Strategic CSR - Value

The article in the url below demonstrates how the concept of value is widely misunderstood – even among those, such as business journalists, who should know better. The author, adopting the stereotypical stance of a Wall Street Journal journalist, equates the creation of value with the largest dollar amount. That is, he suggests that for an investor in a socially responsible investment (SRI) fund to accept a lower return is for that investor to receive less value:

 

"Wall Street considers it a truism that money sloshes around the globe seeking the highest return. But there are countless investors, believe it or not, who are willing to accept lower returns. P.T. Barnum supposedly said there's a sucker born every minute. Many of them go into so-called socially responsible investing. … the basic idea is to throw money away. In reality there is no trade-off of Vice vs. Nice. There are only returns."

 

Putting aside the contentious issue of whether SRI funds are able to match the performance of the market, let's assume SRI funds perform at a lower rate – say 1, or 2, or even 3% below the market as a whole. This doesn't mean that the investor is receiving less value. If the value I get from knowing my funds are supporting companies/issues in which I believe (and, to some extent, build my identity around), then that could easily compensate for any lower financial return, and will probably exceed it. Instead, this journalists resorts to the well-trodden, knee-jerk ground of Milton Friedman's quotes about CSR (which, in my opinion, are also misunderstood – see Chapter 5, pp. 90-92 + Strategic CSR – Bill Gates) to undercut his own argument:

 

"Profits are the best measure of a business's value to consumers—and to society. No one holds a gun to the customer's head. If the buyer weren't glad to pay the free-market price, he would make the product or perform the service himself. Yet this idea is questioned all the time."

 

I agree that "profits are the best measure of a business's value to consumers—and to society," but that is exactly why SRI funds exist. If an SRI fund is profitable then, by definition, it is creating value for the investors who select it over other, more conventional investment options. To see what this means at the societal level (i.e., the population of all firms), it is instructive to look at the makeup of those companies that are considered 'successful.' The fact that many of them are global brands that persuade consumers to pay a significant premium for the 'lifestyles' that accompany their products disproves the author's point about SRI funds. In other words, he cannot say SRI funds are a waste of money because they deliver returns that are below those of other competing investment options, yet also say that a consumer is demonstrating Nike's 'value' by paying a significant price premium for those parts of sneakers (e.g., design, logo) that do not serve a functional purpose. In both cases, consumers are receiving something other than functional value in exchange for the 'price' they are willing to pay. Why is there even a market for $150 sneakers if it is not to provide some value to those who are willing to pay that much? If this argument applies to Nike, then, by definition, it applies to SRI funds. The Wall Street Journal cannot have it both ways.

 

Take care

David

 

David Chandler

Strategic Corporate Social Responsibility: Sustainable Value Creation (4e)

© Sage Publications, 2017

 

Instructor Teaching and Student Study Site: https://study.sagepub.com/chandler4e

Strategic CSR Simulation: http://www.strategiccsrsim.com/

The library of CSR Newsletters are archived at: https://strategiccsr-sage.blogspot.com/

 

 

Stocks Weren't Made for Social Climbing

By Andy Kessler

January 22, 2018

The Wall Street Journal

Late Edition – Final

A15

https://www.wsj.com/articles/stocks-werent-made-for-social-climbing-1516565984

 

Strategic CSR - Philanthropy

In a roundabout way, the article in the url below makes the case for strategic CSR:

 

"Over half of companies increased their level of corporate giving from 2012 through 2014, and the data in the new Giving in Numbers report suggest self-interest is well served thereby."

 

Philanthropy is only justifiable, from an operations perspective, if it somehow meets the needs of some of the firm's key stakeholders. Whether that is matching the concerns or values of consumers, motivating employees, or furthering R&D, philanthropy can be justified when it creates value for stakeholders:

 

"Economist Milton Friedman once wrote that 'There is one and only one social responsibility of business–to use its resources and engage in activities designed to increase its profits.' The pattern of corporate giving is consistent with that green-eyeshade approach to social responsibility. More companies are giving to support education, especially STEM. … However, giving for disaster relief is down. An audience poll of 200 senior giving executives at the CECP Summit in May found 51% rethinking their donations for disaster relief, mainly because of the difficulty of making a business case."

 

Have a good weekend.

David

 

David Chandler & Bill Werther

Strategic Corporate Social Responsibility: Stakeholders, Globalization, and Sustainable Value Creation (3e)

© Sage Publications, 2014

 

Instructor Teaching and Student Study Site: http://www.sagepub.com/chandler3e/

Strategic CSR Simulation: http://www.strategiccsrsim.com/

The library of CSR Newsletters are archived at: http://strategiccsr-sage.blogspot.com/

 

 

Corporate Philanthropy and Shareholder Value

By Gregory J. Millman

June 3, 2015

The Wall Street Journal – The Morning Risk Report

http://blogs.wsj.com/riskandcompliance/2015/06/03/the-morning-risk-report-corporate-philanthropy-and-shareholder-value-newsletter-draft/

 

Strategic CSR - Welcome back!

 

Welcome back to the Strategic CSR Newsletter! The first CSR Newsletter of the Spring semester is below. As always, your comments and ideas are welcome.

 

I hope you all had a good winter break.

 

As I mentioned in the autumn, I have been doing a lot of thinking recently about the core principles that underpin the concept of strategic CSR. The main stimulus for this thinking is a new book that I was invited to write for the UN PRME initiative collection (http://www.unprme.org/). The book has just been published by Business Expert Press (http://www.businessexpertpress.com/books/corporate-social-responsibility-strategic-perspective):

 

 

 

 

The title for the book is Corporate Social Responsibility: A Strategic Perspective. The book details a series of ten principles that I believe provide an intellectual foundation for strategic CSR that better fits with what we know about economic theory and human behavior. As a preview, here are the ten principles that I am arguing define strategic CSR:

1. Business equals social progress.
2. Shareholders do not own the firm.
3. Identifying stakeholders is easy; prioritizing among stakeholder interests is difficult.
4. CSR is not solely a corporate responsibility.
5. Market-based solutions are optimal.
6. Profit = economic value + social value.
7. The free market is an illusion.
8. Scale matters; only business can save the planet.
9. Strategic CSR is not an option; it is business.
10. Milton Friedman was right, the social responsibility of business is business.

 

In particular, I am attempting to redefine CSR as "sustainable value creation." By defining CSR in this way, I believe it moves from being something that is peripheral to strategy and operations (and, as such, something the CEO/executive team can ignore, if they so choose), to being central to the value creating function of the business (something that cannot be ignored). As a result, I think this framework has radical consequences for both business practice and business education.

 

If you have any questions about the book, please let me know.

Take care

David

 

David Chandler & Bill Werther

Strategic Corporate Social Responsibility: Stakeholders, Globalization, and Sustainable Value Creation (3e)

© Sage Publications, 2014

 

Instructor Teaching and Student Study Site: http://www.sagepub.com/chandler3e/

Strategic CSR Simulation: http://www.strategiccsrsim.com/

The library of CSR Newsletters are archived at: http://strategiccsr-sage.blogspot.com/

 

Strategic CSR - Corporations

The article in the url below is an interesting survey of the state of CSR today – where we have been and, possibly, where we are going. In the process, it poses the following question:

 

“Is it naïve to expect corporations to assist in addressing the social, economic and environmental challenges of the day?”

 

There are two points the author makes, in particular, that I want to highlight. First, is the idea that the executives who lead the corporations of the past:

 

“… served not just stockholders, but also workers, customers and the community.”

 

The implication reinforced throughout the article is that executives today serve only stockholders. It is frustrating continually to see such complex ideas presented so simplistically. I understand the constraints of space that newspaper journalists face, but that does not seem to be the main driver behind the problem. In general, we like to see the world as a series of dichotomies, rather than the continua that are all around us. Businesses today operate within a series of stakeholder relationships. They do not choose this; it is simply the way that it is. Now, they can certainly prioritize the interests of one group over another, but it is not true to say that executives only care about stockholders. It is impossible to run a business that way. An overly simplistic representation of this when discussing CSR prevents the more important discussion around stakeholder prioritization, which is the true challenge that executives face. In fact, you could argue that the main job of executives today is to manage among competing stakeholder interests to allocate scarce resources in the best interests of the firm.

 

Second, the author concludes that, due to the narrow, distorted perspective of businesses today:

 

“Elected governments are certainly imperfect. But to address our most intractable ills, they are the better tool.”

 

As someone who has been thinking about CSR for many years (so is well aware of the many ways in which for-profit firms both create and destroy value, broadly defined), I think this statement is ludicrous. A strong and active government is clearly a vital component of a functioning democratic system. But, anyone who pins their hope for social progress primarily on government agencies and, heaven forbid, elected politicians, has just not been paying attention over the past few decades. No-one makes this point more effectively than Milton Friedman, in an interview on The Donahue Show in 1979 (http://www.youtube.com/watch?v=GapXLpLoZBs), which I show in my class and should be, I think, compulsory viewing for all business students:

 

“The great achievements of civilization have not come from government bureaus. Einstein didn’t construct his theory under order from a bureaucrat. Henry Ford didn’t revolutionize the automobile industry that way. In the only cases in which the masses have escaped from [grinding poverty], the only cases in recorded history, is where they have had capitalism and largely free trade. If you want to know where the masses are worst off, it is exactly in the kinds the societies that depart from that. So the record of history is absolutely crystal clear, that there is no alternative way so far discovered of improving the lot of the ordinary people that can hold a candle to the productive activities that are unleashed by a free enterprise system.”

 

Take care

David

 

David Chandler & Bill Werther

Strategic Corporate Social Responsibility: Stakeholders, Globalization, and Sustainable Value Creation (3e)

© Sage Publications, 2014

 

Instructor Teaching and Student Study Site: http://www.sagepub.com/chandler3e/

Strategic CSR Simulation: http://www.strategiccsrsim.com/

The library of CSR Newsletters are archived at: http://strategiccsr-sage.blogspot.com/

 

 

Motivating Corporations to do Good

By Eduardo Porter

July 15, 2014

The New York Times

Late Edition – Final

B1

http://www.nytimes.com/2014/07/16/business/the-do-good-corporation.html

 

Strategic CSR - Milton Friedman

While I was reading a review of the book by Cass Sunstein (Simpler: The Future of Government) in the article in the url below, this quote caught my eye:

 

“Milton Friedman didn't need behavioral economics to know that each of us typically spends our own money on ourselves more wisely than a stranger spends other people's money on us.”

 

My first instinct was to agree. After all, government has certainly demonstrated an inability to predict market outcomes. And, as the author of the review indicates:

 

“[The author] fails to explain why the irrational and impulsively childlike people who are apparently the nation's citizens will elect a government that is itself not irrational and impulsive—or why government officials won't exploit, for their own corrupt ends, the people's cognitive weaknesses.”

 

On second thought, however, I know that it is also true that we are often incapable of making good decisions ourselves. Because human decisions are driven by our inherent fallibilities—irrationality, biases, cognitive constraints, etc.—we often make short term decisions that do not serve our long term interests. This happens even when we are trying to be rational—there are good reasons, for example, why most people fail to save sufficient money for their retirement.

 

Given that we are living in a system designed and operated by humans and that, as I tell my students in class, any system involving humans is flawed to some degree; where is the balance between government oversight and individual enterprise? Sunstein helps push the debate in a helpful direction. He does so by drawing on behavioral economics—the foundation of many ideas in his previous book, Nudge, written with Richard Thaler (Chapter 8, Case-study: Nudge, p485):

 

“Mr. Sunstein deploys behavioral-economics notions such as ‘framing effects’ (our interpretation of facts is affected by how they are presented to us) and ‘status-quo bias’ (we prefer the status quo, simply because it is the status quo, over potential alternatives) to promote what he calls ‘libertarian paternalism.’”

 

The beauty of many of the ideas discussed in Nudge and Simpler is that they preserve the illusion of choice, while also generating more socially-valuable outcomes:

 

“Government, he thinks, should change behavior using ‘nudges’ instead of commands. Regulations can tap into people's psychological quirks and prompt them to choose ‘better’ behaviors—while still leaving them free in many circumstances to act differently. Cigarette packages with grisly images of cancer-ridden lungs are an effort to nudge—rather than command—people not to smoke.”

 

Needless to say, the author of the review (it is published in The Wall Street Journal) feels that, while Sunstein’s ideas are more palatable than most advocates for “a paternalist state,” his view of the world places considerably more faith in the abilities of individuals and the power of the market:

 

“[Sunstein’s] faith in government combines with a scanty appreciation of the creative and disciplining powers of markets to render his case for active regulation, whether imposed through nudges or commands, less than persuasive. The pages of ‘Simpler’ bubble over with examples of adults' weak capacity to choose wisely, which, in Mr. Sunstein's view, calls for more expansive government.”

 

I find that, as I listen to the two sides in this debate and try and work out which side would generate the most optimal outcomes, it is usually helpful to keep Friedman’s core instincts in mind. His ideas remind me that it is important to work within the constraints of human nature as it is, rather than as we would wish it to be.

 

For those who haven’t seen it, here is a fascinating interview of Friedman on the TV program Donahue, from 1979: http://www.youtube.com/watch?v=E1lWk4TCe4U

 

Take care

David

 

David Chandler & Bill Werther

Strategic Corporate Social Responsibility: Stakeholders, Globalization, and Sustainable Value Creation (3e)

© Sage Publications, 2014

 

Instructor Teaching and Student Study Site: http://www.sagepub.com/chandler3e/

Strategic CSR Simulation: http://www.strategiccsrsim.com/

The library of CSR Newsletters are archived at: http://strategiccsr-sage.blogspot.com/

 

 

Thank You For Smoking

By Donald J. Boudreaux

April 24, 2013

The Wall Street Journal

Late Edition – Final

A13

http://online.wsj.com/article/SB10001424127887324105204578384850872793208.html

 

Strategic CSR - Milton Friedman

As you know from Chapter 3 of the second edition (Milton Friedman vs. Charles Handy, pp.55-57), I consider Milton Friedman to be a friend of strategic CSR.

While he was clearly very good at using inflammatory rhetoric to maximize the attention paid to his arguments, the logic underlying those arguments is fascinating to watch:

http://www.youtube.com/watch?v=76frHHpoNFs

He had a first-rate mind, was a brilliant showman, and is someone I would have loved to have met.

Have a good weekend.

David

Bill Werther & David Chandler

Strategic Corporate Social Responsibility: Stakeholders in a Global Environment (2e)

© Sage Publications, 2011

http://www.sagepub.com/strategiccsr2e/

Instructor Teaching Site: http://www.sagepub.com/strategiccsr/

The library of CSR Newsletters are archived at: http://strategiccsr-sage.blogspot.com/

Strategic CSR - FREE 'free markets'

The editorial pages of The Wall Street Journal should be taken with a pinch (read ‘truck full’) of salt. As someone who reads newspapers for informed content, I find them even less helpful than the editorials of The New York Times. Needless to say, Rupert Murdoch’s influence at the WSJ has not improved things! Nevertheless, a recent editorial caught my eye and quickly had me nodding my head:

“The Occupy Wall Street protesters aren't good at articulating what they want, but one of their demands is "end corporate welfare." Well, welcome aboard. Some of us have been fighting crony capitalism for decades, and it's good to have new allies if liberals have awakened to the dangers of the corporate welfare state.”

The column continues:

“Corporate welfare is the offer of special favors—cash grants, loans, guarantees, bailouts and special tax breaks—to specific industries or firms. The government doesn't track the overall cost of these programs, but in 2008 the Cato Institute made an attempt and came up with $92 billion for fiscal 2006, which is more than the U.S. government spends on homeland security. That annual cost may have doubled to $200 billion in this new era of industry bailouts and subsidies. According to the House Budget Committee, the 2009 stimulus bill alone contained more than $80 billion in "clean energy" subsidies, and tens of billions more went for the auto bailout and cash for clunkers, as well as aid for the mortgage industry through programs to refinance or buy up toxic loans.”

I couldn’t agree more. People on both the left and the right tend to favor government intervention when it is in support of a cause they believe in (e.g., subsidies for solar power on the left, tax breaks for oil firms on the right), but at least the left recognizes that it favors government intervention. Right-wing ideology, in contrast, preaches the free market, but then implements heavily subsidized intervention in contravention of that ideology.

What the column does not include, therefore, is the recognition that subsidies and quotas are only one component of the inefficient corporate welfare system we have created in the West. As the article about energy policy in the second url below from the NYT correctly notes:

“Economics 101 tells us that an industry imposing large costs on third parties should be required to “internalize” those costs — that is, to pay for the damage it inflicts, treating that damage as a cost of production. Fracking might still be worth doing given those costs. But no industry should be held harmless from its impacts on the environment and the nation’s infrastructure. Yet what the industry and its defenders demand is, of course, precisely that it be let off the hook for the damage it causes. Why? Because we need that energy!”

It is the combination of reduced government intervention (i.e., the removal of subsidies, quotas, tax breaks, etc.) PLUS the full internalization of all externalities in product pricing that allows a truly free market to emerge. One without the other is not free; at present, we have neither:

“So it’s worth pointing out that special treatment for fracking makes a mockery of free-market principles. Pro-fracking politicians claim to be against subsidies, yet letting an industry impose costs without paying compensation is in effect a huge subsidy. They say they oppose having the government “pick winners,” yet they demand special treatment for this industry precisely because they claim it will be a winner.”

In this light, a government tax on carbon is simply a means of accounting for the full environmental costs of oil/gas extraction, processing, and consumption. In other words, it is a means of creating the conditions for a FREE ‘free market.’ Once the level-playing field has been created (with more accurate prices for all forms of energy—traditional and alternative), then let the market determine which energy sources should drive our future economies.

Take care

David

Bill Werther & David Chandler

Strategic Corporate Social Responsibility: Stakeholders in a Global Environment (2e)

© Sage Publications, 2011

http://www.sagepub.com/strategiccsr2e/

Instructor Teaching Site: http://www.sagepub.com/strategiccsr/

The library of CSR Newsletters are archived at: http://strategiccsr-sage.blogspot.com/

The Corporate Welfare State

November 7, 2011

The Wall Street Journal

A18

http://online.wsj.com/article/SB10001424052970204002304576631192120542046.html

Here Comes the Sun

by Paul Krugman

November 7, 2011

The New York Times

A21

http://www.nytimes.com/2011/11/07/opinion/krugman-here-comes-solar-energy.html

Strategic CSR - David Friedman

Earlier this year I came across the work of David D. Friedman (son of Milton Friedman). He is a proponent of “anarcho-capitalism,” which is defined on Friedman’s Wikipedia page (http://en.wikipedia.org/wiki/David_D._Friedman) as:

“[A system] where all goods and services including law itself can be produced by the free market. … Friedman advocates an incrementalist approach to achieve anarcho-capitalism by gradual privatization of areas that government is involved in, ultimately privatizing law and order itself. … Friedman's version of individualist anarchism is not based on the assumption of inviolable natural rights but rather rests on a cost-benefit analysis of state versus no state.”

Intellectually, I find his ideas interesting, in the same way that a pure version of Communism is an interesting thought-experiment. The practical application of these ideas, however, seems less obvious. In addition, he has adopted his father’s antipathy for CSR (or, at least, what he defines as CSR), which suggests little prospect of reconciliation:

“…my university is big on "sustainability;" it has just been having an extended event designed to boost the idea. I responded to an email urging faculty members to introduce sustainability into one of their classes by asking if it was all right if I argued against it in mine, and suggesting that a program which consisted entirely of presentations on one side of an issue looked more like propaganda than education.”

Friedman is correct, of course, that any program that presents only one side of a story is tantamount to propaganda and any university should feel confident enough to allow a professor to teach an anti-CSR course—you could title it ‘Introduction to Economics’ (J).

Friedman’s conceptualization of CSR (also like his father’s), however, appears somewhat simplistic (see his blog posting criticizing the value of pursuing sustainability at: http://econlog.econlib.org/archives/2011/04/david_friedman_7.html). In Strategic CSR, we raise and address the anti-CSR argument in Chapter 3 (p53), drawing heavily on the work of David Friedman’s father!

Have a good weekend

David

Bill Werther & David Chandler

Strategic Corporate Social Responsibility: Stakeholders in a Global Environment (2e)

© Sage Publications, 2011

http://www.sagepub.com/strategiccsr2e/

Instructor Teaching Site: http://www.sagepub.com/strategiccsr/

The library of CSR Newsletters are archived at: http://strategiccsr-sage.blogspot.com/

Strategic CSR - Bill Gates

The article in the first url below reports on Bill Gates’ (Special Cases of CSR: Microsoft (Bill Gates), p285) recent speech in Davos in which he called for more “creative capitalism.” While appealing at first glance, however, I am unconvinced by Gates’ argument. Ultimately, I am unsure what he actually means by “creative capitalism” and how it is to be realized in practice. For example, it is easy to say that:

“… private companies should be encouraged to tweak their structure slightly to free up their innovative thinkers to work on solutions to problems in the developing world. It's gung-ho, rather than hairshirt, philanthropy.”

But, in reality, what does “encouraged” mean? How are firms to determine exactly what is an ‘appropriate’ project and what is not? Do firms need to calculate a certain level of potential ‘social goodness’ in advance? And, if firms need to be encouraged, who is going to do the “encouraging”? Governments? If so, how are they going to “encourage” them? None of these questions are addressed sufficiently and, at the moment, Gates argument rests on an appeal to the altruistic side of firms and their shareholders:

“While companies or individuals may ultimately profit from this work in developing nations, the reward primarily comes in the form recognition and enjoyment.”

On an individual/micro level, such arguments are appealing, romantic even; but at a macro level, they quickly fall apart. I suggest the market, while imperfect, remains the best means society has for allocating scarce resources. This skepticism of the details behind Gates’ vision is evident in the article in the second url below, which balances the first article’s claim that Gates “gets it” with the assertion that he “misses the point”:

“If [Gates’ idea] sounds familiar, it should. It's an attractively repackaged call for activism that's been kicking around for more than four decades under labels like "corporate social responsibility" and "caring capitalism." Gates' well-intentioned suggestions would shift these efforts from domestic charity to international charity aimed at poorer nations.”

Although the author’s argument is a bit crude in places, he is on firm ground in stating that:

“… there is a stronger argument to be made against "creative capitalism," and it is that profits come from serving society. The larger the profits, the better job the company tends to have done. Profit maximization is a worthy goal by itself.”

I also agree with his implication that Milton Friedman’s ideas (expressed in his 1970 article, “The Social Responsibility of Business is to Increase Profits” http://www.colorado.edu/studentgroups/libertarians/issues/friedman-soc-resp-business.html) demonstrate the social value of business. I would add that Friedman’s argument (inflammatory sound bites notwithstanding) is perfectly compatible with a business argument for strategic CSR—that CSR, implemented throughout an organization that adopts a stakeholder perspective and a focus on long term value creation, maximizes social value. A number of these thoughts are included in the article in the third url below:

“Sure, let those who have become rich under capitalism try to do good things for those who are still poor, as Mr. Gates has admirably chosen to do. But a New-Age blend of market incentives and feel-good recognition will not end poverty. History has shown that profit-motivated capitalism is still the best hope for the poor.”

Have a good weekend.
Dave

Bill Werther & David Chandler
Strategic Corporate Social Responsibility
© Sage Publications, 2006
http://www.sagepub.com/Werther

On 'creative capitalism,' Gates gets it
By Michael Kanellos
CNET News.com
January 25, 2008
http://www.news.com/On-creative-capitalism%2C-Gates-gets-it/2010-1014_3-6227712.html

Gates misses the point on 'creative capitalism'
By Declan McCullagh
CNET News.com 
January 25, 2008
http://www.news.com/Gates-misses-the-point-on-creative-capitalism/2010-1014_3-6227726.html

Why Bill Gates Hates My Book
By William R. Easterly
850 words
7 February 2008
The Wall Street Journal
A18
http://online.wsj.com/article/SB120235183917849631.html