Corporate Social Responsibility has been a growing concern for companies, their management, and board of directors over the last ten years. Non-governmental Organizations (NGOs) have been pressuring companies to not only take action to reduce negative effects on society and the environment in the communities and locations where the companies operate, but to issue reports describing the companies’ efforts. Michael Porter, the famous business management guru and Harvard Business School professor, has joined with an associate Mark Kramer, to write an article on Corporate Social Responsibility (CSR) that has recently been published in the Harvard Business Review. Porter and Kramer believe that the current CSR efforts of companies often reflect merely public relations campaigns. They argue that the exercise of good corporate citizenship is an important part of corporate activity and the conduct of business. However, they advocate a strategic approach to CSR that aligns the actual business of the company to social issues that the company can actually significantly affect and incorporate into day-to-day operations. The article suggests a significant change in corporate governance to address corporate social responsibility.
"The fact is, the prevailing approaches to CSR are so fragmented and so disconnected from business and strategy as to obscure many of the greatest opportunities for companies to benefit society.” Porter and Kramer observe. “If, instead, corporations were to analyze their prospects for social responsibility using the same frameworks that guide their core business choices, they would discover that CSR can be much more than a cost, a constraint, or a charitable deed—it can be a source of opportunity, innovation, and competitive advantage.”
The point Porter and Kramer are making reflects what many of us have observed who practice in environmental law and address such issues as sustainability and climate change: too often the CSR or sustainability efforts and reports of corporations are driven by a sense of a need to satisfy NGO pressure or social responsibility investors, i.e., pension funds, rather than a real effort to determine what changes can be made at the management and business operation level. The CSR actions and reports may be seen as a means of placating outside pressure. Often, no corporate strategic thinking takes place at all.
Corporate Social Responsibility reporting is often the means of addressing this outside pressure. CSR or sustainability reports typically do not really delve into true impacts of the company’s supply chain, business activities, or their products. Nike was sued in 1998 under California truth-in-advertising laws for allegedly making incomplete or inaccurate statements in its social responsibility reports regarding labor practices in its foreign factories. The potential risk of making statements in these reports suggests that the reporting companies recognize that investors or shareholders have a material interest in the environmental and social practices and impacts by publicly-traded companies. This potentially raise questions of what is disclosed in a reporting company’s Securities and Exchange Commission (SEC) filings.
Moreover, reporting alone is a poor substitute for good corporate governance. The reporting demands by NGOs may force companies to focus on image rather than substance. Effective CRS requires actually addressing social issues, rather than simply developing public relations campaigns or reports.
Perhaps the most significant issue companies are struggling today with in terms of social reporting and responsibility is climate change. Several times in their article Porter and Kramer mention climate change and the reduction of greenhouse gases. This is an area where companies can benefit the environment, society, and their own bottom line. Moving beyond reporting and the ratings that NGOs and investors develop, which Porter and Kramer suggest have little real value, is critical for companies to address the social impact of their business. Climate Change is no different. Development of a climate change strategy requires a deeper understanding of the greenhouse emissions of the company’s operations and products.
A good example, recognized by Porter and Kramer, of a company that has developed a business advantage in the climate change and energy conservation space is Dupont. Linda J. Fisher, DuPont chief sustainability officer, announced a huge savings over the last several years by reducing energy consumption, and thereby reducing the carbon footprint of the company.
“Over a decade ago, we set a goal to hold our energy use flat at 1990 levels. We have exceeded that goal; our current energy use is 6 percent below our target. Along the way we have saved more than $3 billion and grown our businesses by 30 percent,” said Fisher. “The focus on energy has contributed to our greenhouse gas reductions, which are 72 percent below 1990 levels. Today we are looking beyond our own energy profile to develop new products and offerings to help our customers address energy efficiency. We believe this will provide growth opportunities for a number of our businesses.”
General Electric’s Ecomagination program is another example of how competitive advantage can be derived if corporate social responsibility and core business strategy are aligned. The advantage is not only corporate reputation. Too much effort is focused on this issue alone, that while extremely important, does not permit the full benefit of a the emergence of a true business or economic advantage. These companies have achieved what Porter and Kramer belive is rare in CSR endeavors.
“Few companies have engaged operating management in processes that identify and prioritize social issues based on their salience to business operations and their importance to the company’s competitive contest." Porter and Kramer conclude. “Even fewer have united their philanthropy with the management of their CSR efforts, much less sought to embed a social dimension into their core value proposition. Doing these things requires a far different approach to both CSR and philanthropy than the one prevalent today. Companies must shift from a fragmented, defensive posture to an integrated, affirmative approach. The focus must move away from an emphasis on image to an emphasis on substance.”
With the rising call for regulation in the United States of greenhouse gas emissions, the publicity and press garnered by the Al Gore movie An Inconvenient Truth and Academy Award for the documentary, the international demand from the European Union for the United States to join in the Kyoto Protocol or its successor, and the NGO pressure for climate change disclosure, all companies with any significant carbon footprint should be evaluating not only how their business could be adversely impacted by legislation, but what opportunities and competitive advantage could be gained by addressing their direct and indirect greenhouse gas emissions before legislation goes into effect.
Porter and Kramer establish the business case for the inclusion in corporate governance and strategy social responsibility. Climate change at this time may be the most critical concern that many companies should be analyzing. To go beyond image and public relations pieces on websites and reports, companies must review and understand the impact they have on society and the environment and what benefits to society and their own bottom line they could achieve if their business strategy and practices were changed. Many examples exist to demonstrate the competitive advantage proactive companies have achieved. The publication of Porter and Kramer’s article may be a watershed event for management and directors to reconsider their corporate strategy in the context of Corporate Social Responsibility.