1.5 Corporate Social Responsibility

The discussion of why companies exist has put corporate social responsibility on the management radar screen. The Dow Jones Sustainability Index defines CSR as "A business approach that creates long-term shareholder value by embracing opportunities and managing risks deriving from economic, environmental, and social developments." The Dow Jones Sustainability Index ranks companies' CSR initiatives based on the following five components:

1. Strategy: Does the organization integrate long-term economic, environmental, and social aspects into their business strategy?

2. Financial: Does the organization meet shareholders' demands by providing sound financial returns, long-term economic growth, open communication and transparent financial accounting?

3. Customer and Product: Does the company foster loyalty with its products by investing in customer relationship management and product and service innovation that focus on technologies and systems, which use financial, natural, and social resources in an efficient, effective, and economic manner over the long-term?

4. Governance and Stakeholder: Does the company set high standards of corporate governance and stakeholder engagement, including corporate code of ethics and public reporting?

5. Human: Does the company manage human resources to maintain employee satisfaction through organizational learning and knowledge?

We therefore define corporate social responsibility as management's obligation to make choices and take actions that will contribute to the welfare and interests of society as well as the organization.

The Triple Bottom Line

Taking a "balanced" or socially responsible approach to decision-making sets up a delicate balancing act. To explore this balancing act, let's focus on the idea of sustainability.

The sustainability story of the past 20 years is powerful. But, the story, as generally told, is incomplete. Sustainability emerged in the 1990s as the “right thing to do.” Given the earth’s finite resources and growing population, no one could argue against the Brundtland Commission’s definition of sustainable economic development as “development which meets the needs of current generations without compromising the ability of future generations to meet their own needs.” Grounded in such compelling logic, the sustainability view was quickly codified as the “triple bottom line” (Figure 1-2). The triple bottom line argues that decision makers should place equal weight on the three Ps—People, Planet, and Profit.

Throughout the 1990s and early 2000s, momentum for sustainable decision-making grew. Companies embraced ecological and social performance, touting sustainability efforts to stakeholders. In the consumer space, a new demographic—LOHAS (lifestyle of health and sustainability)—emerged. By 2005, Walmart’s CEO, Lee Scott, championed sustainability proclaiming,

Our environmental goals at Walmart are simple and straightforward:

1. To be supplied 100 percent by renewable energy.

2. To create zero waste.

3. To sell products that sustain our resources and environment.

These goals are both ambitious and aspirational.

However, the Great Recession followed in 2007 and the sustainability movement lost momentum. Over a dozen years later, sustainability still has not become mainstream business practice. "Why not?" you ask. Managers openly acknowledge that sustainability is only sustainable if it is profitable. Chris Librie, Hewlett Packard’s director of environmental initiatives, describes sustainability as a luxury, explaining, “It’s very difficult to motivate individual consumers around sustainability (…). It’s a nice-to-have, but they’re generally not going to pay more for it.”

To help managers embrace the right sustainability strategy, let's explore underlying motivations for pursuing sustainability. After all, not all motivations are equally powerful or effective. Authenticity—acting in congruence with personal, intrinsic values—plays a pivotal role in the type of motivation that emerges as well as how stakeholders respond. Lower levels of authenticity lead to lightweight motivations, which may prove too weak to 1) establish sustainability as a top strategic priority, 2) sustain required resource allocation and 3) produce a marketable sustainability capability.

Strategic Motivations for Corporate Social Responsibility

Figure 1.3 identifies four strategic motivations for sustainability: Image Enhancer, Efficiency Maximizer, Resource Acquirer, and True Believer. Please note that motivation types are not necessarily mutually exclusive—a company’s culture may be influenced by more than one motivation.

The Image Enhancer

The term sustainability enjoys a luxury halo effect. Companies motivated by “image” seek the spotlight to attract new customers or to insulate themselves from negative perceptions emanating from their business practices (e.g., low wages, worker exploitation, poor quality). Sustainability provides an alternative talking point for burnishing an image—even a tarnished image. However, as an extrinsic motivator, image enhancement leaves companies susceptible to being labeled “greenwashers” by external stakeholders.

Walmart exemplifies the image-enhancement motivation. In the early 2000s, the trade press assailed Walmart for discriminating against female employees, forcing employees to work “off the clock,” and strong-arming suppliers. Instead of being the hero of the everyday consumer, Walmart was portrayed as the foe of small business and an oppressive employer. Then, Huricane Katrina devastated New Orleans. Over the following weeks and months, Walmart responded to requests from local governments and relief agencies to provide vital and visible assistance. Using its scale and supply chain prowess, Walmart alleviated suffering at costs no one could match. Lee Scott proclaimed: “We were showered with gratitude, kindness and acknowledgements.” Shortly thereafter, Scott announced Walmart’s push to become a sustainability leader.

Early public reaction was mixed. Chris Kofinis, communications director at Wakeup Walmart, noted, “We don’t know whether Walmart’s environmental changes are real or a Machiavellian attempt to green-wash a declining public image. But its long record of irresponsible behavior forces one to be skeptical.” By contrast, Fred Krupp, president of Environmental Defense, highlighted the possibilities, saying, “Walmart has as much or more potential than any other company to change the way the world does business.” Krupp underscored a harsh reality: Walmart will be judged by “the results of its efforts.”

Walmart delivered strong results on the two goals that align with its efficiency prowess—to be supplied by 100% renewable energy and to create zero waste. Walmart’s progress on selling sustainable products, however, has been slow and halting. In 2012, Bill Simon, Walmart U.S. President, commented on Walmart’s product sustainability index, saying, “we’ve really got to figure that out; it’s been more difficult to get in place than what we would have imagined when we started” (Hyatt and Spicer, 2012b, p. 11). Walmart had discovered that “sustainable” products often come with a premium price—a fact that conflicts with Walmart’s every-day-low-price (EDLP) culture. Ultimately, Walmart used its sustainability index to shift the sustainability burden to suppliers. Shifting the burden is a common practice among Image Enhancers.

The Efficiency Maximizer

For many companies, efficiency maximization is a natural segue to sustainability. Reduced waste and a smaller carbon footprint—key sustainability goals—are a natural byproduct of the quest for lean. To the extent that operational savings offset sustainability’s price-premium, sustainability is free.

DuPont models the efficiency-maximizer motivation. In the late 1980s, the Toxics Release Inventory placed DuPont at the top of the list of global toxins emitters. At the time, DuPont spent over $1 billion a year on waste treatment and pollution control. To remain viable in a global chemical industry, DuPont needed to shrink these costs. DuPont engineers went to work, redesigning processes to improve efficiency—and reduce emissions. For example, by minimizing materials consumption, eliminating rejects, and reducing energy use in the nylon production process, DuPont reduced toxic emissions 70% by 2002—at virtually no extra cost.

Paradoxically, despite its award-winning emissions reductions, DuPont’s massive scale means it still appears on negative rankings of major world polluters. What does this imply? Efficiency Maximizers may save money but they receive little public credit for being “green.” The result: As sustainability is tangential to efficiency, sustainability goals seldom evoke culture-changing passion throughout the organization. When the low-hanging fruit has been harvested and “sustainability” programs no longer provide a positive ROI, Efficiency Maximizers refocus on other efficiency projects.

The Resource Acquirer

By definition, sustainability focuses on managing resources to “sustain” operations into an unknowable future. Resource Acquirers relate to this view that future scarcity may impinge on growth—or maybe even on survival. They pursue renewable resources—both natural and human—for a mix of extrinsic and intrinsic motivations. Potential resource scarcity is an external driver. The first-mover ethos to go “renewable” emerges from within.

Starbucks typifies the resource-acquirer motivation. Starbucks sells an everyday luxury. That is, Starbuck’s premium-quality coffee sells for a much higher price than most would envision feasible for a chain with 21,000 stores in 65 countries. Yet, Starbuck’s coffee is still affordable for the masses of loyal consumers who are willing to sacrifice a little discretionary income and other pleasures for the taste, experience, and image associated with the Starbuck’s brand. Sustaining growth means that Starbucks must assure long-term supply of a potentially scarce resource. In fact, Starbucks buys more than 500 million pounds of “green” coffee beans each year from 300,000 growers. That is three percent of the world’s supply.

Decision makers at Starbucks know that coffee is a precarious crop. In 2012, one study predicted that global warming could cause the demise of many wild plant species by 2080, including coffea arabica—the special variety that accounts for 70% of the coffee consumed worldwide. To assure supply, Starbuck’s established a Farmer Support Center in Costa Rica and cultivated close, collaborative relationships with key growers. Remarkably, by making Fairtrade coffee desirable, Starbucks made it fashionable to pay more for a raw material. Starbucks goal is to source 100% of its coffee “responsibly” by the end of 2015.

However, by openly advocating socially and ecologically conscious practices as part of its luxury value proposition, Starbucks increased its costs—and its prices. This strategy worked well in an era of abundance. But, when the economy declined in 2007-2009, Howard Schultz, Starbuck’s CEO, was forced to tell investors, “That economic environment no longer exists.” Schultz subsequently announced almost 1,000 store closures and 7,000 layoffs. A further challenge Resource Acquirers face is becoming captive to the suppliers of the scarce resources. Similarly, maintaining authenticity means a Resource Acquirer must walk the talk across the full spectrum of business practices. Starbucks, for instance, announced in 2014 that it will subsidize the costs for employees to obtain an online bachelor’s degree.

The True Believer

For a few select companies, sustainability is part of the organizational DNA—not an add-on or a tangential strategy used to re-position or re-imagine the company in the public domain. True Believers are motivated first and foremost by who they are. True Believers intrinsically and earnestly care about how they can positively and proactively impact the world. They epitomize authenticity—and are rewarded by loyal customers for being authentic.

Patagonia—like many of its ecologically motivated peers—was born as a True Believer. Founder Yvon Chouinard established Patagonia to sell items of the highest quality that are produced in the most responsible way possible. Patagonia’s mission is to, “Build the best product, cause no unnecessary harm, use business to inspire and implement solutions to the environmental crisis.” Like many True Believers, both Chouinard and Patagonia are sustainability evangelists.

Critically, Patagonia invests in and models sustainability behavior. For example, Patagonia established an Environmental Internship program in 1993 that pays employees to take a leave of absence to work for an environmental non-profit for two months. Further, Patagonia lives by what it calls the 5 Rs:

• Reduce. Make high-quality, long-lasting products that do not need to be replaced.

• Repair. Teaches customers how to repair their products instead of replacing them.

• Reuse. Patagonia’s “worn wear” program buys back used clothes in good condition, renews them, and resells them.

• Recycle. Proactively take back old items and recycle them.

• Reimagine. Promote the vision, “a world where we only take what nature can replace.”

Encouraging consumers to buy less runs counter to both consumerism and the profit-motivations of Wall Street. However, Patagonia openly accepts the limitations that come with its chosen culture and strategy. Decision makers at Patagonia recognize that its sustainability strategy limits its growth. Specifically, higher costs push Patagonia products into the premium-product category, consigning Patagonia to niche status. Besides, any attempt to go mainstream would alienate core customers, jeopardizing Patagonia’s future.

To summarize, sustainability’s high costs represent a luxury tax that many consumers chose not to afford. Thus, most companies have not made sustainability a top strategic priority. The logic is impeccable: If consumers won’t pay, companies won’t play. As a result, sustainability implementations closely parallel the hype cycle (see Figure 1.4). A few exemplars like Patagonia and Starbucks won big—both in image and profits. Many companies quickly followed, but few achieved the huge successes. Some companies suffered highly visible failures—think Chipotle or Sunchips—landing in the trough of disillusionment. The rest of the sustainability story is now being written. Eventually, companies will climb out of trough of disillusionment and learn to make sustainability profitable—and the world a better place.