social responsibility

EXECUTIVE DIGESTThe evolution of corporate social responsibilityPhilip L.CochranKelley School of Business,Indiana University,801West Michigan Street,BS 4049,Indianapolis,IN 46202-5151,USA1.CSR:My,how you ’ve grown (and changed!)Over the past several decades,corporate social responsibility (CSR)has grown from a narrow and often marginalized notion into a complex and multi-faceted concept,one which is increasingly central to much of today ’s corporate decision making.T o the extent that corporate social responsibility was even discussed several decades ago,these discussions were confined to a small group of academics.Among the first academics to debate the topic were Columbia professor Adolf A.Berle and Harvard pro-fessor E.Merrick Dodd,in a series of articles featured in the Harvard Law Review .Whereas Berle contended that managers were responsible only to a firm ’s share-holders,Dodd argued that managers had a wider range of responsibilities.In a classic exchange,Professor Dodd (1932)asked:“For whom are corporate managers trustees?”(p.1145).Answering his own query ,he posited that corporate managers were responsible to the public as a whole,and not just to shareholders.The crux of Dodd ’s argument was his contention that,in addition to the economic responsibilities they owed shareholders,managers had social responsibili-ties to society because the modern large firm is “per-mitted and encouraged by the law primarily because it is of service to the community rather than because it is a source of profit to its owners ”(Dodd,1932,p.1149).This reasoning became the intellectual basis for theassertion that firms have a corporate social responsi-bility .Although many other proponents of “sharehold-er primacy ”still disagree,by 1954,Professor Berle famously declared that “the argument has been settled (at least for the time being)squarely in favor of Professor Dodd ’s contention ”(Berle,1954,p.169).During the 1950s and 1960s,the United States witnessed the birth of the modern activist movements.The modern civil rights movement gained momentum with the 1954decision of Brown v .Board of Education .The environmental movement was at least in part sparked by the publication of Rachael Carson ’s (1962)Silent Spring .Some trace the beginnings of the modern consumer movement back to the publication of Ralph Nader ’s (1965)first book,Unsafe at Any Speed .The Vietnam War of the 1960s and early 1970s swept these and other social movements together ,permanently changing the business environment in America and the world by ushering in an era of activist groups and NGOs that are concerned about businesses and business practices,and which today often attempt to focus media attention on business practices they consider to be unethical or irresponsible.Unwanted media attention can seriously tarnish corporate reputation,which in turn can lead to decreases in sales or employee dissatisfaction.If firms do not react appropriately ,this media attention can also lead to unwanted legislation and regulation.In today ’s business environment,executives must either embrace corporate social responsibility or risk serious consequences.As a result,the focus of the debate changed in the 1970s from corporate social responsibility toAvailable online at /locate/bushorE-mail address:plcochra@ 0007-6813/$-see front matter ©2007Kelley School of Business,Indiana University.All rights reserved.doi:10.1016/j.bushor.2007.06.004Business Horizons (2007)50,449–454corporate social te in the decade, William Frederick(1978)wrote a much cited working paper entitled From CSR1to CSR2:The Maturing of Business-and-Society Thought,in which he noted that firms were no longer simply involved in an academic debate about the ethics of different degrees of social responsibility.Instead,they were pragmatically responding to various social pressures. Thus,as various activist groups began applying media and other pressures to firms,the firms were reacting by changing products,policies,etc.The term corporate social performance was first coined by Sethi(1975),expanded by Carroll(1979), and then refined by Wartick and Cochran(1985). Basically,the idea behind corporate social perfor-mance is the recognition that firms do have ethical obligations and that they must also respond prag-matically to social pressures.The range of appro-priate responses has,however,grown dramatically over the past several decades.2.From philanthropy to strategic philanthropyOne of the pioneering aspects of corporate social responsibility was corporate philanthropy.Although early capitalists such as Andrew Carnegie were renowned philanthropists,their charitable activities were pursued as individuals and not on behalf of corporations.The era of modern corporate philan-thropy,when corporations began giving for purposes not directly related to immediate corporate benefit, began in1953as a result of Smith v.Barlow.In this decision,“the New Jersey Supreme Court cleared the way for A.P.Smith Manufacturing Company to donate $1500to Princeton University without violating share-holder interest”(Burlingame,2004,p.104).Barlow opened the floodgates of corporate philanthropy.In the decades that followed,the“gold standard”for corporate philanthropy was for firms to make philanthropic contributions that would improve the overall health of the larger society.This could include donations to universities,local operas,or any other worthy social service cause.One major tenet of this phase of corporate philanthropy was that it be“from the heart,”rather than focused on any clear business or“bottom line”gain.In fact,there was a stigma attached to activities that also produced benefits for the firm.Many argued that activities that also enhance the firm’s bottom line should not be seen as“philan-thropic,”but viewed strictly as business decisions.An important intellectual tipping point occurred with the publication of an article in the Harvard Business Review by Michael Porter and Mark Kramer (2002),which built a powerful argument in favor of a new type of corporate philanthropy.In this piece, the authors noted that“[i]n the long run…social and economic goals are not inherently conflicting but integrally connected”(p.5).Further,they pointed out that many economic investments have social returns,and many social investments have economic returns.Instead of trying to keep these two types of returns totally separate,businesses should empha-size projects that have both significant financial and social returns.Although Porter and Kramer applied this principle to philanthropy,it could easily be extended to virtually any form of CSR.The authors cited the Cisco Networking Academy as an example.Initially,Cisco contributed networking equipment to schools in its region,basically as a goodwill gesture.It soon became clear,however,that these schools did not have the expertise to manage the donated hardware.As such,some Cisco engineers decided to help train involved teachers to maintain the equipment,and soon students were taking these classes,as well.At that point,Cisco realized there was a significant demand for such training,with over 1million unfilled IT jobs worldwide.In response,the company ramped up the program and began systematically offering it in more and more schools.Then,at the urging of the US Department of Education,they began to focus their academies in economically challenged communities.When the United Nations became interested,Cisco began opening academies in developing countries.Within five years,the firm had established nearly10,000 academies and graduated over115,000students, more than half of whom found employment in the IT industry.Through the relatively minor investment of $150million,Cisco dramatically increased the pool of trained network administrators.This benefited not only the students who were trained in network administration but also Cisco,by increasing the number and quality of network administrators.Porter and Kramer argue that firms should not simply throw money at good causes.If a firm has no competitive advantage in a given philanthropic area, it is likely that any investment it makes in that area will have little to no long-run impact.This concept is similar to the business strategy of“sticking to your knitting,”which Peters and Waterman(1982)de-scribed when they contended that firms should concentrate on their core competencies and not be distracted by other apparently interesting opportuni-ties in which they have little to no expertise.Instead,Porter and Kramer suggest that firms use the basic fundamentals of corporate strategy to find those philanthropic areas that not only benefit society,but also benefit the firm.From this view-point,organizations should find social needs that align with their particular expertise.For example,it wouldseem to make little sense for a computer manufac-turer to spend funds on building homeless shelters. This is not to suggest that the computer manufacturer should not engage in philanthropy,but rather that when it does so,it should engage in an activity or issue closer to its area of expertise.In this case,a computer manufacturer might have a goal of providing free or low cost computing solutions for the poor,and would be wise to leave to a construction company the charitable provision of sheltering homeless citizens.Companies that focus on causes in their area of expertise will almost certainly be more efficient at addressing social needs.In fact,Porter and Kramer suggest that firms should exploit this synergy between the social and the economic,rather than try to minimize it.3.From investing to socially responsible investingThe modern history of socially responsible investing (SRI)can be traced back to the activist movements of the1960s and1970s.The real boost to social investing occurred in the1960s,with the growing number of boycotts of firms that were doing business in South Africa.Although but one factor in the eventual collapse of the white minority regime,this successful social movement provided the model for similar movements.The central idea behind social investing is that it is possible for groups of individuals to have an impact on the practices and policies of firms through market mechanisms.By not purchasing or by selling the shares of certain firms that are engaged in practices that the stockholder finds objectionable,he or she can make a small difference.Acting in unison,many stockholders can make a major difference.This is similar to voting in national elections:while it is very unlikely that any single individual can make a difference,the sum of all individuals can make a substantial difference.Today,SRI is a large and sophisticated movement. According to the Social Investment Forum(2006), $2.29trillion in assets was socially managed in2005. This represents nearly10%of all managed assets. Socially responsible investing entails following one of three broad strategies:screening,social advoca-cy,or community investment.3.1.ScreeningScreened funds have either negative screens or positive screens.Those with negative screens weed out firms that produce objectionable goods and services,or operate in distasteful industries or countries.Such funds run the gamut and often exclude firms that deal in tobacco,alcohol,gam-bling,defense,and nuclear power.In addition,they might screen out firms that operate in countries with human rights abuses or repressive regimes,or those that are categorized as terrorist states.Funds with positive screens invest in firms that are viewed as socially responsible.Examples of such organizations include Herman Miller,IBM,Timber-land,and Starbucks,all of which tend to rank near the top of the most recent lists of ethical and socially responsible firms.They have policies and practices lauded by the firm’s employees,custo-mers,and other stakeholder groups.3.2.Social advocacyA second focus of socially responsible investing is social advocacy.One example of social advocacy is the Investor Network on Climate Risk(INCR).The INCR is a network of over60institutional investors that is concerned with climate change.It consists of representatives from major institutional investors,a number of states,and over15countries.What unites this disparate group is the recognition that either their investment portfolios or their beneficiaries are vulnerable to the risks posed by climate change.The INCR holds conferences,funds research,and advo-cates in the area of climate change.On occasion,it will also lobby for climate change legislation.munity investmentThe final strategy of SRI is community investing. Here,funds focus their investments in areas such as non-profits,cooperatives,small businesses,com-munity facilities,and affordable housing.The principle behind community investment is to make investments that will strengthen local communities.4.From entrepreneurship to social entrepreneurshipSocial entrepreneurship is the process of applying the principles of business and entrepreneurship to social problems.Social enterprises are enterprises devoted to solving social problems.The reason for their existence is not to maximize return to shareholders, but to make a positive social impact.One way to envision social entrepreneurship is to picture how an MBA might tackle a social problem.Presumably,an MBA facing a social problem would be concerned with how to finance the operations,market the product, and organize the enterprise.She would be very concerned about measuring outcomes.She would recognize that it will be necessary to generate funds in order to pay for the ongoing social investments.One of the best known social entrepreneurs is Professor Mohammed Yunus,who founded the field of micro lending.Professor Yunus’first experimentin micro lending occurred in1972,when he lent$27 to42families in rural Bangladesh so that each could purchase a small inventory of items to sell for a profit(Knowledge@Wharton,2007).These loans were subsequently repaid in full.Following that and similar experiences whereby he funded loans using his own money,Professor Yunus founded Grameen Bank in1976as a trial to determine whether it was feasible to systematically provide credit and banking services without collateral to the very poor(in his words,“the poorest of the poor”)in developing countries.After several years of testing, Grameen Bank was able to achieve an astounding repayment rate of over98%(Yunus,2002).As of March2007,the institution had lent over$6.13billion (Grameen Bank,2007),and earned a profit in all but three years of its existence.Of critical significance is that once loans are repaid to Grameen Bank,these funds are recycled into the community by extending more loans.For pioneering work in micro credit, Mohammed Yunus and Grameen Bank were named recipients of the2006Nobel Peace Prize.Green Mountain Coffee represents another type of social venture:it makes a profit,but at the same time entertains a significant social mission.The firm,which produces a variety of fine coffees,also supports a wide range of social causes.The exclusive roaster,seller,and distributor of Newman’s Own Fair Trade Certified coffees,Green Mountain gives at least5%of its pre-tax profits to a range of social initiatives.In addition,Green Mountain Coffee has been recognized by Forbes magazine as one of the “200Best Small Companies in America.”5.From venture capital fund to social venture capital fundSupporting the growth in social ventures is a new type of venture capitalist.Social venture capitalists not only supply seed money to social ventures,but also engage in a rigorous process of training future social entrepreneurs.For example,Echoing Green has supported over400social entrepreneurs,as Echoing Green Fellows,in the fundamentals of social enter-prise.Covering individuals for two year terms,the company has invested$25million in the program and has seen its Fellows subsequently raise an additional $938million,representing a nearly40-fold leverage on the initial investment(Echoing Green,2007). Beyond providing seed money and training,Echoing Green provides technical assistance,consulting help, and networking opportunities.Another social venture capital firm,Ashoka,was founded by Bill Drayton.An early recipient of a MacArthur Prize(sometimes referred to as the“genius grant”),Drayton was in2005named one of America’s top25leaders by US News&World Report.In1980, Drayton founded Ashoka with an initial investment of $50,000.T oday,Ashoka’s annual budget is in excess of $30million.Since1981,the organization has named over1800Ashoka Fellows from over60countries, providing them with training,living stipends,and networking opportunities().6.From an MBA to an MBA in CSRA number of MBA programs have begun to focus on the area of social responsibility and social entrepreneur-ship.For example,Indiana University now offers a certificate program in Social Entrepreneurship for graduate students.A joint venture of the Kelley School of Business,the School of Public and Environmental Affairs,and the Center on Philanthropy,the program requires that MBA students(and others)take18credit hours to prepare them to help solve social problems, using courses from all three of these highly rated entities.In1993,the Harvard Business School created an “Initiative on Social Enterprise.”This plan supports “the creation,strategy,and management of socialenterprises;the governance of social nonprofit organizations;corporate involvement in the social sector;and social capital markets”(Aisner& Kavanagh,1999).The Initiative on Social Enterprise now consists of one required MBA course and seven elective courses,involving over40faculty and more than300students in this innovative program.The CSR movement has now reached the point that at least one MBA program,Nottingham University(in conjunction with Nottingham’s International Centre for Corporate Social Responsibility(ICCSR)),grants a degree in the field.This MBA in CSR examines the full range of socially responsible organizations,from for-profit through public.Students apply principles of CSR and business ethics through the spectrum of functional courses.Ultimately,the program prepares individuals for careers that will,at least in part,focus on CSR issues.7.Corporate social responsibility and profitabilitySeveral hundred academic studies have attempted to analyze the relationship between corporate social responsibility and profitability.A recent meta-analysis suggests“the cost of having a high level of corporate social responsibility is minimal and that firms may actually benefit from socially responsible actions”(Wu,2006,p.168).This finding is similar to results of earlier studies,such as Abbott and Monsen(1979),and should not be surprising.Examining themarketing or the research-and-development litera-ture,like conclusions can be found.Although higherlevels of both marketing and R&D are oftenassociated with higher profits,the actual relation-ship is very difficult to parse out in empirical studies.In fact,it is undoubtedly a function of the specificindustry and the environmental conditions faced byany specific firm at any given point in time.Nonetheless,it is possible to find mechanisms bywhich CSR might enhance profitability by examiningthe impact of social responsibility on variousstakeholders.It is important to understand thisdoes not mean that firms which engage in sociallyresponsible activities will always be more success-ful.It is rare when a single factor can explain whyany specific organization is successful or unsuccess-ful.In fact,the overall success of any organization isa result of its entire portfolio of managementpractices and policies,combined with industry andeconomic conditions,plus a certain degree of luck.7.1.EmployeesFirms that have good employee relations are likely tohave significantly lower turnover rates and a substan-tially more enthusiastic workforce.Consider the factthat,in2007,Google was named by Fortune magazineas the best company for which to work.In addition,many would claim the firm is one of the most“fun”foremployees:it offers free meals,a spa,and free med-ical care on site(Fortune,2007).Moreover,engineersat Google are allowed to spend up to20%of their timeworking on projects of their own choosing.As a resultof all these perks,Google can choose from the best ofthe best when hiring staff members;the company of6000employees receives over1300résumés a day.With an exceptionally low turnover rate and very highemployee morale,factors such as these are likely toenhance Google’s bottom line over time.In an important empirical study of this phenome-non,T urban and Greening(1997)demonstrated that “a firm’s CSP may provide a competitive advantage in attracting applicants”(p.658).The authors went onto argue that firms develop a competitive advantageby being perceived as great places to work.Clearly,Google falls into that category.7.2.CustomersAn excellent customer experience is a core elementfor most successful firms.Howard Schultz,chairman ofStarbucks,argues that“[w]ith more than40millioncustomers per week worldwide,Starbucks mustcontinually find ways to surprise and delight customersby offering the highest quality products and services”(Business Wire,2006).Customers who are delighted are likely to be repeat customers.As a result, Starbucks can charge five to ten times as much for a cup of coffee than does the local convenience store,in part due to the quality of the customer experience.ernmentsStrong government relations can also help companies in a number of dimensions.For example,such firms are less likely to see seriously onerous regulations imposed on their industries,and are more likely to be able to anticipate and react to new regulations. Importantly,they are expected to be able to help mold new regulations in ways that are less likely to damage their basic business practices.In a study of how firms can acquire strategic advantage through political means,Schuler,Rehbein,and Cramer(2002) found that“firms with access to those who make public policy enjoy competitive advantage”(p.659).7.4.MediaPositive media relations can be absolutely critical to organizations in today’s media rich environment. Firms that are seen as socially responsible will have an edge over other firms,particularly those with socially irresponsible panies of good repute are much more likely to be believed, and reporting on their activities will generally be significantly more anizations that do a poor job with media relations risk damaging their reputation(Motion&Weaver,2005).8.The bottom linePerhaps the most important intellectual break-through regarding modern conceptions of CSR is that socially responsible activities can,and should, be used to enhance the bottom line.The corollary is that most,if not all,economic decisions should also be screened for their social impact.Economic returns and social returns should not remain quarantined in isolated units.Firms that success-fully pursue a strategy of seeking profits while solving social needs may well earn better reputa-tions with their employees,customers,govern-ments,media,et cetera.This can,in turn,lead to higher profits for the firms’shareholders. 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