September 20, 2004

Corporate Social Responsibility and the Bottom Line

At fall orientation, Professor Geoffrey Heal (pictured) and corporate leaders from the pharmaceutical and paper industries explored the tradeoffs between profitability and social responsibility.

On August 26, business leaders representing the pharmaceutical and paper industries discussed the tradeoffs between profitability and social responsibility for an audience of 500 incoming MBA students. One of three orientation sessions devoted to ethical issues, the event was part of the School’s new ethics curriculum, The Individual, Business and Society: Choices, Tradeoffs and Conflicts (IBS).

Noting that issues of corporate social responsibility have dominated headlines in the past couple of years, moderator Geoffrey Heal, the Paul Garrett Professor of Public Policy and Business Responsibility, posed the question: Is acting in a socially responsible manner contrary to profits and the bottom line?

Mike Balduino, president of Shorewood Packaging and senior vice president of International Paper (IP), explained that sustainable forestry is part of IP’s operating model. “Our overall goal is to keep forests healthy,” he said. “We see that as being integral to our economic success. We see it as a fundamental part of defining our brand image and who we are, and it’s part of the cost of doing business. When earnings are off, nobody says, ‘Let’s stop planting trees.’”

While maintaining a long-term supply of healthy trees is clearly in IP’s self-interest, other environmental issues, such as recycling, present more complicated choices. IP is under pressure from environmental groups to make more products from recyclable materials, but many of its customers are unwilling to accept the higher costs and lower quality of recycled products.

“In products where the quality and the structure of the fibers are not deemed to be important, the use of recyclable inputs is appropriate,” Balduino said. “But for some products it’s not appropriate.”

Roy Vagelos, former CEO of Merck, described a scenario in which socially responsible behavior was costly in the short-term, but ultimately beneficial to the company. In the 1980s, Merck scientists discovered that Ivermectin, a drug the company had developed for treating worms in animals, was extremely effective at eliminating the parasite that causes river blindness, a disease that afflicted millions of people in sub-Saharan Africa.

Vagelos spent a year trying to drum up government support for a public health program targeting river blindness, but without success. In 1987, Merck decided to fund the program itself, and announced that it would donate the drug to anyone in the world who needed it. The company received hundreds of letters from stockholders and employees expressing support for the initiative. For seven years in a row, Merck was at the top of Fortune’s list of the best U.S. companies to work for.

“For a decade at least, Merck had its choice in recruiting,” Vagelos said. “We could get anyone. That was an incredible effect on the most important thing in our company: our intellectual capital.”

In the 1990s, though, Merck’s public image plummeted as a result of the pharmaceutical industry’s response to the AIDS crisis in the developing world. The industry, which had invested billions of dollars to develop HIV treatments, argued that making those drugs available at low prices in the developing world would affect their price structure in the developed world. The major drug companies eventually started small HIV programs in key areas of Africa, but to many observers, the effort was too little, too late.

“The problem was that they had to be kicked into being socially responsible,” said Vagelos, who retired from Merck in 1994. “To me, it was a pathetic response from an industry that could have done better.”

Vagelos advised students to find out as much as they can about the culture of a company before accepting a job. “You have to be selective in where you go,” he said. “Talk to some of the people at the level you’ll be working in and determine what they believe about the culture, because it’s impossible to change the top from the middle.”

Balduino counseled students to look beyond financial compensation in evaluating job opportunities. “You have to ask yourself three questions,” he said. “Are you comfortable with the people? Is it a place where you can grow? And are you comfortable with the ethics and values of the organization?”

The panelists warned that companies should not pursue social causes as a marketing gimmick. “Beware of cause marketing,” Balduino told students. “I think you have to do things you believe in because they’re the right things to do and because they’re socially responsible, and not solely because you think it’s a way to make money. That’s dangerous ground. There’s no evidence that cause marketing yields big results to the bottom line. It’s not an opportunity to make a quick buck.”

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