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As Long as CSR Is Linked to Profit, Just How Genuine Is It?

In these times of increasing corporate scrutiny, do we need a radical new definition of CSR? One that pretty much pushes the idea that companies need to take a financial hit in order to do social good? That solving the world’s most important environmental problems requires a level of business ‘altruism’ that can only be realistically achieved at the expense of the bottom line?

By Maxine Perella | Published 9 years ago | About a 5 minute read

Most ethically minded CEOs would flinch at such a suggestion, but according to business professor Aneel Karnani, the idea that companies have a responsibility to act in the public interest, and will profit from doing so, is fundamentally flawed. His views, which have been widely publicized, are understandably controversial. Popular acceptance of CSR as an effective tool to drive business growth, coupled with growing interest in triple-bottom-line accounting, puts such arguments in direct conflict with current thinking.

CSR expert Robert Epsom, a senior consultant with Ricardo-AEA, is one of many who disagree with the professor. “Financial success is directly linked to social and environmental factors, now and more particularly into the future,” he maintains. “Being green and socially responsible does not have to impact your bottom line and this has been demonstrated by many leading companies.”

Gareth Kane, director at Terra Infirma, goes one step further. “I think Karnani's definition is utterly naïve,” he says. “Altruism which harms the bottom line will be ditched as soon as the going gets tough – although I’m not convinced that it [altruism] exists. CSR measures which boost profitability will be invested in and sustained, so the knack is to align business growth with delivering social and environmental goals. This is not as difficult as it sounds as most practical CSR actions will enhance profitability.”

But does this wash with those organizations that from the outset have embedded social purpose into their core? According to Janet Gunter, co-founder at The Restart Project, whether CSR should be redefined or not depends to some extent on how you define social good.

“Our feeling is, the problem lies with the quarterly pressures from shareholders. We see privately held companies like Patagonia actually more able to invest over the long term in models that take into account planet and people. When we look around for examples of publicly traded companies, it’s harder. They take a lighter, more tokenistic approach because it feels safer.”

She adds: “And let’s not pretend we are not a part of it. Through pensions and other investments, average people are participating in this drive to increase quarterly profits at the cost of longer-term, more sustainable models.”

That said, Brendan May, chairman at Robertsbridge Group, argues that if you destroy profit, and the motive behind it, there is little incentive for companies to change. He points out that that redesigning business models takes investment and capital expenditure – if there is less money to spend on such investment, it won’t happen.

“Without market incentives, it’s simply not possible to implement the great imperatives of our age, such as sustainable fisheries management, ending deforestation or embracing more climate-friendly technologies,” he says. “Businesses also provide jobs, especially in developing countries, where without corporations there would be none. There is a balance to be struck, but making companies less profitable cannot, and never will, be the answer.”

However there is some acknowledgement that CSR will, ultimately, always be seen as secondary to profit. This was evidenced in the last global recession, which saw many companies drop such initiatives in a bid for pure survival. But consequently, it also resulted in a shift of focus – one geared towards operational resource efficiency; actions that underpin broader corporate responsibility drives.

“If we are to have a socially responsible and greener future for companies, then it needs to be one where it quite literally pays to be green,” Epsom observes. “I believe that CSR should be in full alignment with financial reporting so that a business can directly see the correlation between CSR activity, and business profit and loss. This is already working well with mandatory GHG reporting in the UK. If a business is already gathering utility data, then it isn’t much extra effort to include additional metrics.”

Kane echoes this view – he feels CSR should be linked to profit to encourage businesses to scale up such activities, but cautions that companies need to understand “the full business case” for sustainability such as indirect benefits relating to brand reputation and marketplace trust. “Businesses operate within society, which depends on the natural environment. There is a clear win-win-win from taking a holistic approach to CSR.”

Gunter, meanwhile, believes the strongest examples of CSR come from companies that improve the way they do business, such as those that actively look to change perceptions around social value, whether it be among their customers or shareholders – she says it’s not about “offsetting or paying back for harm done.”

Whether CSR claims should fall under greater scrutiny remains questionable, as does the role of government and NGOs relating to this. Kane believes a “robust and noisy” NGO community could be beneficial in terms of applying some pressure: “The fear of damage to the brand by a large-scale NGO campaign is a very strong driver for big business to operate in a responsible manner. Government regulation will never be agile enough to replace such scrutiny.”

May says regulation of CSR claims is “neither possible nor desirable.” He claims that while NGOs play a key role in holding companies to account, “they are not always honest or accurate in their analysis.” He adds: “Ultimately, smart companies realize that their interests are aligned with those who wish to create a stable planet. They do not need regulations to tell them that.”