What Makes Companies Socially Responsible?

When Unilever CEO Paul Polman first decided to include sustainability targets in his corporate strategy, this was exceptional. It’s a decade later, and big companies like Shell are linking the remuneration of their top brass to how well they deliver on climate goals. Dutch central bank DNB has decided to only invest in companies who are doing their bit for ESG, or Environment, Society and Governance. Many companies are recognizing the importance of corporate social responsibility. And yet progress is slow. Why is the transition so difficult to make?

Behavioral change

To become a company that takes its corporate social responsibility seriously requires a behavioral change from everyone involved. That means the top management weighs different considerations and adjusts priorities in their decision-making process when the need arises. But these changes can only be successfully implemented if staff likewise favor different options and adopt other habits. What is needed in both cases is not a one-off decision, but an adjustment of daily considerations and ingrained patterns of behavior. So how can this be achieved?

Corporations are used to managing behavior by setting concrete goals. It’s a way of monitoring progress and performance. Goals provide clear guidelines in matters such as increasing turnover, limiting costs, or extending available finance. But how does this work when the goal is social responsibility? Can it be made as concrete?

Three problems

Social quality marks and CSR certificates are proliferating, but lack a consistent guideline or measuring tool. Experts cite inconsistent assessments, which are difficult to compare. That means it is often unclear to companies which goals should be set, how to tell whether they are achieving them, and what it means to comply with a certain quality certificate. It’s much simpler to assess progress towards the achievement of financial targets, making the temptation to focus on financial goals rather than some vague social goals all the greater when pondering strategy and making daily decisions. That is problem number one.

Some say the solution to this problem is to include social goals in an integral valuation, an approach that is favored by management guru Michael Porter and investment tycoon Warren Buffett. "Shared value creation," they say, is a strategy that will promote continuous innovation and sustain economic growth. The effort to achieve social goals will prompt the development of new products for new consumers, and that is good for business as well. In practice, these two goals have not been that easy to reconcile.

For some years now, the Harvard Business Review's annual list of best performing CEOs not only looks at financial performance, but at corporate social performance as well. It accounts for 20 percent of the rating. However, the data of almost 900 companies on which last year’s ranking was based show a clear negative relation between the two indicators. Top performances in the two areas do not necessarily go together. That is problem number two.

The third problem is that "corporate social responsibility" can mean anything from combating poverty to limiting CO2 emissions. Given the broad range of goals, it is tempting to go for one that is easily achievable or is unconnected to the company’s core business, such as recycling plastic coffee cups or sponsoring company use of electric cars. But this can be counterproductive. An unwelcome effect could well be what psychologists call "moral licensing," which sees staff less motivated to really scale down the societal cost of their activities, because they have "done something good."

A more general question is whether or not companies which support "worthy causes" but do not put their own business operations up for discussion are getting it right. That question is asked, very pointedly, by former New York Times columnist Anand Giridharadas and Stanford University Professor Rob Reich in their books. At the last World Economic Forum in Davos, Dutch historian Rutger Bregman proposed paying tax -instead of avoiding tax payment- as the best way of supporting social goals.

Businesses hoping to attract more customers or better staff by emphasizing their social involvement would do well to choose activities in line with their general strategy. If they don’t, they will lose credibility, and before they know it, they stand accused of greenwashing. And that can be damaging, as the Sackler family learned to its cost. For years the Sackler family donated huge sums of money to charity, but when their pharmaceutical company that had generated these funds found itself in court over its aggressive marketing of addictive pain killers their donations were no longer welcome.

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Corporate social responsibility is not per definition a tool to boost profit. But the three problems set out here can be transformed into as many opportunities if companies are willing to cast a critical eye over all aspects of their business practices and find out who is affected by the costs and benefits of each one. That includes not only the environment, but also the people in and outside the company. A company looking to have a real impact on society does not stop at a single investment or initiative, but transforms itself from within. And that takes a long-term effort under courageous leadership.