Posted on: August 25, 2021
A quiet — and sometimes not-so-quiet — revolution is taking place in the corporate world. It centers around corporate social responsibility (CSR) and a concept that’s being discussed more and more often in boardrooms worldwide: purpose.
Since the rise of capitalism, making a profit has been the primary, if not the sole, objective of business. As Milton Friedman expressed it in 1970, “The social responsibility of business is to increase its profits.” This view – that corporations should focus on increasing shareholder value above all else – had gone more or less unchallenged for decades.
At the turn of the century, however, new ideas began to emerge, exemplified by Earth Day founder Gaylord Nelson’s pronouncement, “The economy is a wholly owned subsidiary of the environment.” In 2012, Larry Fink, CEO of the world’s largest asset manager, BlackRock, began issuing a series of extremely influential annual letters to CEOs in which he stressed the primacy of purpose over profit.
CSR: From Theory to Practice
Many books have been devoted to the concept of purpose in business. All In, the Future of Business Leadership by David Grayson expresses it succinctly. “At its core, Purpose is the deepest expression of a company’s ability to make the world better with its business solutions.” Corporate or organizational purpose is most frequently expressed in terms of sustainability and social equity.
To be clear, CSR and the concept of purpose are not incompatible with profitability. In fact, research has shown that companies with effective CSR programs are more profitable than those that lack such programs. It could easily be argued, for example, that Tesla is profitable not in spite of its commitment to sustainability but because of it. When Nike supported social justice issues with an ad featuring a controversial athlete activist, sales went up 31% . In general, 77% of consumers buy from brands that share their values
CSR initiatives do not ask companies to abandon their focus on the bottom line. Rather, CSR in practice asks them to adopt a broader view of their net results. This is often referred to as the triple bottom line. It measures not only profit but also sustainability and social equity, the so-called three P’s: Profit, Planet and People.
Achieving the Triple Bottom Line
Some companies were founded with a purpose that’s clearly expressed in their mission or vision statements. For example, furniture retailer IKEA’s is “To create a better everyday life for the many people.” Tesla’s statement is explicitly focused on sustainability. “To accelerate the world's transition to sustainable energy.” But many organizations are only beginning to think about CSR after being in business for many years, or they want to expand their concept of CSR beyond traditional activities like philanthropy. These organizations need a process for discovering and formulating their purpose, which will in turn make CSR an integral part of daily business activities throughout the company.
The role of the CEO is crucial. This cannot be over-emphasized. In Sustainability and Corporate Governance, Alan S. Gutterman points out that surveys repeatedly confirm that CEOs must play an active role if CSR is to be integrated into the corporate culture and make a difference in employees’ day-to-day activities. Gutterman also emphasizes the importance of incentives. For maximum effectiveness, executive compensation must be tied at least in part to the achievement of both short- and long-term sustainability goals.
Ivri Verbin presents a detailed exploration of the path to a thorough set of CSR standards in Corporate Responsibility in the Digital Age, which is intended for individuals at every level of CSR experience. One of the key issues is the process of formulating an ethical code that stems from purpose. Although there are many options, they all fall into one of two categories: closed and open. In a closed process, the formulation is assigned to a specific group, often with the help of a consultant. An open process involves input from both internal and external stakeholders such as customers and suppliers. While the closed process is more efficient, the open process leads to greater authenticity and can help kick-start the implementation of an ethical code once it’s written. (This topic is covered in detail in Chapter 11 of Corporate Responsibility in the Digital Age , which is available as a free download .)
Whatever the process to define and articulate purpose may be, what’s most important is that companies “walk the talk.” Purpose must not be limited to slogans and posters on the walls. It has to be integrated into every aspect of the organization. Gutterman argues that, from a structural point of view, the best practice is to create a C-level position, Corporate Sustainability Officer (CSO). In this approach, each business unit has a sustainability director who reports both to the leader of the business unit and back to the CSO.
However CSR is implemented within the organizational chart, it will drive decision-making in every department, sometimes in ways that are not obvious. Here are some examples.
CSR in Engineering
Design decisions about products trickle down to manufacturing and can have a significant effect on the environment. Hewlett-Packard, for example, strives to design printers with biodegradable materials wherever possible so when their useful life is over they can be disposed of responsibly.
CSR in Manufacturing
Every manufacturing plant has numerous opportunities to reduce its environmental impact and move towards sustainability. Honda, for example, has achieved zero waste-to-landfill in 10 of its 14 U.S. factories. Manufacturing organizations can also have an impact on their suppliers by demanding green components and safe, equitable labor practices.
CSR in Marketing and Communications
Companies can include socially responsible messages in their advertising and other external communications. Kaiser Permanente, a large healthcare provider operating in eight states, spends a significant percentage of its communication budget on promoting tips on healthy living to the general public.
CSR in Sales
Companies need to evaluate their product portfolio and make adjustments if products are environmentally harmful. Chemical giant BASF, for example, chose to stop selling a disposable drinking cup because its formulation could cause environmental problems.
CSR in Finance
Organizations can make social responsibility part of their investment decisions. For example, the California Public Employee’s Retirement System (CalPERS), which manages the largest pension fund in the U.S. ( $444 billion ), takes environmental, social and governance (ESG) factors into account when making investment decisions.
In the end, corporations don’t need to abandon the concept of shareholder value, but they do have to broaden it to a new scale of understanding. Shareholders don’t only obtain value when a company’s stock price rises. They also benefit if the world they bequeath to their grandchildren is a better place to live.