Mainstreaming Corporate Responsibility

Three years ago, when The Economist first published a special report on corporate responsibility, the magazine took a highly skeptical view, asking whether, to justify its activities, a company must do anything more than simply earn a profit?[i]

Not surprising, perhaps, that The Economist would echo the orthodox arguments of Milton Friedman, the economist who famously wrote in 1970 that the only “social responsibility of business is to increase its profits,” and that corporate social responsibility is a “fundamentally subversive doctrine in a free society.” [ii]

I was intrigued when the British magazine took up corporate responsibility again last month. It seems The Economist has had a change of heart.

The Economist’s 2008 Special Report acknowledges that corporate responsibility is now seen as mainstream by leading companies and concludes that it is worthwhile to single out corporate social responsibility “if it helps businesses look outwards . . . and think imaginatively about risks and opportunities.” [iii]

Why such a conversion in the space of three years? One reason may be the backlash generated by its 2005 Report, which was widely criticized by corporate responsibility practitioners and, reportedly, by members of The Economist’s own editorial staff.

It is more likely that The Economist is simply acknowledging business realities it can no longer ignore. Events on the ground have outpaced the rhetoric surrounding corporate responsibility – both for and against – and business decision-making has made much of the philosophical debate moot.

Pragmatism rules the day. In the field of business and human rights, for example, leading companies are beginning to address human rights issues as part of their business strategy without waiting for absolute clarity on the precise nature of corporate legal obligations under national or international human rights law. A noteworthy 2006 survey of Fortune Global 500 firms by the United Nations Special Representative on human rights and business, Harvard professor John Ruggie, found:

“[M]any, if not most of the world’s major firms are aware they have human rights responsibilities, have adopted some form of human rights policies and practices, think systematically about them and have instituted at least rudimentary internal and external reporting systems.” [iv]

Few corporate human rights policies existed a decade ago.

Striving to meet reasonable stakeholder expectations for both financial and non-financial performance, companies are addressing the social and environmental impact of their operations. The Economist’s 2008 definition of “corporate social responsibility” comprises traditional philanthropy, risk management and creating value. The same elements contained, for example, in General Electric’s definition from 2005:

“Good corporate citizenship comprises strong economic performance over time, rigorous legal and accounting compliance, and going beyond compliance, supporting ethical actions and the reasonable concerns of stakeholders when there are opportunities to create benefit for society and the long-term health of the enterprise.” ^[v]

Leading companies are going beyond compliance to adopt voluntary minimum standards, and beyond philanthropy to make corporate responsibility an integral part of every business function.

While a contrarian editorial perspective sells magazines, The Economist‘s take didn’t reflect the true state of corporate responsibility in 2005. This year’s effort appropriately moves past the theory to focus on the practice of corporate responsibility. The 2008 Report accurately describes the issues faced by executives and managers dealing with corporate responsibility on the ground – and is worth reading for a broad survey of key trends.

A few highlights:

* Corporate responsibility is rising sharply among global executives’ priorities.

* There is a weak, but positive, link between companies’ social and financial performance.

* Risk management is the most common motivation for corporate responsibility initiatives and the risks associated with managing supply chains are the biggest problem for many companies.

* Corporate responsibility is going global, and will be shaped to a large degree by the decisions of companies based outside North America and Europe, in markets like China and Brazil.

The Economist correctly notes that implementation generally lags stakeholder expectations. While no company can ignore pressure for greater corporate responsibility, few companies are doing it well and they will need to demonstrate a positive impact:

“If people are no longer asking ‘whether,’ but ‘how,’ in the future they will increasingly want to know ‘how well.’”

“How?” and “How well?” are the right questions. More and more companies are finding ways to demonstrate corporate responsibility and I suspect the next Economist Special Report will have many more practical examples and even some answers.

As Friedman might have said, on corporate responsibility, The Economist is a lagging indicator.

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[i] The Economist, “The Good Company: A Survey of Corporate Social Responsibility,” January 22, 2005.[ii] Milton Friedman, “The Social Responsibility of Business is to Increase its Profits,” The New York Times Magazine, September 11, 1970.

[iii] The Economist, “Just Good Business: A Special Report on Corporate Responsibility,” January 19, 2008.

[iv] John Ruggie, Interim report of the Special Representative of the Secretary-General on the issue of human rights and transnational corporations and other business enterprises, UN doc. E/CN.4/2006/97 (22 Feb. 2006) (PDF).

[v] General Electric Company, Our Actions: GE 2005 Citizenship Report (2005) (PDF).