Leo Martin is a director and founder of GoodCorporation, the corporate responsibility standard and is the principal character in the BBC’s series, Good Company, Bad Company; in this the second of a new series ‘CSR and beyond’ Martin looks at how to make a business case for corporate social responsibility.
In the last article we put forward the argument that corporate responsibility is not philanthropy, marketing or glossy reports. Instead we argued that it is about treating all stakeholders fairly and implementing good practices to make sure that responsible business policies are in place and that stakeholder feedback is used to refine and develop these policies.
One of the key questions is whether or not these types of policies actually pay. In this article we set out the argument that the usual (macro) business case for corporate responsibility is actually very weak and is damaging the proponents of responsible business behaviour.
The rationale for corporate responsibility has emerged out of the so-called socially responsible investment (SRI) community. This community started with church investments and union investments but has now became more widespread, albeit still a very small proportion of all funds invested.
These investors have been motivated by a desire to avoid ‘bad’ companies, typically starting with the manufacturers of tobacco, alcohol and arms. The approaches have also moved into wider aspects of responsible behaviour including environmental protection and labour standards. More recently the SRI community has taken to buying the shares of ‘bad’ companies and then trying to change their behaviour from inside.
Throughout its history the SRI community has been interested in trying to demonstrate not only that their investment strategies are morally right, but also that they pay. The logic is, if only we can prove that ‘good’ companies out perform ‘bad’ ones then we will be able to ride off happily into the sunset, making money and promoting principled behaviour at the same time. This will absolve our consciences and make us rich.
Unfortunately the evidence does not exist to support the SRI community. Many studies have now been conducted which try to show that one group or other of ‘good’ companies out performs a group of ‘bad’ companies. But for every study that shows a positive correlation, there is another one that shows no correlation or a negative relationship.
The problem with these types of investigations is that they’re fundamentally flawed. They are not actually differentiating between good and bad companies at all and therefore it is no surprise that they find no conclusive relationship between profitability and principles.
The main issue is that they look at listed companies only, a very narrow set of organisations to study.
They might be the most interesting from an investor’s point of view (because they are available to invest in) but they are not necessarily helpful for assessing the relationship between goodness and profitability.
One piece of compelling evidence comes from the most recent poll of ‘Best Companies to Work For’ published by the Sunday Times. In this poll of 100 large companies only eight are listed companies. The rest are all private, foreign-owned or have some other type of ownership structure like mutuals or co-operatives. Therefore any study of goodness and profitability should look at the different range of organisations and not just those that are listed.
The second problem is about definitions of good and bad. The studies conducted on listed companies are usually based on a very flimsy understanding of the companies and their differences.
Typically they are based on questionnaires, completed by the companies themselves, on topics such as the policies deployed by the company. There is obviously a problem here that companies may not answer honestly.
A more serious issue is that a company may well have an environmental policy or an equal opportunities policy, but it may not work in reality. It is very difficult for these questionnaire-based approaches to pick up the real story of which companies have good policies that work and which do not.
The third problem is that these types of studies have naïve sector distinctions. They often exclude tobacco manufacturers, but then include the marketing company, the distribution company and the retailer of the cigarettes, even though these companies may profit more per cigarette than the manufacturer.
Not surprisingly then these studies have a very false set of ‘goats’ and ‘sheep’ which they try to compare. Typically they assess performance over three or five years, which can be very misleading. It is also inadequate, when the corporate responsibility issues at stake are usually about very long term behaviour and certainly the underlying beneficiaries of most of the investors (that is you and me) are usually trying to save for our retirement and want investments to make money over 20 years not three months.
It is interesting to note that at the height of the stock-market boom there were a number of studies showing that good companies were out-performing bad ones.
But the good companies were weighed heavily towards technology stocks and new services businesses (because they have relatively lower environmental impacts and do not operate in the excluded sectors such as tobacco, arms and alcohol).
When the bubble burst, the same studies showed that good companies under-performed bad ones. This illustrates the point that the time frame used is too short and the way of distinguishing between good and bad companies is wholly inadequate.
These studies damage those of us who want to show that principled business behaviour pays. To make this case we need to look elsewhere. For HR and CSR managers convinced that corporate responsibility is the right path but need to persuade sceptical colleagues the answer is to avoid all the stock market based studies. They will not help make the case internally. Instead the business case can be found by looking at the micro issues and how they add up to profitable business behaviour.
The way to build upon the reasoning for corporate responsibility is to break down good behaviour into each of the individual business practices (treating customer complaints seriously, consulting employees, paying suppliers on time) and to recognise that each of these practices has a business case.
These may be long-term in some cases, the payback may not be spectacular in others, but overall the logic is compelling. By bringing together diverse activities that affect each of the different stakeholders the organisation can ensure that a ‘fairness’ and ‘responsibility’ test is applied to each one.
This builds up consistent good practice throughout the organisation. Together these elements of fair and responsible behaviour combine to make a successful and profitable business culture. In the next article we will explore how to make this (micro) business case in more detail.
Other articles in this series
