By Keren G. Raz, NYU Law Social Enterprise Fellow and Apollo Management’s Socially Responsible Investing Associate
Karnani, Professor of Strategy at the University of Michigan’s Stephen M. Ross
School of Business, made the case against corporate social responsibility (CSR)
in the Wall Street Journal. Hundreds
of comments flowed in arguing the case for CSR. Having spent the past few
months deeply immersed in the CSR world as Apollo Management’s Socially
Responsible Investing Associate, I thought I would weigh in on where Karnani is right in his case against CSR and what he gets wrong.
TRUE: In practice,
business goals do conflict with CSR program goals, and where they do, business
Karnani wrote, “In circumstances in
which profits and social welfare are in direct opposition, an appeal to
corporate social responsibility will almost always be ineffective, because executives
are unlikely to act voluntarily in the public interest and against shareholder
interests.” Karnani’s statement that profits and social welfare at times
conflict has been criticized as outdated. One person wrote in response, “We see
from experience that profit and public interest are interdependent.” This
critic’s comment through is an oversimplification.
Generally, the two may be
interdependent, but Karnani is looking at the situations where the two
conflict. He is right: business and CSR goals will experience conflict at some
point in time for any given company. A hypothetical illustrates this point. Company
A has hired a manager to oversee its operations. The manager now has a choice
to make as he/she puts together a budget. He/she can retrofit all of the
company’s smokestacks with new and expensive carbon-reducing technology that
the company can barely afford, or the manager can leave the current smokestacks
alone. Regardless of your opinion on what the outcome ought to be, it is
crucial to see that there is a conflict here between business goals and social
welfare goals. An acknowledgement of this conflict arms us with additional
information and provides us with a good starting point as we determine the root
causes and most appropriate solutions to a problem.
ERROR: Karnani leaves stakeholders out of his analysis
In discussing how we might arrive at a solution to social problems, Karnani lists government regulation, citizen activism, and corporate self-regulation as the main players. Crucially, in this statement, Karnani leaves out the stakeholders who also play a role, constituencies including consumers, employees,
suppliers, and others who are necessary for a business to succeed. Employee
strikes in China make poor working conditions unprofitable for corporations.
Consumer preferences for organic foods make putting organic food on the shelves
a smart decision for Wal-Mart. Cheaper energy saving technologies, provided by
suppliers, motivate companies to buy them and save on costs. In other words,
where profits and social welfare conflict, stakeholders may hold the answer to
realigning incentives such that the two no longer oppose each other.
Stakeholders are not only
noticeably absent in Karnani’s piece, but also detrimentally so, for the
absence affects his analysis. Where a corporation is vigilant about its
consumer CSR interests and desires that affect long-term demand for its
products, the corporation designs a good CSR program to anticipate these needs.
In this way, a good CSR program identifies strategic social and business
opportunities. While there may not be a perfect match at times between business
interests and public interests, a CSR officer can find the synergies that
continue to ensure alignment. Thus, for consumers and other stakeholders who
want to see companies act as good corporate citizens and for companies that
want to stay relevant, a CSR program is now vital. Stakeholders and CSR programs also hold the keys to solving problems.