The Case for Corporate Social Responsibility

In a recent WSJ opinion piece titled, “The Case Against Corporate Social Responsibility” Professor Aneel Karnani argues the typical economics case that businesses will relentlessly pursue profits and that calls for corporate social responsibility (CSR) are futile if they do not align with corporate profits.

Dr. Karnani cites two examples of when socially responsible acts by business have been in sync with business’ bottom line.  1) The trend of fast food restaurants serving more healthy choices and 2) Automobile manufacturers producing more fuel-efficient vehicles.  The author goes on to state:

Healthier foods and more fuel-efficient vehicles didn't become so common until they became profitable for their makers. Energy conservation didn't become so important to many companies until energy became more costly. These companies are benefiting society while acting in their own interests; social activists urging them to change their ways had little impact. It is the relentless maximization of profits, not a commitment to social responsibility, that has proved to be a boon to the public in these cases.

And what is Dr. Karnani’s solution?  Government regulation.

The ultimate solution is government regulation. Its greatest appeal is that it is binding. Government has the power to enforce regulation. No need to rely on anyone's best intentions.

It is interesting the way this argument is framed – When business profits and corporate social responsibility are not aligned, then profits will win.  I argue that there is never a time when long-term company profits and CSR are not aligned.  Businesses will always gain higher earnings by acting in the good of the public, although higher returns may not be realized in the short-term.  Modern business theory and Wall Street investors have a myopic focus on short-term profits.

For example, an energy company may reap higher short-term net income by continuing to use cheap coal to fire its power plant.  It may delay investment in scrubbers to clean the emissions of its current plant or make the decision that the capital outlay for clean energy doesn’t create a positive return on investment. 

The fact is that the when performing a financial analysis, an oft-forgotten aspect is take into account the future consequences of inaction.  When cheap, clean energy is made widely available, that same utility will face rapidly declining revenues and its once booming short-term profits will have translated into long-term catastrophe.  By failing to act and not producing fuel-efficient vehicles that consumers have craved for so long, American automakers are flat lining.  While Ford seems to have self-medicated, the GM and Chrysler have leaned on the government to stave off collapse.

I agree that government can provide a necessary framework of regulation for business to act in a more socially responsible manner.  But can we honestly trust that our current government can provide such leadership?  At this point, healthcare, education reform, and the typical partisan bickering are taking precedent.  Politicians’ short-term focus on re-election is eerily similar to the corporate C-suite’s obsession with meeting analysts’ expectations.

How about a change in the way business education is taught?  As the next generation of managers, we have a huge responsibility to open our eyes and make the case for CSR and long-term profitability.  And as investors, we all need to shift from a short-term to long-term mindset.