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ABSTRACT
Corporations have responded to society's plea to provide innovative solutions to deep-seated problems of human misery. Organization and management scholarship can play an important role in understanding and guiding this corporate action. To date, this challenge has largely been ignored. Instead, the empirical quest to link a firm's social investments to its financial returns has preoccupied researchers. Our goal in this paper is to reorient debate and research about social initiatives by business. We try to stimulate a fresh research agenda in three ways. First, we document the 30-year history of empirical work on the search for a relationship between corporate social performance (CSP) and corporate financial performance (CFP). Second, we critically appraise the quality of this work. And third, we question the underlying theoretical and practice-based premises of this research and, in so doing, introduce a set of new research questions to examine. We believe that these alternative questions offer great promise for understanding and, ultimately, guiding possible corporate social initiatives. We conclude the discussion by reflecting upon the role that scholars play, and can play, in guiding the conduct of the business enterprise.
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The world cries out for repair. While some people in the world are well off, many more live in misery. Ironically, the magnitude of the problem defies easy recognition. With the global population approaching six billion people, it is difficult to paint a vivid and compelling picture of social life. In the extreme, Bales (1999) conservatively estimates that there are 27 million slaves in the world today, while Attaran and Sachs (2001) report that 35 million people are now infected with the HIV virus, 95 percent of them living in sub-Saharan Africa. Even more broadly, one is left with aggregate statistics that both inform and numb.
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Living in the United States, we may be shocked to learn that so many people in the world live on less than $2.00 per day, or that a quarter of the children in Bangladesh and Nigeria are at work in their nations' labor force, or that some countries have infant mortality rates more than ten times our own. Indeed, access to a computer, well enough access to sanitation or a telephone, can be very limited around the world. The lists go on. People in Delhi and Beijing breathe air that has 415 and 377 micrograms of total suspended particulates per cubic meter, yet the World Health Organization establishes 90 as a maximum safe level (Berlin's level is 50). Over 25,000 square kilometers of land were deforested in Brazil each year from 1990 to 1995 (on average, 5,886 square kilometers of land were reforested each year in the United States during this same time period). Thirty percent of all indigenous mammals in Indonesia are threatened with extinction, while 13% of Japan's birds are threatened and 24% of higher plants in the United States are so threatened.
| The challenge facing social advocates is to find a way to enact humanitarian sentiments in a world where shareholder wealth reigns. |
| —Margolis & Walsh |
Closer to home, the picture may be more vivid and compelling. For twenty years, Americans have lived through a period of unparalleled prosperity. Ibbotson Associates (2000) tells us that in real terms, a dollar invested in large company stocks in December 1925 was worth $24.79 by year-end 1979. Exactly twenty years later, that dollar was worth $303.09. Nevertheless, the fact that the upper echelon of society disproportionately reaped these gains is no longer news. Galbraith (1998) and Mishel, Bernstein and Schmitt (1999) provide a comprehensive picture of wealth inequality in America, while Conley (1999) clearly points out that many Black Americans have been left out of this economic boom. In real terms, Americans in the 90th percentile enjoyed a 6.4 percent wage increase from 1979 to 1997, while those in the 10th through 70th percentiles actually lost 14.9, 8.0, 7.8, 8.6, 5.5, 4.4, and 3.9 percent respectively. Those in the 80th percentile saw an increase of only .4% in this same time period (Mishel et al., 1999: 131).
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Miringoff and Miringoff (1999) chronicle these same kinds of inequality data but also provide evidence that child abuse, child poverty, teenage suicide, and violent crime, as well as the number of people living without health insurance, have all increased in the United States since the 1970s. These kinds of data serve as a stimulus for outrage and reform (see Danaher (1996), Kapstein (1999), Sklar (1995) and Wolman & Colamosca (1997) for a domestic consideration of these issues, and then Greider (1997), Henderson (1996), Korten (1995) and Madeley (1999) for discussions from a global point of view).
The calls for corporate involvement in redressing broader problems of society come from many quarters. All three branches of the United States government have addressed the role of the corporation in promoting social welfare. President Bush and Secretary of State Powell have asked companies to contribute to a global AIDS fund (New York Times, 2001), while Former President Clinton used his "bully pulpit" to urge corporations to attend to social problems (New York Times, 1996) and later advocated that minimum labor standards be a part of international trade agreements (New York Times, 1999). With the Economic Recovery Act of 1981, Congress increased (from 5% to 10%) the allowable corporate tax deduction for charitable contributions (Mills & Gardner, 1984). And even as a majority of states were adopting "other constituency statutes," statutes that allow directors to attend to factors besides shareholder wealth maximization when fulfilling their fiduciary duty (Orts, 1992), the Delaware Court endorsed this same idea in 1989 when it allowed Time's management to reject a lucrative tender offer from Paramount Communications to pursue other non-shareholder interests (Johnson & Millon, 1990).
What might be most intriguing, however, is the activity beyond the halls of government that has focused on the corporation's role in society.
Non-governmental organizations (NGOs) have worked tirelessly in recent years to establish worldwide standards for corporate social accountability. Ranganathan (1998) compiled a list of forty-seven such initiatives; more recently, Business for Social Responsibility, a national business association, prepared a document in 2000 that compares and contrasts eight of these standards (http://www.bsr.org/resourcecenter). Lacking enforcement capability, NGOs nonetheless offer a host of principles (the Reverend Louis Sullivan's Global Sullivan Principles), management standards (the Institute of Social and Ethical Accountability's AccountAbility 1000), best practice guidelines (the OECD Principles of Corporate Governance) and reporting initiatives (the CERES' Global Reporting Initiative), all designed to foster exemplary social and environmental performance. Alongside NGOs, foundations are using their money to advance a business-led social change agenda (see, for example, the Aspen Institute's Initiative for Social Innovation through Business). Other groups, such as the Prince of Wales Business Leaders Forum, work in partnership with business, government, and community leaders to promote business models that emphasize the public good.
Beyond government and NGOs, other parties put their money where their values lie as well. Activist investors try to pressure firms to be more responsive to social problems. Examples range from TIAA-CREF's board diversity initiatives (Carleton, Nelson & Weisbach, 1998), to the Interfaith Center on Corporate Responsibility's (ICCR) tactic of taking an equity position in a company to advance their social change agenda (see http://www.iccr.org), to the wide variety of socially screened mutual funds that offer individuals and institutions an opportunity to invest in firms that meet their social performance objectives (see http://www.socialinvest.org).
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The challenge facing advocates of corporate social initiatives is to find a way to promote social justice in a world where the shareholder wealth maximization paradigm reigns supreme. Advocates for corporate social initiatives must be prepared to argue with a Nobel laureate in economics that such social initiatives do indeed benefit shareholders. This daunting task has attracted a large number of business researchers over the years. Their hope is that business scholarship will play a central role in sorting out the relationship between shareholders, with their economic interests, and society, with its interest in broader well being and human development. The reformers' challenge has been to demonstrate that corporate attention to human misery is perfectly consistent with maximizing wealth: that there is, in the words of United Nations' Secretary General Kofi Annan, "a happy convergence between what your shareholders want and what is best for millions of people the world over" (Annan, 2001). Annan is responding to the often-heard (and often skeptical) refrain from business leaders to "Show me the business case for this kind of social investment activity." The now 30-year search for a correlation between corporate social performance (CSP) and corporate financial performance (CFP) reflects the enduring quest to find this persuasive "business case"—to substantiate claims, such as the one made in Annan's recent appeal to U.S. corporations, that "by joining the global fight against HIV/AIDS, your business will see benefits on its bottom line" (Annan, 2001).
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Research to date has been motivated, at least in part, by the belief that a manifest relationship between CSP and CFP will persuade firms to invest in social initiatives if the relationship is positive, or dissuade firms from doing so if the relationship is negative. While the existing body of research can be used to justify or invalidate corporations' social investments in financial terms—and thus can be mustered in debates over the appropriate role of the firm—a fundamental fact is often missed: firms already engage in social initiatives. We propose a research agenda that takes these initiatives, these investments, as a starting point, and not as an ultimate policy objective. We suggest a set of questions that focus on how companies make their social investments and execute their initiatives, examining the effectiveness of corporate social initiatives—even as debates continue about whether or not a firm should invest in these initiatives at all.
Excerpted with permission from the working paper "Misery Loves Companies: Whither Social Initiatives by Business?" by Joshua D. Margolis and James P. Walsh. Copyright by authors, 2001.
Five Questions for Joshua Margolis
by Carla Tishler, Managing Editor, HBS Working Knowledge
HBS Working Knowledge: When people think of social enterprise, they often think of nonprofits, yet your work focuses on the for-profit sector. Can you talk about the differences between the types and kinds of social enterprise done by each sector?
Margolis: We focus on the social enterprise activity of corporations that are not specifically in the social enterprise field. Therefore, a large share of what they do involves volunteer programs, charitable contributions, expert guidance, and cause-related marketing. Unlike both for-profit and non-profit firms dedicated specifically to social enterprise, these companies do not operate for the purpose of providing social goods and services. Rather, they tend to make targeted contributions to existing causes and to other organizations that do operate specifically in the social enterprise space.
City Year, the youth service corps, and Second Harvest, the hunger relief organization, are examples of organizations dedicated specifically to social enterprise. Our focus is not on these organizations but on corporations that provide resources and guidance to these sorts of organizations, as Timberland and Compaq do with City Year and as UPS does with Second Harvest.
The sort of social enterprise we investigate includes positive efforts by companies to redress broad societal problems, such as hunger, and to encourage civic solutions, such as youth voluntarism. It also includes corporate responses to problems that companies have helped to create, such as pollution. Activities therefore range from Exxon's clean-up efforts after the Valdez spill to Ford Motor Company's participation in a charter school.
Q: You quote UN Secretary General Kofi Annan as making the connection between social enterprise and major benefits to a business's bottom line. Is this a viable and strong connection after all?
A: Annan himself cites the example of Volkswagen in Brazil, which introduced an HIV prevention, education, and treatment program in 1996. By 1999, the cost of treatment and care had gone down by 40%. Because nine out of ten workers with HIV were able to live symptom-free, the company benefited from increased productivity and reduced absenteeism.
On a broader scale, there have been 80 academic studies in the last 30 years attempting to document the relationship between social enterprise activities and corporate financial performance. The majority of results (53%) point to a positive relationship, and only 5% of studies indicate a negative impact on the bottom line.
But we caution against drawing hasty conclusions from these results. To date, there is a limited understanding of how the positive financial impact associated with social enterprise comes about, and many of the studies suffer from methodological problems.
Q: Are there companies that have made ill-timed or misdirected forays into social enterprise? Are there pitfalls or common mistakes? Has this type of activity ever backfired?
A: These are intriguing questions because they beg a deeper question: What does it mean for a social initiative to fail? Often, there is a concern that social enterprise will fail to enhance a company's bottom line or will harm, rather than help, a company's reputation. For example, Ben & Jerry's was widely criticized when its rainforest nut sourcing fell short of its promise and publicity, and Avon Products has been criticized recently by some for its choices in fund-raising and sponsorship of specific breast cancer causes. However, there is another type of failure—failure to deliver value to the intended beneficiaries of the social enterprise activity.
Unfortunately, the mere decision of a company to engage in social enterprise is often considered an indicator of success. We need to develop ways of evaluating the impact of these corporate activities on intended beneficiaries. Without ways of measuring and assessing the impact, it is difficult to determine the extent to which these social enterprise activities succeed or fail.
Q: You make the point that determining the relationship between Corporate Social Performance (CSP) and Corporate Financial Performance (CFP) may be distracting attention from "investigating questions that would make a difference." Can you comment on that: what are the more important questions?
A: Researchers have tried so hard to document a relationship between social performance and financial performance, in part, to justify why companies should engage in social enterprise. If there are positive effects on the bottom line, then shareholders do not suffer, and managers can more comfortably dedicate resources to worthy social initiatives. If there are positive bottom line effects, then a business case can be built for social enterprise.
We claim that companies are already engaging in social enterprise and that they are motivated to do so by a host of reasons and pressures. By focusing primarily on building a financial justification for engaging in social enterprise, researchers miss other crucial questions essential to the effective selection and execution of social initiatives.
Companies sorely need guidance for managing their social enterprise activities. We pose a series of questions that companies might consider, and that research could inform, as companies involve themselves in social enterprise. For example, what criteria should a company use to select the social enterprise in which it will participate? Should it be an activity related to the company's core competence, such as UPS's contributions to logistics manuals for food recovery programs? Should it be the most compelling social concern, regardless of a company's specific competence in addressing that concern, as Kofi Annan suggests in his appeal for corporate assistance on AIDS?
Just as selecting social initiatives may differ from selecting suppliers, manufacturing processes, and product markets, so too managing social initiatives involves distinctive management challenges. How are social enterprise activities best managed? Which management practices can be applied from marketing, sales, and operations, for example, and what challenges are distinctive to social enterprise and thus demand distinctive management practices? One area crying out for special attention is measurement. How might the impact of social enterprise activities, on intended beneficiaries as well as the bottom line, be measured? Unlike other arenas of corporate activity, the aim of social enterprise is not to generate profit. How can the outcomes of social enterprise be evaluated relative to the goals of that activity, while still keeping an eye on the efficient use of corporate resources?
These are the sorts of questions we highlight. We suggest that managers and researchers alike should ask these questions both from the perspective of the company and from the perspective of society and its citizens. People call upon corporations to become involved in social initiatives because companies deliver resources and results. But society also has an interest, for example, in making sure that problem-solving initiatives strike a balance between efficiency and effectiveness, on the one hand, and open access and involvement, on the other.
Q: What about the future of the relationship between the business sector and social enterprise—do you see any new trends or directions on the horizon?
A: The press for more systematic accounting is one clear trend. The number of corporate social and environmental reports is climbing, matching the trend seen in the 1970s. These reports are currently inconsistent in what they report and how they present data, but a number of non-governmental organizations are attempting to coordinate efforts to develop a uniform method for companies to report the social impacts of their business activity.
Collaboration between activist organizations and corporations may also become increasingly common, even if the two parties do not see eye-to-eye. Companies and non-governmental organizations alike are recognizing the opportunity each has to learn from the other, to understand the complexity of the problems they each face, and to work together to develop insight and solutions.
Perhaps further on the horizon, the ability to manage social enterprise effectively may well become integral to business leadership, regardless of the company or industry. Companies and managers increasingly find themselves taking on roles and responsibilities once the province of government, and the full impact of corporate activity, beyond just bottom line effects, is becoming increasingly evident. As a result, effective management and successful leadership in business entails sound handling of problems and opportunities in the domain of social enterprise, whether or not those problems and opportunities are directly related to bottom line performance. Competence in social enterprise may well be vital for business leaders in the next century.