February topic: SE & sustainability Part I – corporate social responsibility

February 1, 2010 Featured 1 Comment

by Ana Boa-Ventura

Social good or profit maximization?

After months of resistance, the popular UK chocolate firm Cadbury is about to accept a sweet 19.5 billion dollars takeover from the multinational Kraft Foods. In the UK, Cadbury workers hold “Kraft go to Hell” signs (see picture), and start FaceBook groups , speaking up against the acquisition.

An elderly Cadbury's worker protests against the take-over by Kraft at Bourneville, a village built by the Cadburys to provide a peaceful and nurturing environment for workers and their families.

There was a time when Cadbury had an eye on social reform rather than both eyes on sheer profit. When John Cadbury started a little tea and cocoa store in 1831 in Birmingham, his main motivation for the trade chosen was his belief that alcohol was at the basis of poverty and other social problems. A hot cocoa was an alternative. As a social reformer, he led campaigns to ban child labor from health damaging job positions and against animal cruelty. Cadbury provided his workers and their families with good health insurance systems. He developed Bourneville, a quite little village for its workers, and a ‘dry’ area (no alcohol allowed at pubs or bars).

John Cadbury was a social entrepreneur. And yet, the business thrived….

In stark contrast, and between February 2008 and October 2009, 25 employees of France Telecom committed suicide (“Nouveau suicide à France Télécom” 2009). The France Telecom workers (some, in interviews to the press after failed suicide attempts) put the blame on an unforgiving drive for efficiency by the top management, which has grown exponentially since the company’s privatization in 1998.

How did we go from sweet Bourneville and chocolate to managerial practices leading to suicide? Today, we mostly have firms that sacrifice their workforce to the only aim that matters – profit.

However, there is an alternative way to conduct business. The principles that governed John Cadbury’s business have since been made ‘formal” under what is commonly known as ‘social entrepreneurship.’ (SE). The idea is simple: social return takes precedence over financial profit.

Social Entrepreneurship (SE) and sustainability

Today, SE is often more directly connected to the common good and the scope goes well beyond providing a good work environment for the company’s workers only. In fact, these enterprises are usually small – a handful of staff members – though the total network of ‘busy bees’ may be in the thousands, pulled in the cause through social tools such as Facebook or more graphic / sophisticated social spaces like Second Life.

A will to solve social problems is not enough as many social entrepreneurs have painstakingly learned. Many good SE ideas sink because they position themselves as so radically alternative to traditional companies that they reject any and all their practices. In this article, I discuss several ways to keep your social enterprise “open for business” (pun intended) .

This week and in the 3 weeks that follow, I will discuss 4 ideas that permeate a social enterprise: corporate social responsibility (CSR), governmental support, and innovative models based on social media space. The latter are so numerous that they will cover the last two weeks. In 2010, social media is necessarily part of CSR and governmental support but my focus on those two final weeks will be on the actual web 2.0 models that leverage social giving and on cases that illustrate those models.

Part I – Corporate social responsibility

In 1970, Milton Friedman provocatively wrote that the responsibility of corporations is “to conduct the business in accord with [shareholders’] desires, which generally will be to make as much money as possible while conforming to the basic rules of the society…” Firms engaged in corporate *social* responsibility (CSR) would need to survive in the capital markets. Friedman’s economical arguments revolve around the idea that citizens can invest their funds in the capital markets, as well as make personal gifts to social causes, and that social good can also be provided by firms as CSR. In the case of multinational corporations it is not uncommon to find critics of their social responsibility divisions, which are often considered mere ways to avoid government regulation.

One key concept in CSR is the triple bottom line (other designations are “TBL” “the three pillars” or “3BL”), meaning people, planet, and profit as a revision of the traditional definition of capital. The TBL proposes to expand the spectrum of criteria for measuring success beyond the economic, and embracing the ecological and social. With the 2007 ratification of the UN and ICLEI TBL standards (ICLEI: International Council for Local Environmental Initiatives, now Local Governments for Sustainability), natural capital and human capital are well identified measurements along with what we used to know as simply… ‘capital’ , which was really the economical component of what we see today as a much larger concept. To illustrate the two less familiar concepts of capital: an on-site conference may be more costly (natural capital; the ‘planet’ pillar) than a virtual conference due the carbon footprint resulting from air travel but may also translate into lower *costs* in human capital (the ‘people’ pillar).

Firms engaged in CSR are necessarily committed to TBL reporting, in one way or another. When public interest bears its weight in corporate strategy – and this is really what CSR is – then there is a better chance for the triple bottom line to be respected.

In an excellent article, David Baron (2005) notes that although social good is non-traded, financial and social returns from a CSR firm are driven by investment in a profit-maximizing firm and personal giving, and therefore, an implicit price for CSR can be identified. Baron goes on to say that firms that practice CSR have a lower market value than profit-maximizing firms. He concludes that there is a cost to CSR and that it can be calculated. Overall, he notes that there are gains to an entrepreneur who decides to start a social responsible firm, which he describes as a ‘social glow’. Furthermore, corporate giving is tax-advantaged and has more efficient channels for the distribution of social good, when compared to personal giving. In any case, managers of social responsible firms would conduct CSR activities rather than convert the firm to profit maximization. For a discussion of strategic CSR and maximization of profits, in the case of citizens who only respond to those activities in the marketplace, please refer to Baron’s paper. Some complex economical concepts support strategic CSR are discussed but they are beyond the scope of this article.

In a paper entitled “Fortune at the Bottom of the Pyramid: A Mirage How the private sector can help alleviate poverty,” Aneel Karnani discusses the fallacies of the popular ‘bottom of the pyramid’ (BOP) proposition. According to the BOP argument, large companies can increase profits by selling to poor people and at the same time help eradicate poverty (Prahalad, 2004).

With examples such as the failed Coca Cola campaign for the distribution of carbonated soft drinks in smaller pack sizes of 200 ml in India, Karnani argues that the BOP is monetarily too small to be very profitable for most multinationals and for many medium size companies. In the case of the Coca Cola campaign, each pack costed $0.57 (at PPP). When Indians live on less than $2/day, it is not ‘affordable’ to buy a drink that is over 25% what they have per day to survive. Karnani (2007) concludes that companies should view the poor as producers rather than consumers.

Often, companies seen in the developed world as CSR champions, are not seen under the same eyes by the communities whose development they claim they help. Again, Coca Cola in spite of winning the Corporate Social Responsibility Award in 2009, has been accused of depleting the already scarce water sources in India. While the Coca Cola corporate website announce the Award, India-based websites (and I can access only those written in English) demand accountability for the multinational’s practices of water extraction (notably in Kerala).

REI, a Seattle based company selling outdoor gear and apparel, finds less dissonant voices on the value of its social responsibility office. Sally Jewell, REI’s President and Chief Executive Officer since 2005, says that REI has long abandoned “random acts of kindness,” to embrace a strategic focus on stewardship. Watch the following video to better understand the REI’s CSR agenda.

REI has an innovative business model, as it is a consumer cooperative. If you buy a one-time membership fee of $15 you become a member for life, and you get up to 10 percent back of you annual purchases online shopping or at the stores. In 2009, REI distributed $58 million to 3.1 million members on sales of $1.18 billion. Because REI is a cooperative, it doesn’t have access to the capital markets and needs therefore to run a strong business. For Jewell, CSR in a key element in leveraging that strength.

This was Part 1 of the February topic: social entrepreneurship & sustainability, dedicated to Corporate social responsibility. Summarizing we can say that there is an emerging frustration with the free market and this is putting the focus where it should be: in the urgency in adopting measures for poverty reduction. Relying on the so called ‘trickle down’ effect (the idea that liberalization of markets leads to economic growth) is not working: it is too sluggish. The CSR strategies adopted by big companies are related to the business model of the company. In Moving Cause, we believe the response is social entrepreneurship in its various forms. This week, we focused on corporate social responsibility and discussed the importance of considering the three pillars – people, planet – when assessing the impact of corporate decision-making. Public interest can take different configurations in a social responsible corporate strategy but citizens should be viewed as stakeholders. Next week the focus will be on governmental support of SE.

Bibliography:

Baron, David (2005). Corporate Social Responsibility and Social Entrepreneurship. Available at SSRN: http://ssrn.com/abstract=861145

Bhattacharya, Sindhu (2005). ‘Coke’s challenge.’ The Hindu Business Line, 14 July, 2005.

Friedman, Milton (1970). The Social Responsibility of Business Is to Increase Its Profits. The

New York Times Magazine. September 13, 32-33, 122, 126.

Karnani, Aneel G. (2007). Fortune at the Bottom of the Pyramid: A Mirage. Ross School of Business Paper No. 1035; California Management Review, Forthcoming. Available at SSRN: http://ssrn.com/abstract=914518

Nouveau suicide à France Télécom, Liberation (2009, September).  Liberation. Retrieved January 28, 2010, from http://www.liberation.fr/economie/0109590529-nouveau-suicide-a-france-telecom

Prahalad, C.K. (2004). The Fortune at the Bottom of the Pyramid: Eradicating Poverty Through Profits. Philadelphia: Wharton School Publishing, 2004.

Some resources to consult in the case of Portugal:

Teles, H., Dias, I., Pereira, J., Dias G., Caeiro, J., Ferreira, S., Ramalho, V.. (2009). Economia e política social: contributos para a intervenção social no século XXI. Lisboa: Editora Universidade Lusíada.

Vau, C. (2005). As Relações Públicas na Responsabilidade Social das Empresas. Volume n.º 3, Colecção Comunicando. Lisboa, Portugal: Organização.

Conselho Empresarial para o Desenvolvimento Sustentável www.bcsdportugal.org/

Normalização em Responsabilidade Social das Organizações

http://naturlink.sapo.pt/article.aspx?menuid=7&cid=8988&bl=1&viewall=true#Go_1

Bolsa de Valores Sociais Portuguese Social Stock Market http://www.bvs.org.pt/

RSE Portugal Associação Portuguesa para a Responsabilidade Social das Empresas www.rseportugal.org/

GRACE (http://www.grace.pt/), the first nonproft in Portugal dedicated to CSR

“Enterprises and the Millenium’s Objectives” Manual (“As Empresas e os Objectivos do Milénio”, July 2005) , available at grace.pt/cms_grace/ImagensBo/Manual_OBJMilenio1.pdf