Category: corporate social responsibility

Taking an ethical approach to business may not always be about morality or making the world a better place – it is about responding to shifts in consumer behaviour and the demands of ethical investors to remain commercially relevant, competitive, socially acceptable and investable.

Milton Friedman famously stated 52 years ago that “there is one and only one social responsibility of business – to use its resources and engage in activities designed to increase profits so long as it stays within the rules of the game.”

Friedman questioned the notion of corporate social responsibility, suggesting that businesses can’t have social responsibilities, only people can. But he didn’t have Gen Z or millennials to deal with.

Shifting consumer behaviour

Friedman also didn’t have socially responsible investor activists organising themselves under the fashionable acronym ‘ESG’ (Environmental, Social and Governance) but he might at least be glad that they found a new way to say CSR without emphasising the ‘responsibility’ bit.

In 2019, McKinsey and Company stated in its annual review of the international fashion business that “nine in 10 Generation Z consumers believe companies have a responsibility to address environmental and social issues” and that these consumers not only consider them to be the defining issues of their time but that they also “increasingly back their beliefs with their shopping habits, favouring brands that are aligned with their values and avoiding those that don’t.”

McKinsey goes on to state that Gen Z and millennials accounted for $350 billion of consumer spending in the US alone, with Gen Z representing 40% of all global consumers. Put preferences and power together and you get a consumer force that cannot be ignored.

Ethical trading values are not confined to younger consumers either. McKinsey estimates that two thirds of consumers worldwide would “switch, avoid or boycott brands based on their stance on controversial issues”.

Aligning with change

This tsunami of consumer sentiment has led to the B Corporation movement. B Corporations, certified by B Lab US and UK, state their strategy as “rooted in the global Theory of Change, aiming to redefine the role of business within our economic system so that every business is a force for good”.

To be a certified B Corporation, businesses commit to an agenda that promotes “an inclusive, equitable and regenerative economy for all people and our shared planet”.

I can hear you more seasoned business leaders scoffing at the wokeness here, but know this: there are now more than 1,000 B Certified corporations in the UK, 4,300 in the world and 6,000 new applications in 2020/21, representing a 38% increase over the previous year, according to the B Lab Company’s annual report for 2021.

Sounds impressive, right? Gen Z and millennials think of themselves as being “more learned, more egalitarian and more humane” than previous generations, as described by Dana Thomas in the 2019 book, Fashionopolis. But then, why are they still buying £5 GBP t-shirts and £12 jeans from Primark? Do consumers reconcile their values with the value retail sector? What do they think Primark paid their manufacturers for these items and what do they think these manufacturers paid their workers to make them?

So it is not only businesses that muddy the ethics waters; consumers do too.

Muddying the waters

According to the NGO, China Labor Watch, there is evidence that Apple “violates China’s labour laws through practices such as using child labour and forced overtime work.”

Yet, “experts say the company is unlikely to change its subcontracting practices [in China] as long as there is no consumer backlash—and so far, there is no evidence of one,” according to research from Jonathan Broder, published in 2020’s Issues in Business Ethics and Corporate Social Responsibility.

Apple has 343 billion reasons to allow China to censor its app availability and not care about any ethical dilemmas or consumer consequences. It is still consistently reporting record profits: the company posted an all-time revenue record of $123.9 billion, up 11 per cent year on year for its fiscal 2022 first quarter ending December 25, 2021.

But Apple does care, apparently. According to CEO Tim Cook: “We do the right thing even when it is not easy.” Indeed, Apple cares enough to publish a 19-page Business Conduct Policy but how do we reconcile this with regularly reported whistleblowing accounts of dubious practices in supply chain management? Is its Business Conduct Policy really about sincerely expressed ethical business values or is it more about the ‘Applewashing’ of world-record breaking profits?

Connecting with the consumer zeitgeist

Patagonia built corporate social responsibility into the core attributes of its brand. It has a robust set of environmentally sustainable policies that underpin all business activities from fair trade to organic farming.

Its stated goal is “to not only minimise harm, but also create a positive benefit for the lives that we touch through our business.” As such, Patagonia rails against fast fashion, preaching wear and repair instead. It also promotes fair trade and regenerative cotton production.

Here’s the thing though: by connecting with the current consumer zeitgeist, all that fantastic ethical brand equity, all of Patagonia’s renowned better way of doing things for the benefit of mankind, has made owner, Yvon Chouinard a very wealthy man indeed, with a reported net worth of $1.2 billion.

But if it’s an ethical approach to business you want, maybe all billionaire owners should consider what Chouinard did in September 2022 when he gave away his company to a charitable trust in order to fight climate change. Now that is living your brand values.

The relationship between corporate social responsibility (CSR) and performance is a frequent topic of research. The problem is that the results vary across studies. Some conclude that the relationship is positive, while others find that it is neutral or even negative. How can this surprising state of affairs be explained?

A review of dozens of studies published in the top academic journals showed that the relationship between CSR and financial performance is slightly positive. Furthermore, the intensity of the relationship depends on which journals publish the studies.

The (positive) relationship between CSR and profitability is twice as strong in articles published in journals specialising in ethics as in economics, finance and accounting journals. The results of the studies that are published in management journals lie between these two extremes, although they are nearer to the ethics journal publications. This may seem odd. Since all the researchers are examining the same problem, study results shouldn’t differ between publication outlets. The meta-analysis revealed that these differences are mainly attributable to ideology.

Differences in ideology

Ever since Milton Friedman, economists have tended to be sceptical about CSR, believing that it always has a negative effect on profitability. The upshot is that economic, finance and accounting journals tend to publish studies showing a negative or (at best) weakly positive relationship between CSR and financial performance.

Ethics specialists take a diametrically opposed approach. They see no incompatibility between CSR and profitability, and even hypothesise a virtuous circle: greater corporate investment in CSR leads to better financial results, facilitating more investment in CSR. Ethics journals thus give priority to studies finding a strongly positive relationship between CSR and corporate financial performance.

Management researchers are less categorical. Unlike the economists, they don’t systematically reject the idea that socially responsible behaviour can enhance profitability. Nor do they have the pro-CSR convictions of ethics researchers. As a result, the studies published in management journals have the most nuance.

What can we learn from this meta-analysis? The first takeaway is a warning: beware studies exploring topics with ideological connotations. CSR is undeniably one such topic. Some people think CSR should be a requirement for all firms. Others see it as a heresy that does nothing but distract firms from their true purpose, which is to create value for shareholders.

Although studies published in academic journals are more objective than reports published by think tanks, they can still contain biases. Academic journals play a ‘gatekeeper’ role for the screening and dissemination of knowledge. A study that finds a strongly positive relationship between CSR and financial performance corroborates the ideas held by ethics journals editors and reviewers. So it has a much better chance of publication in a pro-CSR journal than in an economics, finance and accounting (or management) journal.

The second takeaway is more encouraging. Annoying though it may be for the ethicists, nobody has yet managed to prove that CSR is good for financial performance. But neither has anybody proved the opposite. So why wouldn’t firms adopt (more) socially responsible behaviours? It would enhance their image without being bad for profits (or shareholders). And it’s a fairly inexpensive way for business leaders to do good.

How investments in CSR affect a CEO’s tenure

While there is no evidence that CSR strategies get in the way of business, research shows that they have a subtle effect on the tenure of CEOs at the head of a firm.  

Indeed, results show that a business leader’s view of the importance of CSR has no direct effect on their tenure. CEOs who make significant investments in CSR have neither more nor less chance of being shown the door than CEOs who make no investment at all in CSR. However, CSR investments accentuate the impact of financial performance on the way shareholders treat CEOs.

When a firm’s financial performance is good, financial markets respond very positively to investments in CSR. They take them as a sign that the CEO can both create value for shareholders and act responsibly. A CEO with good financial results who also considers CSR to be very important runs half as much risk (-53%) of losing their job than a CEO with good financial results who doesn’t consider CSR to be very important.

The opposite applies when a firm’s financial performance is poor. In that situation, financial markets tend to think that the CEO’s focus on CSR has been detrimental to creation of value for shareholders. A CEO with poor financial results who treats CSR as very important runs almost twice the risk (+84%) of getting marching orders than a CEO with good financial results who pays little attention to CSR.

So, is investing in CSR advisable for a CEO keen to stay at the helm? It all depends on the firm’s financial performance. If it’s good, a CSR-focused CEO will hold on to the job longer than counterparts with less of an interest in CSR. If it’s poor, the same CEO will be dismissed faster. Financial performance thus remains a priority for the markets. They have no objections to CSR… as long as the financial results are there.