CSR - Much Ado about Nothing?
Part II: Let's talk about "Responsibility"
April 12th 2020 - Edition #31
Last week I dedicated a few words on the appeals and perils of shareholder primacy, and ended with a cautionary note on the often uncomfortably-close relation between the prioritization of corporate profits and (temptations of) corporate irresponsibility. Many businesses around the world are becoming increasingly aware of this slippery slope and are committing significant efforts to not only curb misconduct within their ranks, but also to position themselves as sustainability pioneers. Indeed, the idea that firms have a responsibility to shareholders and only shareholders seems like a mantra of the distant past. Yet, before we rejoice the advent of the responsible, moral, and stakeholder-oriented firm, let us first understand what this firm looks like.
In contrast to last week’s shareholder primacists, stakeholder theorists argue that “values” are an inextricable part of doing business. The reason is two-fold. First, the fiduciary duty of managers to shareholders does not relieve managers of their broader ethical obligations to which they are bound in their daily lives. If managers do not (and rightfully so!) mistreat their neighbors at home, they shouldn’t mistreat their neighbors at work either (e.g. by polluting their rivers). Second, since the right of property ownership is not unrestricted, shareholders should use their property (i.e. the company) responsibly in the same way that a dog owner responsibly restrains her dog from biting a passerby.
But if businesses (and their managers) have responsibilities that transcend shareholders, an important question is what exactly are these responsibilities? This may not be as simple as it sounds. In fact, as an exercise, challenge yourself to define in one sentence -and as concretely as you can- a firm’s responsibilities to non-shareholders. Chances are you will soon realize two things. First, unlike profits, the responsibilities you are considering are more subjective and difficult to quantify (for example, “dignity” and “meaningfulness”). Second, different stakeholders may require different ‘modes’ of responsibility. For example, you may find yourself thinking about “protecting” the environment but “improving” employees’ livelihood.
The difficulty conceptualizing firms’ responsibilities towards non-shareowning stakeholders is perhaps one of the key challenges facing a stakeholder-oriented view of the corporation (especially compared to the simplicity of shareholder primacy’s “shareholder wealth maximization”). But that doesn’t mean we should scrap it entirely. Below I highlight a ‘responsibility framework’ that may be useful for managers to consider as they navigate the tricky landscape of CSR. Building on the example above, this framework originates from the field of human rights and pertains to individuals’ own rights and responsibilities. In essence, the framework proposes three ‘types’ of responsibilities that all individuals have (albeit to varying degrees). What we would morally expect or not expect from individuals, in turn, serves, as a useful way to gauge the responsibility of business.
There are certainly caveats to this approach— including the notion that some firms are likely to be judged differently (more critically) if they are endowed with greater resources (e.g. financial slack, branding) that allows them to make positive change. But this also applies to individuals in that we would expect billionaires and celebrities to ‘give more’ to society. In essence, it is a matter of degree of responsibility rather than the mere presence or absence of it. But first, let us go over the three responsibilities briefly:
- Do no harm. As individuals, one of our basic responsibilities is not to hurt, violate, or degrade others. This is (hopefully) something most people will agree with, and -by extension- shouldn’t be any different when we talk about firms. Of course, the definition of “harm” is itself contentious (what you and I may consider harmful is likely to differ) but regulations and legislation typically establish an unequivocal -albeit minimum- standard that firms can rely on to fulfil this responsibility. For many (smaller) firms, simply sticking to the law (e.g. with respect to implementing and enforcing safety standards in the workplace) is an effective way to minimize harm.
- Do not capitalize on unjust conditions for personal benefit. We shouldn’t benefit from opportunities that are unjust/unwarranted. Even at the individual-level, this is clearly more controversial than the above responsibility. I tend to ask students in class the following question: assuming that next week’s exam is leaked online, who of you would expect others in class to take a look and prepare for that exam accordingly? The number of positive responses I receive is typically substantial. The same applies for firms. To what extent do firms have a “responsibility” to pay their outsourced workers in emerging economies more than the government-mandated minimum wage if that wage is low? As alluded to above, responsibility can best be conceptualized as a spectrum—at one extreme is sticking to the law (where the do no harm responsibility ends), on the other is flat out refusing unjust opportunities (refraining from low-cost outsourcing altogether or paying higher wages at the risk of violating the efficiency-seeking rationale behind such internationalization).
- Promote the well-being of others. Many of us strive to improve the livelihood of others. But to what extent is it our “responsibility”, in the true sense of duty, to do so? Put differently, are individuals that do not actively strive to benefit others irresponsible, or are they merely self-centered and selfish? The implication of this debate for firms is clear: are firms obliged to strive towards the betterment of others in their pursuit of profit, or are those firms that do so going the extra mile? Another challenge is what are the limits to bettering others. How far should you -as an individual or a company- go to help others without compromising your own aspirations?
In many respects, it is useful to think of the above as a hierarchy of responsibilities. Lower-level responsibilities (do no harm) are usually easier -and cheaper- to attain, but they are likely to serve merely as hygiene factors rather than means for competitive advantage. Customers are unlikely to flock to a company just because it does not exploit its workers. At higher-levels of responsibility, firms are presented with the opportunity to stand out as proactive social agents (think of the Patagonias of the world). But higher-level responsibilities also typically necessitate serious investments and a radical organizational cultural shift to ensure that a sustainability mindset permeates the entire company and encompasses its members.
So, what should managers do? The first step is to recognize that responsibility is not a monolithic concept with unequivocal meaning across all stakeholders. Responsibility is a matter of degree, and comes in varying forms. A company may be perceived as socially-responsible on one dimension (e.g. if it doesn’t bribe foreign officials) but simultaneously socially-irresponsible on another (e.g. if it merely operates -and thus pays tax- in authoritarian countries). Second, before even considering higher levels of responsibility, managers would be well-advised to first ensure that the lower-level responsibility of “do no harm” applies consistently across business units and markets. This is not just a matter of ethics; some of the world’s largest companies have seen their ambitious social initiatives fall flat because they could not simultaneously rein in adverse behavior occurring in other parts of the business (for instance, the fact that BP was the first company to publicly acknowledge the need to address climate change is often eclipsed by its disappointing record of oil spills and safety lapses). Third, managers can (and should!) consider investing in fulfilling higher-level responsibilities but must also realize that implementing CSR as a strategy for competitive advantage necessarily entails some tough choices. An aversion to unjust conditions means that managers may find themselves overlooking markets and opportunities that their ‘less-responsible’ competitors would not. Similarly, a commitment to the promotion of others’ well-being frequently means investing in social initiatives with uncertain economic gains. For some managers today, this may be a step too far and that is understandable. But this should not be an excuse for businesses to abandon their responsibilities to stakeholders entirely. To borrow from last week’s message: “[That companies] refrain from misconduct and “do no harm” against vulnerable stakeholders who lack the capacity to mobilize and articulate their grievances against the firm is a minimum standard we can all agree on, even if we disagree on whether companies have a responsibility to go further and “do good”.
Omar El Nayal
Assistant Professor of Strategy
Católica Lisbon School of Business and Economics
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