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August 31, 2005
Book Review--The Market for Virtue: The Potential and Limits of Corporate Social Responsibility
    by William Baue

David Vogel scrutinizes the business case for CSR and finds no causal link between corporate virtue and profitability, but rather finds a robust niche market for it.

The Market for Virtue hits like a jolt of strong coffee the morning after a spirit-filled cocktail party: the points made by that jerk you argued with no longer seem so unreasonable, and the attractions of the partygoer you flirted with are now counterbalanced by warts. Author David Vogel similarly sobers the discussion on corporate social responsibility (CSR), validating arguments against CSR and identifying holes in the case for CSR. Prof. Vogel, who teaches at the Haas School of Business, takes neither a pro-CSR nor an anti-CSR stance, but rather advances a clear-eyed perspective on CSR, exposing its attractions as well as its warts.

According to Prof. Vogel, two primary factors drive CSR: ethics and profits. The degree to which these two factors are complementary fuels the growth of CSR, while the degree to which they are contradictory impedes it. The two factors are not, however, equal in their influence on the development of CSR (or corporate virtue, as Prof. Vogel often calls it.)

"[W]hile profitability may not be the only reason corporations will or should behave virtuously, it has become the most influential," explains Prof. Vogel. "[I]n the final analysis, CSR is sustainable only if virtue pays off."

A prerequisite for profitability is demand in the market for CSR, and Prof. Vogel documents such.

"Based on the record since about the early 1990s, we can conclude that there is a market for virtue," he writes. "But there are important limits to the market for virtue" (emphasis in original.)

"The supply of corporate virtue is both made possible and constrained by the market," he adds.

Prof. Vogel posits that a primary constraint on corporate virtue is the dubiousness of a comprehensive business case for CSR

"Unfortunately, there is no evidence that behaving more virtuously makes firms more profitable," he states.

Prof. Vogel bases this pronouncement on a perfunctory review of the body of empirical research relating CSR to financial performance, admitting that the scope of the book precludes a more comprehensive review. He cites perhaps the most significant paper addressing this question, Marc Orlitzky's "study of studies" that examines 52 studies between 1972 and 1997 and finds a positive correlation between CSR performance and corporate financial performance.

Oddly, though, he does not factor these findings into his discussion determining that the academic research on the relationship between CSR performance and financial performance is "inconclusive." It is unclear if a more careful consideration of Prof. Orlitzky's findings would have changed Prof. Vogel's opinion.

Another lapse casts doubt on the meticulousness of Prof. Vogel's consideration. Examining CSR/financial performance from a slightly different angle, through the lens of socially responsible investment (SRI) performance, he compares returns for the KLD Domini 400 Social Index and the S&P 500 between May 1, 1990 and June 30, 2004. He finds the former outperforming the latter, but attributes the difference to "the industries in which the fund [sic] invested; there was no evidence of a 'social' factor."

The footnote to this statement cites studies published in 1996 and 1999, when indeed SRI's overweighting in sectors such as tech seemed to fuel SRI outperformance. Since then, however, the tech bubble has burst, and research has come out undercutting the argument attributing SRI performance to mere sector bias.

These minor chinks in the armor of Prof. Vogel's argument do not impair the overall impact of his book. Indeed, CSR and SRI supporters would benefit by deeply considering his sober arguments, which tend to temper undue enthusiasm. Far from obliterating grounds for enthusiasm, however, Prof. Vogel identifies the firm bedrock upon which support for CSR is warranted.

The Market for Virtue functions much like dating the partygoer you flirted with would, allowing you to appreciate the blemishes that humanize beauty. Similarly, knowing CSR's weaknesses and limitations can strengthen one's espousal of it.


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