Held at the RSA, April 7, 2005
Words from John Drummond, Chief Executive, Corporate Culture
The argument
“The selfish pursuit of profit serves a social purpose”. That is how The Economist editorial in January anchored the case against CSR. In that way, The Economist has linked a debate on CSR to a debate on the purpose of business and I welcome that debate. So I’d like to begin by challenging the assumption that the primary purpose of business is profit for shareholders.
In my view the primary purpose of business is not profit – it is to create products and services that people value. If they do this successfully, shareholder value follows. What that means at its most successful is showing consumers “the difference my products or services make to your life”. Why does this matter? Because I am convinced that business does not have an economic goal at its heart but a social goal.
Everything comes together not with the shareholder but with the customer and here is the gulf between us. The original Economist article argued that social goals were externalities. I argue that business is the engine behind most social progress by providing cars, planes, food, drink, water, energy, leisure, health, information and all the fundamentals we need to live. If it is going to have that freedom to deliver social benefit and do it in a way that is profitable to company owners, it must retain the trust of consumers.
I am clearly not alone. In original research Corporate Culture commissioned for this event through Opinion Leader Research, we asked 100 people from business, politics, the City and the media for their views. Only 10% said that companies that engaged in CSR cheated their shareholders. Around 70% agreed that the primary purpose of business should be to create products and services that customers value and in that way shareholder value will follow.
But let’s focus for a few minutes on the core proposition – that companies engaging in CSR are digging their own graves.
The starting point is to pin down what we mean by CSR. My view is that CSR is about effective corporate governance, listening to stakeholders, motivating employees, investing in their training and development, caring about how your products are sourced, reducing energy use and many others practices. I simply do not accept that The Economist is seriously arguing that these practices are not in the best interests of business.
Consider these words: “Some business practices often labelled as CSR raise profits and advance society’s well-being at the same time.” Not my words, but the words of Clive Crook in the original survey of CSR in The Economist.
On this we agree. There are good examples of how CSR can also have commercial benefit. There are also bad examples of CSR but these bad examples challenge the practice of corporate responsibility not the principle. Otherwise, the very many companies who go bankrupt every year could be reasonably seen to challenge the principle of capitalism and I don’t buy that.
Effective CSR is designed to deliver commercial benefits. And there are five main areas of benefit. One of them is to improve results. The others are to comply with regulation and legislation, to reduce risk, to improve reputation and to improve relationships with stakeholders.
I believe there are around 10 arguments that “managing CSR effectively simply makes perfect commercial sense for business”. (Summary attached).
In January, The Economist argued that good corporate citizens believe that capitalism is wicked but redeemable. Nonsense. Who are these corporate citizens who believe that capitalism is wicked? If you believe that you would imagine the advocates of CSR are do-gooding backstreet evangelists. The fact is that CSR is a business led practice and many of the strongest advocates of it are the same people who run the world’s most profitable businesses.
In the original article, Clive Crook said that the movement for corporate social responsibility has won the battle of ideas. It is honourable of him to admit defeat in this debate before it has begun but not sensible. There is a debate to be had here and we should all thank The Economist for triggering it. But as we do so, let’s stick to reason not rhetoric.
Final words
Today, it has been CSR on trial. I would like to suggest a return match and that The Economist holds another debate entitled: “Companies who put shareholder value as their sole purpose are digging their own graves.” We have not touched today on where a true shareholder value only philosophy can take a business. For example, the search for shareholder value often leads to unsuccessful mergers and acquisitions. According to KPMG, 70% of mergers and acquisitions fail to achieve their objectives or raise shareholder value; of these 39% actually lead to lower returns for investors. *
But let’s be clear. The opposite of responsible business practice is irresponsible business practice. That is the way to loss of trust in business. It is the way to tighter regulations. It is the way to lose employee commitment, customer loyalty and shareholder value. It is not responsible business people who are digging their own graves. The opposite is true. Companies who deliberately overlook responsible business practices are digging their own graves. Worse. They are digging the graves of others.
At the end, it comes down to what you believe. What do you believe inspired Karl Benz to build the first four-wheel drive motor vehicle in 1886? What do you believe motivated Gates and Allen when they offered the first Altair microcomputer kit for sale in 1975?
If you look at the origin of most businesses, commercial progress and social progress go hand in hand. They always have. Companies are rediscovering that. The motion is that companies practicing CSR are digging their own grave. Not true. This is not a funeral we are witnessing. It is a birth. Thank you.
The 10 arguments for CSR
1. The legal argument: A great deal of CSR is a regulatory or legislative requirement on business so we cannot ignore it. That includes legislation on employment, the environment, reporting and in many other areas. Complying with the law cannot be commercial suicide.
2. The “good management” argument. Even if we were to take the narrow definition of this just being about the community and the environment, the fact is business has an impact on society. The only real question is “do you manage it or choose not to manage it?” And why would any well managed business choose not to manage it?
3. The cost saving argument. Well managed CSR has commercial value. Let’s look at BT. This company has secured savings of £600m in the last 10 years by managing its environmental impact. It simply makes good business sense.
4. The “customer satisfaction and customer loyalty” argument: Again, BT research shows that customer satisfaction for them is down to four things – price, quality of products, the customer experience and image and reputation. Image and reputation is the biggest single factor - accounting for 40% of total customer satisfaction and positive press linked to CSR is a major contributor to image and reputation.
5. The “increased sales” argument: Let’s stick to BT. This company has also shown through cause related marketing programmes associated with a cause that you can directly improve the sale of products and services. Their promotion of the Speaking Clock service linked to ChildLine showed a 4% increase over the year, bucking a net 8-10% decline over the last 10 years and raising £200,000 for ChildLine Again, there are other examples and I’m happy to share them.
6. The cost to profit when CSR principles are ignored. McDonalds would be the first to admit that the attack on the company linked to obesity and the mix of items on the menu had an impact on their business success. Here are some other examples. The Carnival Corp, the major world cruise group, pleaded guilty in US District Court in Miami to ocean pollution charges, and is to pay an $9m fine as a result. And black workers at NASA's Goddard Space Flight Centre and Wallops Island Flight Centre were awarded a $3.75 million settlement following claims that they were systematically denied promotions.
7. The “intangibles” argument: Let’s look at investors. I am one. When I am investing in a business, short term financial success is only one factor. The fact is I am investing in the future not the past. So I am immediately interested in non-financial information – strategy, the skills of the management team, customer loyalty, intellectual capital, the strength of the brand, employee skills, competitive advantage and positive relations with stakeholders. It is often the intangibles like the brand that add to capital value. And you have to ask what the constituent elements of the brand are – and one of them is trust. Is The Economist seriously suggesting that only tangibles matter in a judgement of business success?
8. The “externalities” argument. The Economist argues that externalities are the role of governments not business. But let’s look at this. Are there any occasions where externalities are either business risks or business opportunities? Of course there are. Global warming is a potential risk for car manufacturers, oil companies and civil aircraft companies. The lack of mathematics, science and engineering skills among young people is a potential risk for engineering companies. The fact that people are living longer has a major impact on the pension schemes of all companies and, with high disposable incomes, elderly customers are a major opportunity. The idea that externalities are not critical for business success defies commercial logic.
9. The “beliefs” argument: My conviction is that employees do not just come to work for money. They also want to work with people they like, with a sense of purpose and meaning, with companies that know that getting the best from them usually means helping them achieve their goals in life. The fact is that it does matter to many companies that people want more time, energy, health,
fun and meaning as well as more money.
10. The “opposites” argument: Maybe one stark way of looking at this is to break CSR down into its constituent parts and look at their opposites. For example: Does it really make sense for companies not to invest in the skills of employees? Does it really make sense for companies not to consider health and safety at work? Does it really make sense for companies not to save money by managing their energy use? Does it really make sense for companies to include ingredients in food that are harmful to health? Come on?
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