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Corporate Social Concerns: Are They Good Citizenship, Or a Rip-Off for Investors?

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Corporate Social Concerns: Are They Good Citizenship, Or a Rip-Off for Investors?

Smith Debate in The Wall Street Journal

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What obligations do companies have to be socially responsibly? It's a question that prompts dramatically different answers from different quarters. A growing number of nongovernmental organizations push for ever more corporate action on issues ranging from pollution and global warming to AIDS and poverty. But investors typically want companies in which they have a stake to focus on the bottom line so they can get the best possible returns. Corporate executives often find themselves caught between these two groups. They know their companies' primary mission is to make profits, but they also feel pressured to demonstrate that their businesses have a social conscience.

 

The Journal Report:

What follows is a debate on this topic among Fred Smith Jr., president and founder of the Competitive Enterprise Institute, a free-market think tank in Washington; Benjamin W. Heineman Jr., senior vice president for law and public affairs at General Electric Co., which last year published its first Citizenship Report detailing its socially responsible activities; and Ilyse Hogue, director of the global finance campaign for Rainforest Action Network, a San Francisco-based group that that aims to make the marketplace friendlier to the environment.

Meet the Participants:

 

Benjamin W. Heineman, Jr., has served as senior vice president, general counsel and secretary of GE since 1987. At year's end, he leaves GE to become a senior fellow at the Belfer Center for Science and International Affairs at Harvard University's John F. Kennedy School of Government, and a distinguished fellow at Harvard Law School. He will also join Wilmer Cutler Pickering Hale & Dorr LLP as senior counsel. Previously, Mr. Heineman was managing partner at Sidley & Austin in Washington, D.C., where he focused on Supreme Court and test-case litigation. He is a former Rhodes Scholar, was editor-in-chief of the Yale Law Journal and was a law clerk to Supreme Court Justice Potter Stewart. He has written books on British race relations and the American presidency.

 

Ilyse Hogue is the director of the Global Finance Campaign for Rainforest Action Network. Before joining RAN, Ms. Hogue worked with Greenpeace USA on the Ancient Forest Campaign. Participating in mass mobilizations around the world, Ms. Hogue has expertise in tactical issues, strategic analysis, media, and direct action. She holds a Master's of Science in resource ecology management from the UniversityMichigan and a Bachelor's of Art in environmental science from Vassar College. of

 

Fred L. Smith, Jr., is president and founder of the Competitive Enterprise Institute, a free market public policy group established in 1984. Before founding CEI, Mr. Smith served as director of government relations for the Council for a Competitive Economy, as a senior economist for the Association of American Railroads, and spent five years as a senior policy analyst at the Environmental Protection Agency. Currently, he sits on the Institute Turgot in Belgium. Mr. Smith holds a B.S. degree in theoretical mathematics and political science from Tulane University.

The debate is moderated by Carol Hymowitz, a senior editor on management issues at The Wall Street Journal.

See highlights of reader reactions to the debate, and join a related discussion.

 

* * *

 

MS. HYMOWITZ begins the debate: Aren't businesses that spend some of their profits on social issues, from global warming and avoiding pollution to improving education and eliminating poverty, robbing investors of their returns? And if companies should have a "social conscience," how many issues and problems are they responsible for?

MR. HEINEMAN writes: You have to answer this question in the context of a definition of corporate citizenship or corporate social responsibility (and I view the phrases as synonymous).

There are three elements of Corporate Citizenship in my view -- and they are all interrelated.

1. Strong, sustained economic performance
2. Rigorous compliance with financial and legal rules
3. Ethical and other citizenship actions, beyond formal requirements, which advance a corporation's reputation and long-term health.

 

The question goes to the last element. But decisions on ethical or citizenship actions beyond what the laws require will turn on the specific issue and on whether, as a matter of risk-reward analysis, it advances the "enlightened self-interest of the company." For example, a company may take a citizenship action because it helps retain employees, and hire the best of a new generation, practicing non-discrimination around the globe, even though the laws in all nations may not require such a position.

 

The question, in candor, cannot be answered in the abstract.

MS. HOGUE writes: Ben's response is quite accurate. In fact, it was [GE Chairman and CEO] Jeff Immelt who said, "We are going to solve tough customer and global problems and make money doing it."

The question presupposes a narrow and short-term definition of "returns" as well as a stubborn adherence to an outdated model of economics, which views ecological realities as both separate from economic ones and also inhibiting. The business leaders poised to leap into the new century understand that there is opportunity in innovation. Harvard Business Review distinguished between CSR [Corporate Social Responsibility] and social innovation when Rosabeth Moss Kanter called these companies the "vanguard of a new paradigm" and recent studies have begun to conclude these companies are outperforming their peers in the marketplace.

MR. SMITH writes: Ben's comments seem reasonable but, of course, suggest that CSR is nothing more than rational profit maximization (a definition that I would find acceptable). I've found it useful to consider business operating in two worlds: the private competitive marketplace and the political bureaucratic sphere.

• In the Private World, business must, of course, be attentive to those groups whose trust and good will are essential to its economic success. These include shareholders but also employees, customers, suppliers and neighbors. All these groups have a reason to push for win/win arrangements. They own, work for, buy from, sell to or live by your plans and their good will is useful to minimize the costs of doing business. Bad relations with any or all of these groups can (and will) impact the bottom line. Thus, "community relations" can be useful as can a careful "fact-based communication" strategy to inform these groups when/if some mishap occurs. Corporate good neighbor polices are a good idea.

• However, in the political sphere -- where people's opinions about the firm and, thus, the firm's vulnerability to political predation is also important to the bottom line -- there is no linkage between the average citizen and the firm. The GE's of the world are abstractions -- people will spend a few minutes (more likely seconds) deciding whether GE is (or is not) guilty of destroying the Hudson (the PCB issue) or whatever. In that world, the fact-based communication strategies that have proved so useful in the private world are unlikely to be useful. Indeed, studies show that attempts to explain a problem (to "educate the public") often raise the negatives of the firm ("Yes, we beat our wives but we're cutting down" isn't a very effective strategy to gain legitimization). Yet public opinion is very important -- AGs and others are always seeking out pariah firms to demagogue against (GE certainly knows this) and a firm must seek legitimization.

• Unfortunately, the CSR approach seeks generally to appease its critics, to apologize for past mistakes, to bribe its opponents. CSR as enlightened self-interest, YES. CSR as appeasement, NO.

But in the world of today, CSR has become industry apologetics, not industry legitimization.

 

MS. HOGUE writes: We agree with Fred that corporate good neighbor policies are good practice. However, in the globalized world, multinational corporations are neighbors with people and places all over. Yet decision making tends to be very centralized and unable to absorb the multitude of very real effects that they incur. Public concern about corporate behavior has resulted from a demonstrated abuse of power as well as mounting scientific evidence regarding these real impacts. Would there be public outcry had their been no Exxon Valdez or Union Carbide Bhopal?

MR. SMITH writes: They're neighbors with people all over the world (and should be responsive to all their neighbors) but they're not neighbors to the anti-growth NGOs who seek control over corporations. If everybody is responsible to everyone, we simply observe the Tragedy of the Commons. There is a value in civilization -- and that has led to the creation of specialized institutions that do some things very well. The modern firm solves one (but only one) of the major problems of mankind -- the creation of wealth. That wealth then allows individuals in their various roles the opportunity to protect values they care about. Competition, of course, encourages efficiencies which move us away from some of the nasty cultural traps of the past -- racism, fatalism, sexism, nepotism, etc. The firm is a civilizing influence on society -- but its primary and most important role should not be sacrificed to utopian dreams.

MR. HEINEMAN writes: With respect, Fred's comments, like the initial question, suffer from being abstract. The debates about what is in a company's enlightened self-interest are not simple. Each issue requires analysis, risk-reward considerations, broad view of what is the company's interest with respect to its various stakeholders, and how those stakeholder relations (the "good neighbors") effect the overall health of the corporation.

GE doesn't apologize (we believe we are right on the Hudson and the EPA is wrong -- but now we are under a legal order and so will comply fully as we do in all areas where the law requires us to do something). GE acts. Two quick examples:

1) We have banned public and private bribery all across the globe by our employees and our distributors. This is beyond what the law requires. But we believe that there are a variety of reason why bribery is bad economics and bad for the company -- starting with the proposition that a culture of integrity in the company is key to long-term performance and you can't have such a culture when people are allowed to bribe. Moreover, GE has been a leader in the effort to strengthen anti-corruption laws around the globe, and was an early supporter (indeed founder) of Transparency International, the main NGO in the anticorruption area.

2) Ecomagination. Two dimensions. We are investing hundreds of millions of dollars in research to produce technologies which will reduce green house gases and other pollutants and yet be cost effective for customers. This, as Jeff Immelt has said, is good environmental policy but it stems from being good business. Green is green. We have also committed to a reduction of our own output of greenhouse gases on an absolute basis -- even as we are growing -- and to increase our energy efficiency by 30%. This will cost money. These internal commitments, from an environmental perspective, are also a good step, but we are doing it as a proof statement to our customers that these technologies can work in both an economic and an environmental sense.

MR. SMITH writes: CSR talks much about "sustainable development" which, in practice, means reducing the use of energy and materials. It is that reality which has led the developing world (and now even Great Britain) to recognize the foolishness of the "conserve ourselves into prosperity" nonsense of Kyoto. I wonder whether the U.S. developmental cycle which saw us cutting down everything east of the Mississippi during our developmental period, using that resource-based growth to innovate and create wealth and then return that land again to woodlands—would be viewed by Rain Forest Network as "sustainable" ?

RAN certainly seem unhappy about developing world forestry today.

MS. HOGUE writes: An abundance of resources led us to practice behavior that, given increased understanding in the way our world functions, forces a different model. The Millennium Ecosystem Assessment this past year proved conclusively that the state of the world's ecosystems are in greater peril than previously believed, resulting in lost ecosystem services that are most needed by poor people in developing countries. Forest degradation in Africa means less clean water, less farmable land, impacts that hit the poor harder than anyone. It is time to explore new models that factor in the value of these services and tap into our most precious asset, human creativity, to solve these issues in a way that is beneficial over the long term.

MR. HEINEMAN writes: Again, we need to be specific to sharpen this point and see if there are real differences, but it is certainly hard to quarrel with the general idea that corporations need to be mindful about having a growing, healthy society (not just economy) to have long-term opportunities. For example, most of us doing business in China recognize, as do China's leaders, that they must balance economic growth with better environmental practices or their society won't work and their citizens won't be healthy. GE believes we have a role to play in ensuring growth by providing good, cost-competitive environmental technologies, e.g. wind, solar, clean coal.

Rough numbers: the life expectancy of a male in Russia is about 58 years, in ChinaRussia is poor environmental protection. With rapid industrialization, China has to make sure it doesn't go the way of Russia. That is a very legitimate concern of the Chinese government, and it should be a concern of business which wants a healthy, growing and, hopefully, increasingly progressive society in China. about 74. One (not the only) source of disease in

MR. SMITH writes: Ben need not be apologetic about the health impacts of industrialization. Human lifespans increased rapidly as people moved from the bucolic (if largely imaginary) farms of England into the Satanic mills immortalized by Dickens and company. The confusion arises because capitalism creates a middle class -- a bridge between the terribly poor and the obscenely rich. That creates the social dynamic that worries (not improperly) about inequalities and so forth. Still, the point remains: wealthier is healthier. Russia replaced communism with feudal mercantilism and has suffered accordingly; China and India are moving toward market liberalism and lifespans are increasing.

Ben's view that what GE is doing is good business policy may be right -- it's not clear. However, he (like most involved in the global warming alarmist fight) blurs "energy efficiency" (a good thing) and "CO2 reductions" (a goal that is far too costly until and unless some non-carbon form of energy becomes viable). GE makes wind turbines and nuclear facilities and combined gas turbines -- all good things -- and (in the short run) activities that might become more profitable if anti-carbon fuel policies are enacted. The temptation -- and one of the major problems with GE flirting with the CSR movement -- is that they will move from being justly proud of their technology advancement program to rent-seeking regulations and subsidies designed to make their programs profitable (after taxes and subsidies). The ethanol scandal is non-abstract evidence that this risk is very real, as are lobbying efforts (in the past by Enron, today by Cintergy and others) to achieve in Washington what they've failed to achieve in the market.

MS. HOGUE writes: "Corporate Social Responsibility" is a term that reflects the need for social institutions to do more to assure a world that prioritizes health and justice. When governments cannot regulate -- and there are companies like Newmont Mining poisoning water supplies in PNG and Peru -- citizens are left in crisis with little recourse. People are suffering while many corporations continue to profit from both unscrupulous and unsustainable behavior.

Arguing against responsibility is a sign of failed imagination. We believe in an economic system where all players have incentives to consider how their decisions affect the true wealth of their customers and stakeholders. People are desperate for a definition of wealth that expands to centralize the health of individuals and communities. The recent leadership we have seen from the business community is the best chance we have to restore confidence that corporations are made up of people who understand all of the challenges we face and are working toward real solutions.

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