Is It Fair To Expect Companies To Choose Social Responsibility Over Profits?
The largest corporations in the US have just declared that they are no longer solely focused on their shareholders. But unless shareholder and stakeholder interests become perfectly aligned, nothing will have changed once the dust settles.
Power to the people
As we all become increasingly connected to each other, consumers like you and I have become significantly empowered. In an age where we can compare prices online within seconds, or leave scathing reviews that could make or break businesses, companies find themselves exposed to unprecedented levels of public scrutiny that were not possible a couple of decades ago. Bad perceptions can spread like wildfire online, and missteps by corporations are now much costlier than before. As a result, companies find themselves constantly having to find new ways to impress and endear to consumers.
Large corporations therefore spend millions crafting a public identity to build trust with their customers. One effective way to do this is via corporate social responsibility (CSR) programs. It is a tried and tested concept, with research showing that consumers buy more from companies that they think are doing good. This is, for the most part, a good thing. By voting with our wallets and purses, we have been able to push companies to behave better or even give a little back to the community. Companies are falling over themselves trying to show us that they really, really care in order to win a place in our hearts, and such competitions in generosity will continue to benefit the communities that they are helping.
The more things change
This obsession to win the kindness pageant has reached a point where some of the largest companies in the world have announced that they are shifting their corporate focus altogether. Instead of solely focusing on driving returns for their shareholders, these corporations are declaring that while shareholders are important, they will now spread their attention equally to include everyone else that they have dealings with, such as suppliers, employees, government agencies and customers.
The Business Roundtable, a committee consisting 200 of the largest companies in the US, have just changed their definition of what they think a corporation’s purpose is. For the first time, 181 of its member corporations have seemingly signed up to set their sights towards a more noble reason to exist, focusing on making sure that all parties can benefit, from small independent farms supplying raw materials to the hourly wage workers toiling away in textile factories. To the casual outside observer, this does seem like a big deal worth getting excited about.
So, are we facing a new dawn in capitalism? Have these corporations experienced a sudden awakening, and does this herald a new way to do business? Various news sources have jumped on this, making it seem like a truly groundbreaking moment. Have we finally bid farewell to the Friedman Doctrine?
The more they stay the same
Unfortunately, promising to do something and actually doing it are two very different things. In fact, anyone watching these companies make a very public declaration full of PR buzzwords but empty on clear action plans would be wise to adopt a cautious stance. Without any clear idea of what these companies intend to actually change, this essentially boils down to a bunch of billionaires sitting in a circle, talking philosophically about how they think a company should behave, with no clear guidelines of how they intend to steer their own companies towards such ideals. Those with a slightly longer memory would also remember that the Business Roundtable has a notorious track record for fighting labour unions, opposing legislation that addresses climate change and supporting anti-consumer court rulings.
At this point, it would be remiss to ignore the fact that there actually is a very small minority of companies which are genuinely walking the talk. Take Ben & Jerry’s for example. In order to ensure that their corporate social programs are equally prioritised after its acquisition by Unilever, the founders of the famous ice cream maker forced Unilever to allow Ben & Jerry’s to be run with greater autonomy, so that it can continue to pursue its social and environmental goals.
More often than not, however, we have seen CEOs talk enthusiastically about corporate social responsibility when the occasion calls for it, but shy away if the solution to these issues involve taking a hit on profitability. When you remember that these CEOs typically own large amounts of company stock, it can all seem very self-serving.
Who is to blame?
There is, however, more to the story. There is perhaps a tendency for us to romanticise the purpose of a company, with the belief that corporations which make billions every year are morally obliged to care less about themselves, and more for others. Reality, however, is more complicated than that.
A CEO’s job description will mention only one group of people that he or she has to report to: the board of directors. The board of directors, in turn, has a legal obligation to act in the best interest of the company’s shareholders. A small percentage of these shareholders consist of individuals, who might genuinely care about the planet and the people living on it. However, a significant majority (80%, in fact) of all company stock belong to institutional funds.
The managers of these funds like to be seen as advocates of responsible investing (also known as ESG investing), but ultimately, their performance is primarily measured on how well they can drive returns for their investors. In order to keep their jobs, their first priority will always be the share price of a company that their funds are invested in, not the number of plastic bottles that the company has managed to recycle, or the number of rest days that the employees are given.
The last piece of the puzzle involves how we value companies. Share prices have always been linked to a company’s financial performance. Doing good to ensure the longevity of a firm is a great idea, but is almost impossible to quantify in a meaningful way to drive the value of a company’s stock. What makes this worse is the fact that stock markets are notoriously short-sighted. For example, if a company’s profitability for a single quarter falls below expectations as it switches to more expensive but ethical suppliers, investors will likely focus only on the under performing bottom-line, which can send share prices plummeting. Even if a CEO truly intends to steer the company towards making impactful change, he or she faces a conflict of interest, as they ultimately have shareholders to answer to.
In such an environment, it is almost inevitable that CSR programs become nothing more than a balancing act — CEOs need to make it look convincing enough so that the company stays in our good books, without diverting too many resources away such that it affects profitability. High visibility initiatives such as launching fancy educational campaigns are much easier to justify to shareholders, compared to costlier initiatives such as improving working conditions, especially if there is an oversupply of labour in that particular industry. In order not to attract the ire of its shareholders, CEOs and their board of directors will always be inclined to take the path of profitability, even if it is in the opposite direction of righteousness.
This brings us back to the 181 CEOs who have declared that shareholder value is no longer their main concern. How likely is it that they have managed to either absolve their board of directors from their fiduciary duties to shareholders, or convinced fund managers holding their stock that their demands for better financial performance is no longer top priority? Their words have pretty much the same credibility as a fourth grader boasting that he intends to drive the family car to school tomorrow, while his parents standing behind him, chuckling as they shake their heads. Like the fourth grader, these CEOs simply do not have the permission to do as they please.
Changing how things are therefore requires more than a fancy statement of intent from the Business Roundtable. The only way to truly change things would be to ensure a perfect alignment between shareholder and stakeholder interests. Companies need to embrace CSR programs not just for the sake of their reputation, but because it is widely accepted to be accretive to a company’s value. Once the sustainable choice becomes more profitable than the current one, shareholders would naturally apply pressure on companies to change their ways.
Unfortunately, this is easier said than done. Alternatives to plastics are still more expensive to make, and recycled materials are typically of a lower quality. Companies that employ workers to do low – end jobs might pay just enough to keep the spotlight away, but have no financial reason to start paying them fairly unless they are forced to do so. Unless this imbalance improves, companies will always be compelled to continue on the current path, treating CSR programs as mostly a matter of form over substance.