Does It Pay for a Business to Do Good?
Newswise — As Google recently illustrated when it compromised its “Don’t be evil” motto to do business in China, socially responsible corporate behavior does not always go hand in hand with the bottom line.
In fact, while there may be a business case for doing good, there is no evidence that more responsible firms perform better financially, according to Haas Professor David Vogel, author of the new book, “The Market for Virtue: The Potential and Limits of Corporate Responsibility.” Similarly, socially responsible investment funds don't deliver higher or lower returns than any other fund, Vogel writes.
“CSR does make business sense for some firms in specific circumstances,” Vogel writes of corporate social responsibility. But “there is no reason to expect a convergence of CSR strategies any more than companies can be expected to converge on any other strategy,"
Google underscored the potential conflict between profits and good corporate conscience when it censored search results in China in order to continue doing business in the world’s most populous country. A Congressional panel subsequently lambasted Google and rivals Microsoft and Yahoo for operating in China, where Internet censorship is widespread. In addition to Google, Yahoo has drawn sharp criticism for giving Chinese authorities emails of citizens who were then arrested.
“Global firms that have to balance respect for human rights with business imperatives have few easy choices,” Vogel notes. “Moreover, while more irresponsible human rights practices can threaten a firm’s international reputation, they can also restrict where it makes investments and loans, placing it at a competitive disadvantage.”
In his book, Vogel examines several cases, including Nike and Shell, where pressure for good corporate citizenship led to improvements in working conditions and environmental practices. More challenging, however, is balancing respect for human rights with business imperatives –¬ an issue that confronts Google and its rivals in China today. For instance, Vogel notes in his book that Levi Strauss drew wide applause for deciding to phase out production in China in 1993, but then had to reverse its policy five years later to remain competitive.
Research to date offers no conclusive evidence that corporate social responsibility, or CSR, affects profits, according to Vogel. And over the long term, social responsibility's impact on a company's financial performance is typically dwarfed by other factors, Vogel adds. Just consider the many firms known for their socially responsible behavior that have hit on hard times, including Ben & Jerry's and the Body Shop International.
Similarly, more than 100 studies of social responsible investing, or SRI, funds showed returns are neither harmed nor helped by including social criteria in stock picking. SRI practices –¬ which typically prohibit investing in such industries as tobacco, alcohol, defense and nuclear power –¬ failed for foresee recent corporate scandals involving companies such as Enron, WorldCom, and Adelphia, Vogel points out. Ironically, Enron was widely respected for its CSR and held in a number of SRI funds.
Still, the lack of a proven connection between responsible corporate behavior and profits doesn't mean there is no business case for virtue, according to Vogel. Obvious payoffs of CSR include a better reputation, improved employee morale, and lower risk of boycotts. But rather than viewing CSR as a defining factor of financial success, Vogel frames it as one dimension of corporate strategy – no different from advertising or research and development – and like any corporate strategy, it does not necessarily improve a firm’s financial performance.
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