Does CSR actually pay off?

Economy, Environment

After asking the question “Corporate Social Responsibility or just a Marketing Tool?!” and writing about Social Entrepreneurship I finally want to examine what professionals say concerning the profitability of CSR and whether companies should even bother with investing into the society and raising social welfare. So, I will try to outline some opinions experts in this field have on this question.

As an opponent of CSR Aneel Karnani, professor at the University of Michigan – Ross School of Business, claims in his article “The Case against CSR” that “the idea that companies have a responsibility to act in the public interest and will profit from doing so is fundamentally flawed.”

He warns that “It’s not surprising that this idea has won over so many people—it’s a very appealing proposition. […] But it’s an illusion, and a potentially dangerous one.”

He explains his position by saying that the main responsibility of a manager in a company, in most cases, is to act in the interest of its shareholders, so-to-say, to make the highest possible profits. And this would stand in direct opposition to acting for social welfare, as this would always incur costs and therefore lower profits. Managers would be paid to bring profits to the companies, otherwise they get fired and are replaced by another person who will then try to pursue the interest of the shareholders better. So, it should be irrational, says Karnani, for a manager to act against that will.

He insists that CSR, which as per definition are “voluntary activities undertaken by a company to operate in an economic, social and environmentally sustainable manner” therefore can’t exist with for-profit organizations. Organizations seeking profit will probably contribute to social welfare but only because it will profit themselves in return.

But Karnani also gives an exception to this assumption. Only when owner-operated businesses choose to accept decreasing profits for the sake of social welfare they clearly do not fall under that assumption but do an admirable thing by giving some of their fortunes back to the society.

Moreover, Karnani is of the opinion that profit is the right goal for companies because profits generate taxes that allow governments to spend money to tackle problems in the society. Therefore he argues, “as society looks to companies to address these problems, the real solutions may be ignored“, what would mean that CSR even brings negative effects for the society and not only to the business or the manager.

Mike Lawrence (Chief Reputation Officer & Executive Vice President at Cone Inc.) shares the view that companies should have profits as their first priority, but that CSR is “the right approach for a company’s long-term viability… and its bottom line” as he claims to “see from experience that profit and the public interest are interdependent.”

He argues that companies must invest into CSR, first, because prospective employees are more likely to accept a job at a socially responsible company what will also increase their morale and decrease training costs, second, corporations can expect support from local authorities in turn for CSR programs, thirdly, costs will be reduced when environmental impacts are reduced and that CSR offers even more advantages.

To back up his arguments he refers to a study by AT Kearney that shows that “companies committed to sustainability had a 15 percent stronger financial return even in the down economy” and also adds that Walmart reportedly could save $1 mill. in costs just by turning off some lights in 4000 employee break rooms.

Looking closely at Lawrence’s and Karnani’s arguments, we can detect that both pursue a strictly capitalistic view but that, on the one hand, Karnani insists that any corporate spending, as responsible as it may be, towards the society contradicts the assumption that the government should maintain social welfare but, on the other, Lawrence totally supports the idea that things that can benefit the community or the environment and indirectly also benefit the company are to made use of. That means that the calculation of profitability and evaluation of Corporate Social Responsibility, when properly planned and practiced, actually is a matter of economic theory and highly depends on one’s economic perceptions.


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