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June 16, 2011
Is Corporate Social Responsibility a Distraction?
    by Robert Kropp

A paper by consultants at Dalberg Global Development Advisors argue for the return of a focus on the single bottom line of corporate profitability, but calls for a long-term horizon that coincides with the interests of sustainable investors.


A recently published academic paper, which argues that efforts by companies to improve their corporate social responsibility (CSR) are "inefficient workarounds or substitutes that should ultimately lead back to a single bottom line – profit – with a long time horizon and rational expectations," has generated a measure of media attention, including an article about it in the New York Times.

The paper, entitled The Single Bottom Line, was co-authored by Daniel Altman and Jonathan Berman of Dalberg Global Development Advisors. Altman, who was identified in the Times article as a former writer of economic commentary and editorials for the publication, is also an adjunct professor at the Stern School of Business at New York University.

When SocialFunds.com spoke recently with James McRitchie, the founder and publisher of CorpGov.net and a member of the United States Proxy Exchange (USPX), he observed, "We have incorporation laws so corporate activity can benefit society, but we've certainly taken the focus off of that." The authors of The Single Bottom Line express doubt as to whether corporate activity originally considered social benefit, or "creating shared value (CSV)," stating, "As Western countries industrialized in the late nineteenth century, creating social benefits for their communities was not often a high priority. Companies polluted freely, exploited workers, and used natural resources without concern for their sustainability."

Corporate philanthropy emerged in the twentieth century as a means of compensating for some of the damage to social benefit caused by corporate activity. It, in turn, began to be supplanted by the concept of CSR, which, according to the authors, became widespread in the 1990s. The authors define CSR according to the formulation of Archie B. Carroll: "A company demonstrates CSR by doing what society expects of it – making profits, obeying the law, behaving ethically, and taking additional roles in society according to the norms of the day."

In questioning the value of CSR initiatives, the authors argue that "shareholders and executives using CSR and CSV to create private benefit will sometimes miss. CSR and CSV are imperfect tools." Arguing further in favor of "the use of the single bottom line to assess investments with social benefits," the authors observe, "Adherence to CSV may favor investments that, though potentially profitable, would not offer competitive long-term returns within a company's portfolio."

On the other hand, the authors observe that by the practice of CSR, "externalities are internalized as companies recognize the economic value that they create…The fact that CSR and CSV continue to be priorities for companies is evidence that they are indeed creating private benefits for shareholders."

What the authors offer as an alternative to CSR is a return to the single bottom line, or profitability, in corporate accounting. But their concept of profitability stands in sharp contrast to the prevalent focus among companies on short-term profits, and may in fact coincide with the argument by sustainable investors and other advocates that engagement with companies on CSR is undertaken with the goal of enhancing financial returns as well as effecting social benefit.

"Despite the current slavish focus on quarterly earnings reports," the authors state, "A company's market capitalization still represents – in theory – the expected value, in today's money, of all of its future profits." It can be argued that the effect of a long-term horizon in corporate strategy would necessarily lead to implementation of the very measures called for by CSR advocates, that is, the integration of environmental, social, and corporate governance (ESG) considerations into such strategies.

After all—to cite but one example—in an era of mounting resource depletion, the decision by an energy company to ignore efficiency measures and continue to focus its activities on fossil fuel extraction would lead, in the long term, not only to an unsustainable contribution to climate change but to loss in revenue and investment as other firms embrace the necessity of a low-carbon economy.

It would seem, then, that what the authors describe as ill-advised CSR measures—they cite as one example that of a mining company building a school in the community in which it operates—might more properly be described as corporate philanthropy, while other CSR measures described in the paper—such as strategic community initiatives, employee satisfaction, and the willingness of executives to accept lower compensation in return for investments in developing economies—both contribute to social benefit and lead to greater profitability in the long term.

In a recent academic study, authors Fernandez-Kranz and Santalo described the question of a linkage between CSR and financial performance as "inconclusive," although half of the empirical studies surveyed conclude that a positive association exists. On the other hand, they found positive associations between market concentration and CSR, the effects of higher import penetration on CSR performance, and the environmental performance of companies in competitive industry sectors.

"Doubling competition in the marketplace would increase the CSR ratings of an average company by between 184% and 800%," Fernandez-Kranz and Santalo argued.

The authors' call for a return to a single bottom line coincides with a growing effort on behalf of integrated reporting, which would lead to the internalization of such externalities as ESG considerations. Last year saw the formation of the International Integrated Reporting Committee (IIRC), which seeks to demonstrate "the linkages between an organization's strategy, governance and financial performance and the social, environmental and economic context within which it operates."

According to Mervyn King, the Deputy Chair of the IIRC, "The old form of annual report focusing primarily on financial information and the short-term horizon was no longer adequate to meet the needs of investors and other stakeholders." Instead, "The overarching objective of an integrated report is to enable stakeholders to assess the ability of an organization to create and sustain value over the short-, medium- and long-term," according to a discussion paper addressing the issue.

Furthermore, the authors observe that "there is still a need for government, consumer movements, or other forms of collective action to influence the equilibria in markets where for-profit companies are the most efficient producers of social benefit and are underproviding it." In other words, the responsibility of shareowners to engage with companies to influence behavior toward CSV is not likely to diminish.

 

 
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