Why did you write When Principles Pay?
There was a lot of interest in the Business and Society course I’ve been teaching the last few years, but there were no books that covered the material. And in the last five or six years, there has been a growing sense that business schools need to do more to engage their students in considering ethical issues. I saw a need to take a distinct angle on ethical issues, rather than the standard “this is what is right, this is what is wrong” approach.
I wanted to look at ethics in a business context and particularly in light of two aspects of business operations. First is the environmental impact — all businesses have an environmental impact to a greater or lesser degree. The second aspect is social impact, by which I mean a company’s impact on minorities, the poor and people in developing countries. I began to focus on how a firm’s behavior on those two fronts affects its success in terms of conventional measures: profitability, market valuation, market share, brand value and brand image. In other words, is there a payoff to behaving well?
To what extent is pressure from consumers driving corporate social responsibility (CSR) efforts and success, as opposed to doing good for its own sake or strictly because it has an ethical component to it?
Consumer pressure certainly plays an enormous role. The success of Whole Foods is almost a cliché. The extraordinary growth in the last 10 years of organic food, which is more expensive than regular food, has shown that people are willing to pay a higher price, partly because they think organic food is better for them, and partly because they think it’s better for the whole world. People are willing to pay a premium to get things they believe are more environmentally and socially acceptable. The Toyota Prius is now one of the 10 best-selling cars in the United States, overtaking the Ford Explorer in popularity. A car like the Ford Focus, comparable in size and features, is roughly $5,000 less than a Prius, but people are willing to pay extra for an environmentally low-impact car.
Managing impacts is a way firms reassure consumers that it’s legitimate to buy a company’s product or that buying the product doesn’t conflict with the customer’s values. The companies most sensitive to CSR efforts are those for which brand image matters. If a company has a negative image, customers will sometimes avoid dealing with it. Consumers are increasingly concerned about environmental and social issues and are asking questions about the goods they buy: Was this product made with sweatshop labor? Did this product damage the environment when it was made? For some customers, buying is a statement of values.
Companies also face pressure from investors to manage their impacts. Socially responsible investing [SRI] has existed for many decades but really took off during the antiapartheid movement in the 1980s. People were trying to persuade big funds to sell their shares in companies that did business with companies in South Africa, which was the first time there was a major effort to use capital markets to influence corporate policy. SRI has grown quite a bit. Today, between 10 and 12 percent of the money that is professionally managed in the United States is cast as SRI, having some kind of social or environment goals or limitations on how the funds can be invested.
I chair Columbia’s Advisory Committee on Socially Responsible Investing. We review the University’s portfolio and recommend to the trustees which funds and companies we should and should not be investing in. All the other major private and public universities have SRI committees, as do large philanthropic organizations like the Ford Foundation and the Rockefeller Foundation. None of these institutions’ investments are formally classified as SRI funds, so that 10 to 12 percent is probably something of an understatement.
Do you foresee a day when every corporation must respond to consumer concerns by integrating CSR into its operations?
No, not every corporation. Defense contractors and weapons firms are quite large and are significantly immune from the forces we are talking about here. It doesn’t mean they are behaving badly, and whether you or I approve or disapprove of what they are selling doesn’t make any difference. But most industries are not immune to CSR.
What about industries facing pressure to adopt CSR measures but for which CSR requires a daunting investment?
In most cases it’s a simple matter of leadership. The car industry is interesting. Responding to environmental concerns may be challenging for the automakers, but Toyota anticipated it. Toyota believed that environmental issues would begin to constrain the industry, and placed the company strategically to react to that. Toyota put together a very high-powered team of people to determine what sort of product they needed; they started designing the Prius seven years before it appeared on the market. Honda took similar steps with its Civic, Accord and Insight models.
I suspect leadership in the U.S. auto industry decided to just go with the SUV flow instead, and now that approach is hurting them. The U.S. industry is recognizing that it will have to reconcile its vehicles with the public’s concern with environmental issues. There’s a lot of emphasis on Chevy’s forthcoming electric vehicle, the Volt, but the industry has been dragged into innovating and is still lobbying against effective policy measures.
You mention brand image as a factor in CSR, but in the book you are quite adamant about distinguishing CSR from cosmetic efforts aimed at building brand image.
CSR is a carefully thought-out response to minimize companies’ social and environmental impacts. If a tobacco company gives money to the Metropolitan Opera, it may be good philanthropy and it may be good public relations, but it’s not CSR because it does not address the social and environmental problems caused by a tobacco company.
Consider Starbucks, which has gone to some lengths to minimize the negative environmental impact of growing coffee. Starbucks pays its employees at a higher rate than is typical in the retail food trade, it offers employees more benefits and it buys from fair-trade growers as much as possible. Starbucks has fought through the classical social and environmental problems associated with being in that business.
Measuring the impact of CSR in achieving social and environmental goals has been difficult. What do you think are going to be the best, most effective ways to do that?
Companies do spend a fair amount of time producing CSR reports, but at the moment the reports are a bit of a missed opportunity — they don’t really say very much.
There’s the old saying that what gets measured gets managed. There are ways of measuring environmental impact; we can measure the pollution that companies produce, for instance. It is much tougher to measure social issues. For example, how can contributions to gender equity be measured? But we can move toward quantifying those to a greater degree than we do now.
On the environmental side we could have reporting that is much closer in general format to the GAAP than we now have. We could actually compare across companies in terms of their environmental impacts. The Global Reporting Initiative has tried to standardize the format, but without addressing quantification. I’d like to see reports and audits be standardized and quantified as far as possible.
I’d also like to see internal and external reporting become the standard. There are very compelling reasons why we have audits for our regular financial accounts. People have a tendency to misstate things in their own interests — that’s unavoidable. If you want consumers to take the numbers in these reports seriously, the numbers have to be credible, and that means external review by a neutral third party.
Ultimately, we need internal reporting, external auditing, quantification and standardization to really make CSR reports more operational. But I think it’s all very doable.
Geoffrey Heal is the Paul Garrett Professor of Public Policy and Business Responsibility and a Bernstein faculty leader at the Sanford C. Bernstein & Co. Center for Leadership and Ethics at Columbia Business School.
Read an excerpt from the book here.
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"When Principles Pay: Corporate Social Responsibility and the Bottom Line"