Two
Professors
on
SPAR CSR
Prof. Aneel Karnani
Prof. Tom Lyon
ANEEL KARNANI, associate professor of Strategy in the Stephen M. Ross School of
Business at the University of Michigan, and TOM LYON, Dow professor of Sustainable Enterprise, also at Michigan, take divergent views when it comes to the concept
of corporate social responsibility.
Karnani says the idea that companies have a responsibility to act in the public interest
— and will profit from doing so — is fundamentally flawed. Firms can only be expected to embrace corporate social responsibility (CSR) when the market naturally marries profits to social interests, or when government regulation forces such a union.
Lyon refutes the idea that markets and governments alone can shape responsible corporate behavior. He makes the case that CSR is essential in the real world of business.
Ross Net Impact (RNI, founded in 2005), a network of University of Michigan graduate students, alumni and professionals, and the International Policy Center recently
brought the professors together for a lively debate moderated by Jan Svejnar, Everett
E. Berg professor of Business Administration and director of the International Policy
Center. The edited highlights of this discussion that follow are published with the
KARNANI: In my view, CSR is either irrelevant or
ineffective and dangerous. So I have very little good to
say about CSR. What's wrong with it? First, we have to
take two different types of situations. One is where the
interest of the company and the interest of society are
aligned together — they're congruent. If they're congruent, a company can increase its profits and increase its
social welfare simultaneously. This is exactly what capitalism is about. The system, by the invisible hand, works.
The more interesting situation is with a market failure
and when the interest of the company and the interest of
society diverge from each other. When they diverge from
each other, it's not realistic to expect companies [that]
have a fiduciary responsibility to their shareholders to
sacrifice profits for the sake of social welfare. In this situation, we need some external force to make the company
behave in a responsible manner to achieve the social
objectives. What is this external force going to be?
There are two possibilities. Either the government or
some sort of social activism that puts pressure on companies to actually achieve the social welfare, and I think [it is]
government [that] is the ultimate binding constraint here.
The counterargument is often that the government
doesn't work. Well, that is clearly true. The government
often doesn't work. But that's not a reason to get away
from the government. That's a reason to make the government work better. And we all as citizens have to be politically engaged and make the government function better.
If you are going to be a social activist, rather than
telling the companies to please be nice, you're much better off telling the government to make the companies
behave nice. That's the role of regulation.
To go one step further, not only is CSR not effective,
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it's dangerous. Why is it dangerous? When there is a conflict between business and social interests, CSR serves the
purpose of “greenwashing.” Companies say they do
things, but they don't actually do very much. This is
much worse. This is CSR being hijacked by companies to
hide the fact that they're not socially responsible and
they're not achieving social objectives.
There are many instances of greenwash. If you had
asked a few years ago which is the most socially responsible oil company, the answer would have been BP —
they were “beyond petroleum.” Well, now we know that
petroleum is beyond BP; the company was getting all
sorts of awards, they're a member of the United Nations
Global Contract and so on.
This hides the fact that their safety record was miserable, they had an explosion at a refinery in Texas [and]
their pipeline in Alaska was leaking. But they sound
socially responsible. If we de-emphasize CSR, we can
focus on the real conflict and the real issues, and get
away from this PR stance.
LYON: You've heard that CSR is bad; you haven't heard
what it is. Professor Karnani has artfully failed to define
the thing he's attacked. So let's define it before we move
forward. I generally define it, in my work, as corporate
actions that go beyond compliance with the law. Typically, we're talking about reducing externalities, so it's a voluntary action by a company to internalize externalities
and go beyond what's required by law.
So first let's ask, can companies do well by doing good?
I think it's absolutely clear that they can. Many large multinationals establish what's called a global common
standard. They use the same technology in every country
financial executive | march 2011
C O R P O R AT E S O C I A L R E S P O N S I B I L I T Y
permission of the University of Michigan.
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around the world. That often serves
two functions.
Take Dow Chemical moving into
China or Brazil. They're using topquality American technology that's
probably better than what most domestic firms are using in those countries. It serves to elevate the expectations for technology in those
countries. It may create a strategic advantage for Dow as it moves into
Brazil because it forces the other guys
to raise their costs and meet its requirements, but it's doing well by doing good.
There are lots of examples of companies that have reduced their greenhouse gas emissions substantially and
made money in the process.
Aneel's argument in this situation
is, “Ah, that's easy. It's simplistic. We
don't need to worry about that
because free markets are efficient,
and if you're making money and
doing good then it doesn't count.”
I think that is just way too simple
because the frontier of what's profitable is constantly shifting. And it's
not easy to identify where you can
do well by doing good. What we try
to teach students — at least within
the Erb Program here — is how to
look ahead and anticipate where
those frontiers are going to be five to
10 years down the road so that your
company can be on the cutting edge
and ahead of the rest of the pack.
Can companies do harm by
doing CSR? Absolutely, and I totally
agree with Aneel that greenwash is a
serious concern and quite a lot of
CSR initiatives are shallow, cosmetic
dressing. So we want to push hard
on companies to make sure they're
doing something substantial. But I
don't agree that all of them fall into
that category.
Finally, I think we need to raise
the question: “Do we need CSR?”
Obviously, Aneel thinks we don't.
And in a simple world where markets are efficient and government
does what it's supposed to do, of
course we don't need CSR. But we
don't live in that world. We have
market failures; we have plenty of
government failures as well.
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financial executive | march 2011
The thing that really bugs me is
that many companies cynically
undermine the effectiveness of government regulation while proceeding to profit from that lack of regulation. That's the height of corporate
irresponsibility.
We ought to be refocusing the
demand for CSR into the political
arena and we ought to be demanding
that corporations behave responsibly
in their political behavior so that
what they say and what they do are
actually consistent with one another.
KARNANI: I disagree with Tom that
this is simplistic. I think the more
interesting issue is the last point that
Tom raises, which is that companies
often undermine the government and
regulation. In my view, Tom and the
other side work themselves into a
black hole, so to say. On one hand, he
says that companies are undermining
the government and [he] then is
telling companies, “Please don't
undermine the government.” Well,
that's not going to work.
The only thing that's going to
work is if you put enough pressure
on companies through transparency
and other mechanisms so that they
don't undermine the government, so
that we have government regulation
that says what you can contribute to,
what you cannot contribute to, which
sort of lobbying you can do, which
sort of lobbying is out of bounds.
In fact, I would go a step further.
I think companies should not be able
to play a political role, period. That's
it. Companies are given a wonderful
privilege in society, which is limited
liability. Society should say to companies, “the quid pro quo for limited
liability is that you will not play a
political role at all. Citizens play a
political role; companies should just
obey political laws, and that's it.”
But the least we can do — and I
agree totally with Tom — is have
much more transparency and pressure on companies to make their
lobbying transparent.
LYON: I really like Aneel's last comments. I think that's right at the heart
of things. This issue of the corporate
role in politics is really central. I do
think the issue of government failure
is central, and in a lot of ways I agree
that government regulation is often
what we require to make companies
do anything that is costly and difficult; otherwise they'll just stall.
But because government doesn't
always take action, we just have to
plunge into the swamp of what happens when there's no government
response. And then we get into looking at the network of civil society and
how does it influence companies.
In some sense I think what Aneel
is saying, and again I'm going to
agree with this, is it's not sufficient
for NGOs [nongovernmental organizations] or civil society to politely
ask corporations to do the right
thing. We should definitely not
expect them to respond to that.
KARNANI: Another problem I have
with CSR is that CSR is, at a fundamental level, an undemocratic
process. I think a lot of these big
issues should be resolved in a democratic arena, not in a nondemocratic
arena between a few social activists
and a few CEOs talking to each other.
For example, today the U.S.
would like energy independence.
One way to get energy independence in the U.S. would be to burn
lots of coal because we have lots of
coal in this country. But that poses a
tradeoff, because that's not very
good for climate change.
Who should make this tradeoff? I
don't think it should be an oil company, not a coal company, and not
Greenpeace that makes the tradeoff.
We all as citizens should figure out
that tradeoff between climate change
and energy independence or if you
have either of these, this might
imply a tax on the economy today
and therefore less employment in
the short term.
These are complex tradeoffs, and
they should be resolved in a broader
arena. That's exactly what the political system is designed for. Bad as it
may be, it is better than a few people
sitting in a room together.
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