August 26, 2010

In a Connected Society, Corporations Must Focus on the Social Good

"The Case Against Corporate Social Responsibility," by Aneel Karnani, associate professor of strategy at the University of Michigan, appeared this week in a special supplement of  The Wall Street Journal, produced in collaboration with MIT Sloan Management Review

In the article, Dr. Karnani argues that corporations that focus on social responsibility will "delay or discourage more effective measures to enhance social welfare" and characterizes these efforts as a tax on shareholders.

With all due respect to Dr. Karnani, the argument he put forth is wrong. Moreover, his essay has exposed the futility of an ideological debate pitting the free market against the common good as if they were wholly separate entities.  

This is not a hypothetical conversation. The world is full of real problems that threaten the corporate sector.

We face unconventional threats and irregular enemies, and we spend enormous sums at home and abroad for a semblance of security in which to conduct business.  

While we may have averted a financial catastrophe, we are plagued by high unemployment, our natural resources are under siege, and our social safety nets are clearly stressed. And there are those who argue that our institutions—government, media, educational organizations, and even corporations—are not up to the task of solving these grave problems. 

Dr. Karnani’s argument relies on an obsolete framework that assumes the free market requires managers to maximize profit and create enduring value for shareholders regardless of the corporation’s social impact. While this has defined the debate for the previous century, it will not and cannot define the future because of one undeniable fact: profit and shareholder value are not created in a vacuum.

The Changing Roles of Institutions

The proliferation of online and mobile communication offers myriad new tools and channels through which to debate social issues. These tools, however, do not solve problems on their own.  

To understand and address the complex challenges that exist in the world today, we need a new framework of thinking and approach.  

We need to recognize that the ubiquity of technology and the increasing speed at which information travels does not just shift how we communicate, connect, and collaborate but it also fundamentally changes the nature and work of the institutions that exist within our society.  

The tools that empower a more active, engaged global citizenry can create new opportunities to solve old challenges when combined with reorganized and refocused institutions.  

We are witnessing the rise of a more nuanced, multidimensional marketplace that is breaking monolithic entities into groups of networked individuals.

People and organizations that choose to ignore this reality and cling to their ideology will be doomed to fail. The one-to-one conversation is not between artificially constructed corporate brands and the collective populace, it is between corporate brand ambassadors (internal and external) and individual consumers. This shift requires a new framework and new approaches to profit, enduring value, and social responsibility.

Dr. Karnani’s case and two other recent high-profile editorials in The Washington Post and The Wall Street Journal assailing corporate social responsibility efforts fail to recognize this fundamental shift. But they aren’t alone. Most corporations, nonprofit groups, and government entities are trying to solve the world’s problems using structures and systems designed on past experiences, not present and future possibilities.  

New Ways to Determine Value

Dr. Karnani's argument also fails to realize profit derived from extracting value at the expense of employees, customers, and the greater social good leads only to profits in the short term, not enduring value over the long term.  

Now that employees, customers, shareholders, watchdogs, and government regulators all have access to easy-to-use media tools and ubiquitous access to the Internet and handheld devices, it is much more difficult to hide from the glaring spotlight that can erase shareholder value overnight. Corporate leaders need to embrace the cleansing properties of sunlight and find new ways to create profit and enduring value for shareholders.

Dr. Karnani and I do share common ground on one fundamental point: Corporate social responsibility is a vague concept.

Like so many other worthy, and necessary, elements of corporate life in the digital age, the terminology related to corporate social responsibility has become unclear. Such a variety of practices have been lumped under the same umbrella concept that it is difficult to understand what is, and is not, part of the conversation.

Historically, corporate social responsibility programs, along with corporate philanthropy, government affairs, and cause-marketing activities, have been sequestered in different silos within corporate structures. They have been kept away from operational decision making, seen instead as a marketing opportunity or a reputation management necessity. This type of approach and thinking is inherently flawed—especially when the world is no longer about controlled messages and imagery.

Earnest concern for the common good is not a dangerous illusion; it is the cost of doing business in a connected society.  

In the broadcast era, the distance between the boardroom and the kitchen table was much greater and shielded managers from the scrutiny of the community. In a connected society, how a corporation makes its profit and how it helps address wider social problems matter. The more connected we become, the more aware those who make profit possible are aware of who is adding to the social burden, who is ignoring community problems, and who is working to create solutions for them.   

The Financial Opportunity of Creating Social Good

Characterizing corporate social responsibility as a tax on shareholders misses its true financial opportunity for corporations.

Effective corporate social responsibility recognizes the importance of strengthening and buttressing the community, which makes profit and enduring value possible.  

The savvy corporations understanding their refocused role will not settle for lip service and lukewarm commitments. Rather, the vanguard will raise the standards of success to new heights, thereby opening the doors to exponential growth of profit and shareholder value. 

For taking on their redefined role, the connected society will reward savvy corporations with sustained growth fueled by the attraction and retention of talent, intellectual property spun off from efforts to solve vexing social issues, capital influxes from socially responsible investment funds, increased value of the brand, and the invitation to enter new, burgeoning markets in need of their products, services, and social commitment.  

Like the real problems facing the world, these growth factors are not hypothetical. They are real opportunities. Just ask IBM about the $3 return on investment it gets for every $1 invested in corporate-citizenship initiatives.

Do all corporations need to be socially responsible in a connected society? No, just the ones that want sustained profits and increased shareholder value.

Scott Henderson is managing principal of CauseShift, a consulting company with offices in Boston and New York. He has worked with Procter and Gamble, Unicef, and, a yearlong effort to spark innovation in efforts to fight hunger.  He is publisher of the blog and writes the Profit and Purpose blog with his partners, Anne Mai Bertelsen and Brian Reich.