More on Corporate Social Responsibility

I recently wrote an article for SHRM on Corporate Social Responsibility, which took further the address at the Humane Capitalism Conclave and the SHRM event which I've already posted earlier. This one explains a bit more about my viewpoint on CSR.


CORPORATE SOCIAL RESPONSIBILITY: CHASING A CHIMERA?


This is not an article on economic theory. But, in order to understand why I believe that Corporate Social Responsibility (CSR) is an unsustainable concept in the context of the capitalist system within which business today operates, it is necessary to look at what economic theory says about capitalism itself. While the analysis of economic theory that follows is a bit simplistic, it will be sufficient to explain the factors that underpin the capitalist system.

Let us begin the journey with Adam Smith. In The Wealth of Nations (1776), Smith presented the capitalist system as the interplay of capital, labour and land (the factors of production) and profits, wages and rent (returns on the factors of production respectively), within a structure of market exchanges involving production, income and expenditure. Smith described an “invisible hand” at work, created by the market forces of supply and demand, which in turn are the result of the independent decisions of countless individuals. Smith posited that it is this invisible hand that drives markets to a state of equilibrium. Underlying these decisions is the pursuit of self interest (by consumers) and the pursuit of profit (by owners of capital). The point to note is that owners of capital will productively employ capital where it yields the maximum profit.

Karl Marx believed that this theory was flawed. According to him, capitalism has inherent contradictions that are not explained by Smith’s theory. Marx postulated that capitalism promotes the production of commodities that have an “exchange value”, over the satisfaction of human needs through commodities that have a “use value”. This is the conflict that is inherent in capitalism and it is driven by the pursuit of profits. According to Marx, the biggest failure of capitalism is the inability to maximise collective welfare as a result of the pursuit of individual interest in the market.

Max Weber, in his work General Economic History, defines capitalism as a system in which enterprises engage in industrial production in the pursuit of “net profit” which is rationally calculated. By introducing the notion of net profit as an accounting concept, Weber further accentuates the profit motive inherent in an enterprise operating in a capitalist system.

Joseph Schumpeter introduced the concept of “creative destruction”, wherein an entrepreneur exists not to compete, but to change the nature of competition. Through innovation, either the productivity of the factors of production is enhanced or new goods are produced. This leads to profit. This process of creative destruction sweeps away old industries and methods of production, creating new markets or segments in the pursuit of profit. In this scheme of things, entrepreneurs innovate, not for the greater social good or to satisfy human needs, but to build a competitive advantage in the pursuit of greater profits.

Finally, John Maynard Keynes, whose thoughts have been resurrected in the wake of the global economic downturn, explained the role of money and the capital and labour markets in the capitalist system, in his seminal work, The General Theory of Employment, Interest and Money (1936). Without going into the details of this theory, which explained the role of money and interest rates in capitalism, one assertion stands out: capitalism is a monetary production economy which operates with the objective of realising profits.

What do we conclude after this quick look at economic theory over the last two hundred and thirty years? While we’ve just skimmed the surface, there are three inescapable conclusions.

First, capitalism is driven by a single minded obsession with profitability. Second, capitalism is not based on social or collective action, but on the pursuit of self interest. Third, the primary objective for the existence of an enterprise is generating profit for its shareholders, the owners of capital.

And that means that everyone in the system--whether it is enterprises or individuals like you and me—is driven by self interest.

Is it any surprise, then, that larger objectives like social and environmental issues and the quality of life have been subordinated to the pursuit of profit?

I can see some readers saying that this conclusion is not new. We’ve all known all along that the pursuit of profit lies at the heart of capitalism. We really didn’t have to study the theories of five famous economists to reach this conclusion.

True. But the point I am making is this: we’ve just seen how economic theory, irrespective of the ideology of the economist in question, supports the profit motive as the basis for an enterprise operating in the capitalist system.

But, where is the economic theory that supports the contention that pursuing social good or--as it is termed nowadays--social responsibility, is a key objective of an enterprise in the capitalist system?

And that brings me to the problem I have with the concept of CSR. It has an inherent conflict with the concept and operation of the capitalist system.

Don’t get me wrong. I have nothing against the objectives of CSR. Indeed, they are laudable. It is in the implementation of the concept that I see an inherent weakness that will prevent CSR from ever becoming a tool that will reshape the factors influencing social and environmental welfare.

This is not to say that CSR has not had or will never have any beneficial impact on social welfare or the environment. Far from that. However, I believe that this impact, however positive, will be limited in its scale and magnitude. From that perspective, the concept of CSR has been hyped beyond its limitations.

Moreover, quite apart from the limitation of the ability of CSR to impact social and environmental welfare on a large scale, there are drawbacks inherent in the concept, which dilute its effectiveness as a tool of welfare.

To begin with, take the words “social responsibility”. If, after the preceding discussion, anyone still believes that the words “social responsibility” have a place in capitalism, I will urge them to delve deeply into the economic theories I have referred to, before reading the rest of this piece. The only responsibility an enterprise has, in capitalism, is to deliver profitability to the owners of capital. I think that, too, has been conclusively established.

The problem with CSR is that it tries to modify the behaviour of a capitalist enterprise by imposing a social objective that is in conflict with its objective of profit. And this can never be as simple as it sounds. CSR is, in essence, an attempt to change the nature of the capitalist system. It espouses the philosophy that an enterprise exists in a community and therefore has a responsibility for the well being of the community. The philosophy is noble and I have no quarrel with it. However, capitalism is not a social or collective socio-economic system as I have demonstrated earlier. Depending on your perspective, you may view that as a serious flaw in the system or the critical factor that makes it the dominant system in the world today. But that doesn’t change the nature of the beast. Let’s face the truth: there is no place in capitalism for social objectives, unless they are profitable in themselves.

The second issue I have with CSR is that this philosophy of giving back to the community is linked closely to the reputation and image of the enterprise. I believe that this is rather a tenuous basis for the pursuit of socially responsible initiatives. While capitalist enterprises strive to be viewed as ethical in their pursuit for profits, that endeavour stems from the fact that their profitability would be adversely impacted if their ethical image were to suffer, since other enterprises would not do business with them for fear of the risk involved in dealing with a firm that is viewed as being less than ethical. There is nothing else in the concept of reputation and image, apart from this profit driven ethical orientation, which would motivate a capitalist enterprise to value reputation or image, especially when it is linked to social responsibility.

The third drawback of CSR is the fuzziness of definition. Ask a clutch of enterprises to define CSR and you will get a variety of definitions. In many cases, CSR really boils down to philanthropy, especially where the enterprise is driven by a promoter family with philanthropic beliefs. And, philanthropy is not a responsibility. It is a philosophy, a way of life.

It is this variability in the definition of CSR and the flexibility of interpretation that opens it up to misuse and affects its implementation. Misuse, because enterprises often pay lip service to CSR and ignore situations where there is a genuine human need, concentrating instead on situations that offer them the opportunity to enhance their reputation and image as a socially responsible organisation. What this means is that, in the pursuit of image and reputation, genuine social or environmental welfare is often neglected, and CSR fails to achieve its objective.

Even where enterprises are genuine about their CSR initiatives, they often focus on areas that are far removed from their core business. This leads to problems of consistency and sustainability of the initiatives. If the CSR activity is not integrated with the business, it becomes difficult to sustain in the long term, unless there is a strong philanthropic motive driving it. Moreover, in such cases, the CSR activity is often driven by the vision of the CEO. It is quite common to find that the nature of the activity and the beneficiaries change when the CEO changes. And, in the long term, no one really benefits.

In summary, therefore, CSR has great objectives, but the concept itself is open to misuse, and because of the variability of interpretation inherent in its definition, it can often be poorly implemented. Finally, as a concept that is imposed on an enterprise, it conflicts with its core business objective, and ends up being a poor tool for driving social and environmental welfare.

Reflections on Humane Capitalism

I was invited as a keynote speaker at the Humane Capitalism conclave in Gurgaon on 24th January 2009. I thought I'd reproduce my address to the conclave.

REFLECTIONS ON HUMANE CAPITALISM


When I was asked to speak at this conclave, I began thinking about the topic. I reflected on the meaning of Humane Capitalism. On Corporate Social Responsibility (CSR). And on what this means for society. I would like to present today, my reflections on Humane Capitalism, and some of the conclusions I drew from those reflections. I don’t believe that I will be saying anything new today. But I think that it is important to have a perspective on the topic of Humane Capitalism, if our discussion during the day is to lead to any useful conclusions.

To start with, I am going to strike a discordant note. I have a problem with the concept of CSR. For 4 reasons:

a) It is difficult to define
b) It includes the word responsibility
c) It includes the word social
d) It is associated with philanthropy and commitment to a cause or causes

Any concept that is difficult to define is open to interpretation and we see CSR being used variously as an image building, media targeted, empty tool by most organizations. There are a few who genuinely undertake CSR activities that are truly beneficial to society, but they are few and far between.

By talking about responsibility, the concept of CSR becomes forced. It becomes an obligation. Which is at variance with the concept of capitalism, as I will shortly explain. I have a similar problem with the inclusion of the word “social”. That term, too, is at odds with the nature of capitalism.

Finally, philanthropy and commitment to a cause are also concepts that go against the grain of capitalism. Because of these issues, I believe--and this is a personal belief--that CSR is doomed as a tool for promoting Humane Capitalism.

In order to understand the need for, and the meaning of Humane Capitalism, we need to first review what capitalism itself is all about. In The Wealth of Nations, Adam Smith stated that, by acting only in their self interest, individuals will create the greatest good for the greatest number. These atomistic decisions of countless individuals, each aimed at fulfilling their own self interests, come together to create the market forces of supply and demand, which drive the capitalist system.

Capitalism, then, is based not on social or collective action, but on individual interest and profit seeking.

By definition, capitalism implies a distinction between classes. Ownership of capital is limited. There is a class division between owners of capital and workers who provide their physical or intellectual labour or services, in return for wages. Recent innovations in capitalism, like shares for employees, do not change the basic nature of the beast. And even in cases where employees own large shareholdings, due to their part ownership of capital, their interests align with the owners of capital.

Now let us look at decision making in the capitalist system. The owners of capital decide the productive purposes for which capital is employed. The objective: maximizing profits for the owners of capital.

This brings us back to the point I made earlier: at the heart of capitalism lies individual interest and profit seeking; whether it is the individual decisions made by consumers of goods and services or the owners of capital who decide where capital should be employed.

In fact, Milton Friedman says, in The Social Responsibility of Business Is to Increase Profits, published in 1970:

“The only responsibility of individual corporations is to engage in activities designed to increase...profits.”

Now, what does this mean for society?

First, economic growth, and consequently, social welfare (at least to some extent), depends on how well the owners of capital do. If they do well, then there is, or at least should be, according to classical theories of capitalism, prosperity, employment and other benefits to society, to the other class that works for the owners of capital. If it does not, then, as we can see today, there is an adverse impact on society in general.

What this also means is, that government stimulus is, therefore, aimed at the owners of capital, though the intention is to benefit society at large.

The other conclusion which follows from this discussion is that capitalism essentially involves a very delicate balancing act. There is a natural instinct in capitalists, due to the profit maximization objective, to control costs, which includes wages, since that impacts profits. However, there is an inherent interest to ensure that wages do not drop to sub optimal levels as well. Because, if this happens, the wage earners reduce consumption, as can be seen around us today, and this also has an impact on profits.

Second, the conflicts and contradictions of the traditional capitalist system arise from the profit imperative. Conflicts such as the exploitation of the working classes, issues of ecological sustainability and social welfare, the trend towards automation which leads to fewer jobs and the fear of increasing unemployment; these are all driven by the need to maximize profits. In some sense, we could conclude that conflict is inherent in the traditional system of capitalism.

Third, profit contradicts need. Goods and services are not produced only on the basis of needs. They are produced for the benefit of those who can pay for them, since only then can the profit imperative be fulfilled. This naturally excludes a large portion of the world’s population, whose needs go unfulfilled simply because they do not have the purchasing power to back their needs.

Fourth, there is an implication for geographical development, since those locations are encouraged for development, which contribute to the maximization of profits. This has led to lopsided development.

Fifth, the competitiveness inherent in the capitalist system encourages innovation as a source of increased profits. However, this innovation is aimed at fulfilling the needs of that section of society which can pay for the innovation.

Finally, growth is critical for capitalism. Organizations need to grow constantly, to continue increasing revenue and profits. The pursuit of globalization and new markets, new products and increasing market share, all stem from the growth imperative, which is closely linked to the profit imperative. Of course, all growth has to be profitable, otherwise it is not worth pursuing. Again, this has an implication for markets, and consumers who may not be seen to be profitable and are therefore excluded from sharing the benefits of capitalism, either through satisfaction of their needs or through providing them with employment.

The basic issue, therefore, with the traditional concept of capitalism, is the fact that no one in the system looks at the big picture. Of course, government does, but the government is not strictly a player in classical capitalist theory. Governments have flirted with the concept of the welfare state; the USA in the ‘60s and ‘70s for example; but even that concept seems to have been abandoned now.

Clearly, there is a need for a holistic view. Quality of life, the environment and social welfare should be the key drivers that determine what is produced and developed and how it is distributed. But how is that to happen when the intrinsic nature of capitalism is individualistic and not collective or social? Market forces will never consider these drivers while seeking economic equilibrium. Is the answer, then, regulation? But doesn’t that begin treading the territory of socialism?

How, then does one implement Humane Capitalism? While I hope that this series of conclaves can throw up an answer, I’d like to venture some ideas.

Let me begin by quoting Bill Gates, at an address to Harvard graduates in June 2007:

“We can make market forces work better for the poor if we can develop a more creative capitalism – if we can stretch the reach of market forces so that more people can make a profit, or at least make a living, serving people who are suffering from the worst inequities. We also can press governments around the world to spend taxpayer money in ways that better reflect the values of the people who pay the taxes. If we can find approaches that meet the needs of the poor in ways that generate profits for business and votes for politicians, we will have found a sustainable way to reduce inequity in the world.”

I believe this quote addresses the key issues that lie at the core of the need for Humane Capitalism. These key issues should determine the scope of and method for implementing the concept of Humane Capitalism.

Humane Capitalism is necessarily social in nature, and is, therefore, at odds with traditional capitalism. So how do we go about guiding the evolution of capitalism to this higher state?

I see opportunities within the traditional capitalist system, which can be developed further to create a system that is more humane.

First, I have mentioned the contradiction between profit and need and the resultant focus on those with purchasing power. However, in the world we live in today, there are opportunities for owners of capital to successfully and profitably pursue consumers who would not have been included in the traditional definition of consumers with purchasing power. I am talking here about the “bottom of the pyramid” concept, which has been advocated by Prof C K Prahlad and others. There are organizations today who have profitably produced and distributed goods and services to the poorer sections of society. In India itself, rural marketing for traditional goods has begun to gain traction; the concept of micro finance has proved that the bottom of the pyramid is profitable. I see this as evidence of an opportunity that can be pursued further.

Second, the global economy has evolved in the last 200 years. From being an industrial economy, we have now become a knowledge economy. Innovation and intellectual capital are the keystones of this new economy. And, as I have said before, capitalism encourages, and thrives, on innovation. This is another opportunity for Humane Capitalism to establish itself. With new and innovative channels of distribution being created, it is now possible to reach larger populations at lower costs. What this means, therefore, is that there is an opportunity to cater to consumers who would have been neglected earlier; either because the cost of distribution was too high to be economically feasible, or because the profitability from these consumers was too low to justify the cost of distribution. With communication and distribution costs reducing, the profit imperative should drive customer acquisition strategies, which will increasingly encompass less privileged consumers, and, over time, help in equitable distribution of goods and services.

Finally, boardroom strategies have also evolved over the years. The keywords in past decades were: results and financial targets. Today, when I interact with CEOs, I hear more about process development, cooperation, knowledge sharing. While financial targets will always remain the mainstay of strategy, and indeed, capitalism, strategy today combines the softer aspects of business with hard economic reality. This, then, is another opportunity for humane capitalism. The importance of the environment and the opportunities to profit from environmentally friendly business operations with the technologies available or being developed today will reinforce this opportunity.

In conclusion, I believe that Humane Capitalism is an end that can be achieved, if business recognizes the opportunities available and pursues them. With technological developments and greater process efficiencies, there is no reason why the conflicts built into the traditional capitalist system, should endure. Quality of life, the environment and social welfare should, over time, become integrated into the system as drivers of business growth. All that is needed today, is for business to become aware of the opportunities, and utilize the resources available to pursue the objective of Humane Capitalism.