintentionally, through CSR, as the region grows, so does Nestle operations in India.
Rethinking of Corporate Social Responsibility (CSR) and Social Entrepreneurship
Yung Terd Lu
ATTRACTING NEW BLOOD A business is an entity capable of existing for long period of time, given the right governance. CSR is a long term investment for the future. Aside from the external gains CSR may provide to the company, internal motivation is also a good excuse to promote the implementation of such practices. Neville Isdell, Chairman of Coca-Cola summarized this in his report titled “2006 Corporate Responsibility Review”, where he states that committed employees who believe in the company they work for, perform better. Furthermore, these employees who believe in the company’s mission often times have higher levels of employee morale, productivity and ultimately this translates favorably into the company’s brand (Isdell). Also, the CSR aspect of a company has become a major decider to attract new talents. My own conversation with Laura Rasico, a recruiter from PriceWaterhouseCooper in charge of Michigan region, USA, revealed this surprising fact that more interviewees took the company's CSR stand into consideration. She believes that such phenomena will keep on growing in the future, and companies would just have to adapt to a more pro-CSR stance or lose out in the race to attract the best talents tout there (Rasico). So for a company’s corporate social responsibility efforts to have real value, they must have a “line of sight” connection to the business goals. In addition, another survey conducted by Aspen Institute Center for Business Education concluded that business students are thinking more broadly about the primary responsibilities of a company. In addition to citing shareholder maximization and satisfying customer needs, more students are also saying “creating value for the communities in which they operate” should be a primary business responsibility (Aspen). For a company to survive, it needs constant innovation, and often these changes are bought forward by new blood. However, the newer generation is now more concerned with CSR and one of the methods for these multinational companies to attract
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such talents is by going mainstream with CSR.
BRANDING Critics also mentioned that CSR distorts the profit intake and that the resources used for CSR activities could be converted into more financially feasible activities. This statement is true to some point. A fault with CSR, one that frustrates economists, is that the outcomes of CSR are unquantifiable. There is no absolute way to measure the impact of any actions the company undertakes as there is no standard way to calculate social gains unlike profit accounting. However, just as investment should be measured only in the long terms, CSR should also be reviewed only after an extended period of time, for at least a few months to see if the investment will give any returns. Investing in CSR means investing in the brand of the company and having a good branding could differentiate between making a profit or suffering backlash from the consumers (Holstein). So, CEOs and managers should shift their traditional viewing from shortterm profits and instead, focus on long-term sustainability through CSR. Wal-Mart is the largest private sector employer in the United States and one of the largest around the world. Their core mission was reported to sell products at lower prices. However, its logo and presence are felt both negatively and positively around the country. Even though WalMart provides products to the community at a lower cost, it comes at the expense of the local small business community(Heath & Palenchar 125). The local business cannot compete with Wal-Mart, which commands economy of scale to aid in their profit. Hence, Wal-Mart's reputation took a blow, and news of sweatshops abroad, from which Wal-Mart obtained its products, tarnished its image. (Heath & Palenchar 125). Wal-Mart needs a makeover for its image. It began a “green revolution,� focusing on
Rethinking of Corporate Social Responsibility (CSR) and Social Entrepreneurship
Yung Terd Lu
greener alternatives along the production line. With its dominant presence over the manufacturing industry, Wal-Mart coerces its product suppliers to improve themselves on the greening section. The producers are required to wrap their products with smaller packages. Incidentally, this benefits Wal-mart too as each product takes less space in the inventory and allows them to store more. However, the greatest influence Wal-Mart has is to encourage the conversion from the incandescent light bulb into the spiral and energy efficient compact fluorescent light bulb. Given Wal-Mart's massive presence, if this move is successful and the general Americans change their light preferences, it could amount to a huge reduction in greenhouse gases released. It is uncertain whether Wal-Mart could salvage its branding from a negative to a positive viewpoint, but one thing is certain, Wal-mart is moving towards adopting CSR practices, along with a growing number of companies elsewhere.
PROBLEM WITH COST? Considering the benefit of participating in CSR, many others are still not convinced, citing cost as the problem. Any effort of directing resources into CSR would distort the income flow. However, companies that are already practicing CSR are quick to deny this. Kevin Thompson, Senior Program Manager for Corporate Citizenship at IBM, mentioned that CSR is relatively cheap considering the benefit resulting from CSR. The gains from it could cancel out the cost put into developing the CSR program, especially in case of IBM. What was spent is repaid by the company's good image and access to greater markets. Thompson mentioned how while working under CSR effort in Ghana, Africa, the team developed a good relationship with the local government and the local authorities were impressed with the level of commitment put forward to help out their citizens. In response, they requested IBM to help out with some
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consulting projects, which resulted in significantly more revenues and new markets for the company instead of losing out (Thompson).
4. Conclusion CSR used to be a path few companies ventured through, but those who did prospered. Although this trend was slow to catch up upon, the momentum kept building and now, most companies realize that their responsibility lies not only towards the shareholders of their companies' stocks, but also to the stakeholders as well, the public. It is no longer a zero sum game in the business field where there are losers and winners. Instead, it is a win-win-win situation for the companies, the consumers and the environment in general. CSR opens up opportunities for a brighter future. It is the best viable option for a sustainable development and a chance for the remaining global community to raise their living standards to a higher level. As Confucius said, the extrinsic motivations of exogenous forces cannot truly change the hearts of the people. For the culture of CSR to succeed, it must began from the within.
Rethinking of Corporate Social Responsibility (CSR) and Social Entrepreneurship
Yung Terd Lu
Works Cited Aspen. “2008 MBA Student Attitutudes About Business & Society” The Aspen Institute Center for Business Education. 20 March 2009. <http://www.aspencbe.org/documents/ExecutiveSummaryMBAStudentAttitudesReport2008.pdf > Barbado, Michael. “Wal-Mart Puts Some Muscle Behind Power-Sipping Bulbs” New York Times.January 2, 2007 Delevigne, Lawrence. Corporate responsibility is surviving in recession. CNNMoney. 20 January 2009. Accessed 13 March 2009. <http://www.cnnmoney.com/> Friedman, Milton. “The Social Responsibility of Business is to Increase its Profits.” New York Times, 30 September 1970: 17 Heath, Robert & Palenchar, Michael. Strategic Issues Management: Organizations & Public Policy Changes 2ed. Sage Publication, 2009: 125-126 Holstein, William. Fine-Tuning Corporate Social Responsibility. BusinessWeek. 3 April 2008. Accessed 14 March 2009. <http://www.businessweek.com/managing/content/apr2008/ca2009043_500367.htm> Isdell, Neville. 2006 Corporate Responsibility Review. Coca-Cola Company. 21 March 2009. <http://www.thecocacolacompany.com/ourcompany/pdf/corporate_responsibility_review2006.pdf> KLD Reports January 2009 Index Returns, KLD Indexes, accessed March 27, 2009 <http://www.kld.com/newsletter/archive/press/pdf/20090131_Index_Performance.pdf> Domini Index is the benchmark for measuring the impact of social and environmental screening on investment portfolios.
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Mendonca, Lenny T., and Matt Miller..”Exploring business's social contract: An interview with Daniel Yankelovich. “McKinsey Quarterly (June 2007): 64-73 Porter & Kramer “Strategy and Society, The Link Between Competitive Advantage and Corporate Social Responsibility” Harvard Business Review ,December 2006: 11 Rasico, Laura. Personal Interview. 13 March 2009. Thompson, Kevin. Personal Interview. 13 March 2009. The Economist, “Survey: Corporate Social Responsibility”, 20/01/2005. The McKinsey Global Survey pf Business Executives: Business and Society. The McKinsey Quarterly, Web Exclusive, January 2006 and Dec 2005 McKinsey Quarterly
Rethinking of Corporate Social Responsibility (CSR) and Social Entrepreneurship
Yung Terd Lu
Global Initiatives Symposium in Taiwan 2009