From CSR to CSO?

Despite increasing number of business cases where corporate social responsibility (CSR) has led companies to build substantial competitive advantages, generate higher revenues, or lower costs substantially, the skeptics of CSR still abound.  Milton Friedman wrote in 1970 that the “social responsibility of the corporation is to generate profits”.  Today, many business leaders echo the view that a business’ principal, if not only, responsibility is to its shareholders.

The logic behind Friedman’s argument endures.  First, the principal-agent theory, which binds managers to act solely in the best interests of their investors, still applies.  Second, any diversion of resources from a company’s core business for social purposes would amount to an undemocratically levied tax on the investor is still a legitimate objection.  (Of course, I assume that Friedman’s scorn for diversion of corporate resources would also apply to excessive executive compensation or the lavish trappings of the C-Suite). And finally, Friedman’s point is that even if it were acceptable to commit to social causes, how is a manager to know where to invest, as he writes that “one man’s good is another man’s evil.”

But if the logic has endured, the context has not.  A lot has happened since 1970 that challenges Friedman’s critique of social responsibility.  The first is the sheer number of companies that have embraced “CSR” as a core part of their strategy.  Companies like Whole Foods or Honest Tea have moved beyond the “window dressing” that Friedman mocks to strategies that integrate concern for employees, suppliers and the environment into the products they sell in ways that translate into strong market share or a robust bottom line.  Measured by sales per square foot, for example, Whole Foods is the most profitable grocery store in the country, and a commitment to CSR is a central part of their strategy.

Second, a small but growing group of investors has started to look for options that combine financial returns with positive social and environmental outcomes.  Moving far beyond the “screened investment” portfolios of the 1990s, funds like Generation Investment Management or Parnassus believe that publicly traded companies with strong environmental, social and governance practices will outperform the markets in the long term. 

And moving from public equity into private equity and venture capital, a new generation of impact investor like DBL and the Calvert Foundation are raising money from investors who want to see it invested in privately held companies or socially responsible projects that generate positive social and environmental returns.  So while Friedman’s principal agent theory may still be a legitimate concern, there are now a large and growing number of investor who would be willing to back business managers who aim to deliver more than just financial returns.

Third, while it is true that “one man’s good can be another man’s evil”, the emergence of new ratings systems like the B-certification, GIIRS and IRIS promise to enable managers to track and communicate non-financial performance measures in clearer and  more comparable ways.   We still have a long way to go to get to a single, coherent measure of social and environmental performance, but we are making progress.  There is also increasing consensus on the urgency of certain national and global priorities, from the jobless recovery to a stalled public education system to the threat of global climate change, that have allowed many business leaders to make clear and measureable contributions that go well above and beyond what is required of them by law. 

Finally, Friedman’s concern that the business executive’s social initiatives would amount to an undemocratically levied tax was a legitimate concern in an era when government worked.  But in the United States, at least, tax policy has become a dangerous game of partisan brinkmanship and double-speak, where ending tax cuts is considered a tax increase and no one seems to want to take the long-term fiscal health of the country seriously.   Many entrepreneurs, social or otherwise, are tired of waiting for the government to get things done.  Code Academy, a start-up education company, and IBM’s P-TECH partnership in New York City are just two examples of businesses finding ways to train more people for the technology jobs of tomorrow.  And consumers are also voting with their wallets, feeling more informed and empowered to express a clear preference for local, healthier, or more sustainably sourced products.

So maybe it is not the responsibility of a company to act socially or environmentally, but these and many examples certainly highlight the opportunity.  Perhaps the only enduring objection of the skeptics is the word responsibility, which implies a moral obligation to do something beyond tend to the bottom line.  Corporate social opportunity, instead, points to the new and growing markets, the vibrant and healthy communities, the patient investors, and the talented and committed workforce open to managers who take off the green eye shade that has long blinded them to the new capitalism taking shape just outside their window.