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June 13, 2008

When Principles Pay

Geoff Heal
Paul Garrett Professor of Public Policy and Business Responsibility
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We’re living in an era of growing corporate social responsibility (CSR), marked by more and more transnational corporations — from Nike to Starbucks to BP — going above and beyond what is legally required of them in terms of ethical social and environmental behavior.

After the deregulation of the Reagan and Thatcher eras, corporations did not become ethically focused overnight. So how can we account for this?

What I’ve found is that there’s been a shift in corporations’s mindset about the relation between high ethical standards and the bottom line, which might best be understood as “enlightened self-interest.”

Corporations now see that a narrow understanding of self-interest is going to hurt them in the long run. Thanks to globalization, corporations have had to make significant ethical decisions. For example, when expanding into regions of the world where there is little corporate governance legislation (or where it’s not implemented), U.S. corporations face the question: “Should we operate according to U.S. standards, or should we take advantage of the fact that this country’s standards are lower than ours?”

Corporations have learned that operating according to the bare-minimum ethical standard does not serve them well in terms of both public image and bottom line. Quite a few corporations had to contend with consumer backlash, boycotts and significant declines in sales thanks to NGOs who called attention to subpar practices relating to labor and the environment.

The capital markets have also provided incentives for corporations to behave responsibly. Roughly 10 percent of all professionally managed funds are explicitly designated as socially responsible investment funds with prominent environmental, social or ethical components — and this does not include the many other funds, such as University endowments, that also take these aspects seriously. It is therefore reasonable to say that approximately 25 percent of all professionally managed money has some socially responsible component attached to it.

The bottom line is that companies have learned that abiding by a narrow understanding of self-interest is going to hurt them in the long run. And we’ve seen evidence of how ethical behavior is good for the health of organizations of all sizes, across all industries — particularly those that sell directly to consumers. Risk reduction, lower employee turnover, cost savings, increased profits and stability in the stock market are just some of the benefits companies have experienced by taking CSR seriously.

It’s becoming clear to both corporations and their consumers that we all affect one another, and in some ways, we all depend on one another.

Comments

by JasonM | June 13, 2008 at 2:22 PM

I agree that the free market has done a decent job of policing itself so that corporations have it i ntheir best interest to abide by the "higher law". But I am troubled when social/moral relativism defines what is or isn't socially responsible. There is no black and white on what is or what is not acceptable. For instance, there is general consensus that investing in a company that does business in or with Sudan is bad. But I've also heard that any money that touches Big Oil is bad. Who decides what is good or bad? I trust that markets can ultimately decide this, but sometimes outspoken special interests from both sides of the "issues" spectrum can have undue influence. But on balance, special interest funds are excellent because they drive certain behavior and are transparent about their objectives: maximize returns without compromising standards. I'm sure there is some study that shows causality between these types of funds and their rates of return vis a vis the general market. What I don't appreciate are large funds (i.e. Calpers) that have a sole purpose to maximize the returns of their constituents (i.e. teachers), yet take a moral high ground regardless of their participants viewpoints. That is dangerous ground.

by AdamR | February 02, 2010 at 10:16 AM

Excellent article and great point JasonM. I share the same concern. It's a wonderful thing when individuals choose socially responsible investments on their own. However, should SRIs be chosen by fiduciaries when the primary objective is to maximize returns at an appropriate level of risk? I found a good article that suggests social responsibility and return maximization can occur with the same investment. (Or at least this was the case last year!) Maybe markets and investors, both institutional and individual, are beginning to truly value social responsibility. http://www.financial-planning.com/news/Woll-Trillium-SIF-2665566-1.html

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