March 2006

Is Corporate Social Responsibility Serious Business?

A decade ago, corporate social responsibility (CSR) was a trendy idea promoted by quirky entrepreneurial companies like Ben & Jerry's Ice Cream. Now more than 50 percent of the Global 250 corporations issue corporate responsibility reports, and the public expects visible CSR initiatives from businesses of all sizes. Many companies use CSR as a way to burnish their image, generate brand equity, and increase employee loyalty. Corporate critics and "socially responsible investors" have developed CSR measures to promote wide-ranging policies, including labor rights and curbs on global warming. But is CSR really a win-win situation--as its promoters claim--for both corporations and the public? This March 3 conference, organized by NGO Watch--a project sponsored by AEI and the Federalist Society--will examined the complex global CSR phenomenon and took an in-depth look at Wal-Mart, which has been under fire for some of its corporate, social, and environmental practices.

Panel I: Does Corporate Social Responsibility Make Good Sense?

Elaine Steinberg
Leeds University

Corporate social responsibility (CSR), as commonly understood, undermines everybody’s freedom and prevents business itself from operating properly. There are four reasons why CSR is dangerous and should be resisted:

First, CSR is uneconomic: it diverts resources from core business activities to “good doing.” Secondly, it is oxymoronic: CSR proponents want businesses to adorn their corporate purpose, thereby neglecting their core purpose, and as a result, failing as businesses. Thirdly, both the ends and methods are often immoral and irresponsible, as the Greenpeace campaign against Shell (Brent Spar case) showed for example. Fourthly, Corporate Social Responsibility is unethical: it seeks for employees to cheat shareholders by devoting resources otherwise used for business activities to other activities.

Some businesses have wrongly given in to the demands of CSR advocates, believing they could benefit from appeasement. However this is a self-defeating policy, as appeasement will likely lead to increasing demand by CSR advocates.

David Vogel
Haas School of Business and Department of Political Science
University of California-Berkeley

The last five years have seen increasing public and business interest in CSR. Today one can sum up mainly three views of CSR: CSR is superficial, and corporations are not acting responsibly; while CSR is substantial, it undermines shareholders’ value; and CSR is substantial and in the interest of business (the most influential view of the three).

All three are wrong. CSR’s impact is both substantial and significant, especially in the developing world. CSR does not harm shareholder value, and the third view overstates CSR, as the market is indifferent to CSR. While businesses that act responsibly do not perform worse as a result of enrolling in CSR, they also do not perform better, as the impact of CSR is only marginal to the businesses’ overall performance.

It is important to understand the limits of CSR. While having led to impressive outcomes in some cases especially in the developing world, government regulation remains the more effective way of solving public policy problems.

Panel II: CSR in a Globalized World

Aron Cramer
Business for Social Responsibility
 
Corporate social responsibility is taken more seriously by an increasing number of businesses, realizing the impact of being perceived as irresponsible. As a result of a global power fragmentation, NGOs have greater power and better media access than ever before and become stakeholders of the global business conduct. Businesses who wish away these new stakeholders pursue a losing strategy.
 
An issue often exaggerated in the discussion on corporate social responsibility is the transatlantic divergence of attitudes businesses have towards CSR. Business views on CSR are often the same in Europe and the United States.

A crucial understanding for the future for corporate social responsibility is to take a careful look outside the Organisation for Economic Co-operation and Development (OECD) countries. Especially China’s role (both government and business) will have a crucial impact on the future of CSR, as its relative economic importance rises.
 
Phillip H. Rudolph
Ethical Leadership Group

The dialog on global business and corporate social responsibility is in fact easier than commonly assumed. While business has an inalienable right to maximize profit, it also has the obligation to behave responsibly. At the same time the duties of businesses are not unbound, as businesses do not have an abstract obligation to make the world a better place. Rather businesses, even in a globalized world, have local responsibility, as most business impact is local, rather than global.

Given the large size of multinational corporations today, effective regulations are often limited. This absence of effective regulations has caused a void that has been actively filled by global civil society in the form of NGOs. Indeed the challenges for businesses from globalization are largely driven by the increasing global nature of civil society rather than the globalization of business.

Barbara Shepard
Doe Run Company

The Doe Run Company runs a mine in Peru. After being aware of poor conditions in the mines in Peru, the Doe Run Company agreed with Peru’s government to implement a number of projects addressing health and environmental concerns of the communities. Understanding that the company’s operations work with public consent, the company also engaged with the public.

Reaching out to the public did not only lead to support of the community and a positive attitude by American and Peruvian governments and a number of NGOs, it also led to criticisms by some groups. The lesson Doe Run learned from this experience was that working with some NGOs can be mutually beneficial, while cooperation with others makes little sense.

Luncheon Keynote Address

Clive Crook
National Journal and The Atlantic

It is a widely held view that corporations are a necessary evil and as a result have to redeem themselves to be worthy of respect from society. It is this anti-capitalist view that gave rise to the notion of corporate social responsibility. Therefore it is important to understand that while the results of CSR are not always bad, the thinking that underpins CSR is wrong.

Broadly speaking, there are three motives for corporations to embrace CSR: the cynical view held by businessmen who believe that the idea of CSR itself is flawed but what society demands from businesses; CSR is a win-win strategy, as it increases social welfare while at the same time increasing profits; and while CSR costs businesses money, businesses owe this to society.

While the corporate policies differ on CSR, one can divide them in four categories by asking two crucial questions: Does the policy raise profits? And does the policy improve broadly defined social welfare? The different categories are:

• Good management: A CSR policy that both raises profits and social welfare. For example a policy that enhances the employees’ motivation (such as extending health care to the employees’ families) and thereby raises productivity and social welfare. However such policy should simply be called good management, as there lays no specific moral virtue in it.
  
• Borrowed virtue (or stolen virtue): A CSR policy that lowers profits while raising social welfare (for example, charitable donations of a public company). While the donation reduces the firm’s profits, it may increase social welfare. However, the virtue in this case is only borrowed (or better stolen), as the managers spend the money of their shareholders and violate their role as the trustees of shareholders.
  
• Delusional CSR: A CSR policy that lowers profits and social welfare, for example, recycling. While recycling is costly to the corporations, it does not increase social welfare and may even harm social welfare.
  
• Pernicious CSR: A CSR policy that increases corporate profits while reducing social welfare, in other words an inversion of the concept of CSR. For example the deduction or withdrawal from investment of Western corporations in the developing countries as a result of NGO pressure. While the corporation protects or increases their profits by avoiding negative publicity generated by NGOs, the policy reduces social welfare because it harms people in developing countries that are affected by the divestment.

Panel III: Wal-Mart in the Crosshairs

Richard Vedder
AEI

Wal-Mart has been attacked for numerous reasons like: paying low wages, not providing healthcare for most of its workers, destroying downtowns, causing unemployment, contributing to urban sprawl, leading to a decline in U.S. manufacturing because of its outsourcing, promoting substandard labor practices overseas, hiring illegal immigrants, overcharging its customers, and desecrating local architectural landmarks with its hideous stores. 

On the other hand, there are those with a positive view of Wal-Mart for the following reasons: the chain provides low prices and thus billions of dollars in consumer benefits, Wal-Mart creates jobs and lowers unemployment, it raises the American economy’s overall productivity, it reduces poverty and helps its mainly low-income customers, it makes significant philanthropic contributions, and it increases consumer choices especially in rural areas. Looking at Wal-Mart through the lens of American economic history, then, one can see that there are many parallels between Wal-Mart’s Sam Walton and Standard Oil’s John D. Rockefeller--both leaders of companies that are seen as the corporate villains of their day.  

Roger Ballentine
Green Strategies 

Corporate value is composed of tangible and intangible assets, such as reputation and the value of the brand. A company’s record on sustainability and environmental and social performance thus affects its intangible value, which is an important factor in producing returns to shareholders. Corporate social responsibility, then, is good business because much investment capital is influenced by people and institutions with social responsibility concerns. 

It is important to note that there is a consensus that global warming exists because of higher concentrations of carbon gas in the atmosphere. Climate change is clearly a corporate risk and an opportunity, because this change affects the productivity of farms, forests, and fisheries, and the livability of cities. Further, the geography of disease affects health care costs and worker productivity. There is, too, increased risk from storms, floods, and wildfires. In addition, political and regulatory risk is the strongest reason for corporate climate change policy and corporate social responsibility. This risk is rising as climate change becomes more rapid. 

However, there is opportunity as well as risk. Companies such as Wal-Mart that have developed climate change policies gain an advantage over their competitors. Indeed, these policies can even save the company money for example by reducing waste and fuel costs. Wal-Mart, further, is implementing programs such as Acres for America, which preserves one acre for every acre Wal-Mart consumes. This last activity may not reduce cost as some other environmental projects, but it raises a company’s intangible value by improving its reputation and by reducing risk.  

Arindrajit Dube
University of California-Berkeley

Comparing Wal-Mart’s wages and health benefits to those of other large retailers and retailers overall, one finds that Wal-Mart non-managerial laborers make about 12 percent more than the market average. Five percent fewer Wal-Mart employees have heath coverage than employees in the overall retail sector average, but Wal-Mart does provide health care at the same level as the large retail sector average. Nonetheless, Wal-Mart spends significantly less per person on its health plans than the retail sector average. Similarly, the number of Wal-Mart employees on Medicaid is the same as the average for other large retailers. However, the number of children of employees of Wal-Mart who are on Medicaid is much higher than the sector average. 

There is clear evidence that Wal-Mart’s entry into a market reduces earnings for general merchandise and grocery sub sectors. Countering this, there are large consumer savings in areas with Wal-Mart. While these savings are large, they are not as large as some have estimated. Nevertheless, most critics of Wal-Mart agree that the company does add value to the economy. If Wal-Mart were to return to its lower profit margins in the late 1990s, it would be able to raise employee wages. This would have a negligible effect on prices and consumer savings.    

Michael Hicks
Air Force Institute of Technology, Marshall University

Wal-Mart’s story is very similar to that of other large retailers over the last century. There is no consensus on what Wal-Mart’s impact is on the economy. Indeed, much of the research that has been done is flawed because it does not take into account particular local circumstances. 

There are several known effects of Wal-Mart’s entry into a market. First, Wal-Mart, as a more productive firm, produces fewer but higher-paying jobs. Second, there is an agglomeration of retail shopping centers in proximity to Wal-Mart. Third, firms in outlying regions move to regions with Wal-Mart to capitalize on travel externalities. Fourth, Wal-Mart’s entry could break existing monopoly power in an area. Fifth, Wal-Mart’s prices are lower, which causes lowers prices in the sector overall. Wal-Mart’s entry into a market creates more overall employment. 

Studies of Wal-Mart must take into account endogenaity, that is whether an area is growing or declining economically prior to Wal-Mart’s arrival. Indeed, it seems that Wal-Mart is entering places that have lower rates of economic growth. Hence, lower or higher unemployment cannot necessarily be correlated with Wal-Mart unless one controls for endogenaity. In addition, there is no evidence that Wal-Mart is causing urban sprawl, though Wal-Mart stores certainly are following it. There is, too, no evidence that Wal-Mart is disrupting social cohesion. With regards to antitrust concerns, regulators should watch Wal-Mart’s activities carefully, especially its request for a higher minimum wage. Finally, the corporate social responsibility community needs to be more critical of local governments’ tax incentives for Wal-Mart.

Chris Holling
Global Insight

Wal-Mart’s growth has generated tremendous debate. For this reason, Wal-Mart commissioned Global Insight to study the company’s economic impact. Global Insight performed this study with full access to Wal-Mart’s data and was fully independent. Global Insight reported its findings along with pro- and anti-Wal-Mart papers to an independent advisory board of economists retained by Wal-Mart.

The report concludes that Wal-Mart is economically positive for the United States because it does offer lower prices by championing innovative methods of managing its distribution and supply chain. There is no evidence that Wal-Mart pays lower wages than other retailers. Many people apply for Wal-Mart jobs, and Wal-Mart does pay the going market rate for labor. When it enters an area, Wal-Mart brings more jobs and higher real income. It is important, too, to note that Wal-Mart accounts for only 6 percent of retail employment and as such cannot pay below market wages. 

On the national level, Wal-Mart has directly raised total factor productivity, impacting all areas of its supply chain along the way. In addition, Wal-Mart lowers prices and increases real consumer purchasing power in the economy overall. The consumer savings Wal-Mart has provided over the years are significant. Wal-Mart is able to offer lower prices by increasing total factor productivity, not by lowering wages. 

Panel IV: Lessons from Wal-Mart: CSR in the Real World

Russell Roberts
Hoover Institution

To measure the overall effect of Wal-Mart on society would be a difficult undertaking. Nevertheless, members of society continue to criticize the enterprise for providing scant compensation and benefits to their associates. However, they fail to realize that the wages of Wal-Mart’s workers are actually set by its competitors in the market.

Therefore, if Wal-Mart would rather act like a family than a profit-maximizing business it could increase its wages. Wouldn’t it be great if the world at large was run like our families are? To answer this, society must ask if they would rather rely on someone motivated by money or by love. Relying solely on our friends and family would require people to reduce their standards of living back to subsistence because people in general do not have enough friends to fulfill all their material and non-material satisfactions. Rather, relying on strangers motivated by money, frees up friends and family to specialize in doing what they do best--being good companions.

Frank Dixon
Innovest

CSR is not about doing good things; rather it is about holding firms accountable for the costs they bear upon society. If companies are not held accountable for their actions then they have no incentive to act responsibly. In fact, in a competitive market, companies often have a greater incentive to act in a way that may hurt society.

Furthermore, the earlier versions of CSR and socially responsible investing (SRI) often remove value away from a firm because they focused on compliance and charitable giving. However, CSR can also add value to a firm by encouraging waste management, enhancing reputation, and improving the quality of services and products. Moreover, CSR can improve a firm’s relationship with its community, which can facilitate in the firms efforts to open new stores, to have greater access to new resources and markets, and to attract a higher quality work force.

Therefore, the reason why Wal-Mart follows the regulations set by CSR is not primarily based on social obligations, but rather because it is a good business strategy for the firm. According to Lee Scott, the CEO of Wal-Mart, the enterprise is committed to three goals. These include using 100 percent renewable energy, producing zero waste, and making sustainable products. In order to achieve these goals, Wal-Mart must implement changes within its current system.

In order to improve the overall system of their business, Wal-Mart is focusing on making changes that can be done quickly and simultaneously add a lot of financial value to the firm. Furthermore, Wal-Mart is incorporating innovative projects to their business system and focusing on ways to lower the impacts of their business that will benefit their community as well as the firm.

However, Wal-Mart must realize that good CSR will help their business only up to a certain point, and beyond this point mitigating their impacts further will increase costs and eventually force the company out of business. In short, companies must be held accountable for their actions, but this must be done in a practical manner that is either profit enhancing or profit neutral.

In the future, new forms of CSR will focus on systemic issues, such as corporate level activities and cooperation between firms and community members to encourage systemic changes.

AEI researcher Bjoern Seibert and AEI interns Daniel Kaplow and Sapna Thakkar prepared this summary.