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September 02, 2010
Is There a Case to Be Made Against Corporate Social Responsibility?
    by Robert Kropp

The argument that corporate social responsibility impedes better corporate governance ignores the financial relevance of environmental, social, and corporate governance considerations.

In a Wall Street Journal article entitled Th e Case Against Corporate Social Responsibility, published on August 23, author Aneel Karnani, associate professor of strategy at the University of Michigan's Stephen M. Ross School of Business, argues, "The idea that companies have a responsibility to act in the public interest and will profit from doing so is fundamentally flawed."

According to Karnani, "In circumstances in which profits and social welfare are in direct opposition, an appeal to corporate social responsibility (CSR) will almost always be ineffective." Furthermore, he writes, "The danger is that a focus on social responsibility will delay or discourage more-effective measures to enhance social welfare in those cases where profits and the public good are at odds."

Using as examples the offering of healthy alternatives by fast food chains, the development of hybrid automobiles, and the adoption of corporate energy efficiency measures, Karnani argues that such developments occurred because of "the relentless maximization of profits, not a commitment to social responsibility."

In cases where reducing pollution caused by manufacturing decreases corporate earnings in the short term, Karnani states, "Corporate social responsibility is in direct opposition…to the movement for better corporate governance," because the latter "demands that managers fulfill their fiduciary duty to act in the shareholders' interest."

The implication of such a statement is that the interests of shareowners are aligned exclusively with short-term returns, and in too many cases this may indeed still be the case. However, Karnani ignores such developments as the unprecedented growth in membership since the financial crisis of the United Nations'
Principles for Responsible Investment (PRI), whose more than 800 signatories commit to including environmental, social, and corporate governance (ESG) considerations in their investment decision-making.

Karnani also ignores the influence of the
Carbon Disclosure Project (CDP), which, on behalf of 534 institutional investors holding $64 trillion in assets under management, requests disclosure of greenhouse gas emissions (GHG) and climate change mitigation strategies of some 5,000 organizations every year.

On the corporate end of the spectrum, the
UN Global Compact is a voluntary initiative of over 7,700 corporate participants and stakeholders that commit to the alignment of their business operations with universally accepted principles in the areas of human rights, labor, the environment, and anti-corruption.

Karnani acknowledges that "pressure from shareholders for sustainable growth in profitability" can lead to the adoption of CSR measures. However, by detaching shareowner pressure from corporate fiduciary duty to shareowners, he implies that effective corporate governance requires the maximization of profits without regard to long-term sustainability.

The history of activist ownership in the US demonstrates that shareowner pressure has not only influenced corporations to align their behaviors with long-term sustainability concerns, but that such influence is growing. In the 2010 proxy season, shareowner proposals relating to environmental and corporate governance issues have won unprecedented percentages of votes, and in many cases have led to meaningful engagement with companies on the issues.

"The ultimate solution" to the adoption of CSR by companies "is government regulation," Karnani writes. However, instead of highlighting the multi-stakeholder investor initiatives that have successfully engaged with governments in the adoption of regulations, he ticks off a number of instances in which government regulation can go wrong. He ignores the widespread adoption of requirements for corporate ESG reporting, as well as regulations addressing GHG emissions reduction.

Because "pleas for corporate social responsibility will be truly embraced only by those executives who are smart enough to see that doing the right thing is a byproduct of their pursuit of profit," Karnani writes, "That renders such pleas pointless." Such black-and-white thinking may be useful for theoretical arguments. But history tells a different story.

Activist shareowners and sustainable investors have been at the center of the growing movement to pressure corporations away from an exclusive focus on short-term profits, and toward an acknowledgement that consideration of ESG issues is essential for long-term financial health. In 2010, to argue otherwise amounts to dissembling.


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