VideoCorporate social responsibility (CSR), the idea that companies have obligations not just to their investors but also to their stakeholders, society, and the environment, is hot. A recent Google search turned up 4,680,000 hits for the phrase, compared with 2,340,000 hits for "shareholder value." Here and abroad, consumers, nongovernmental organizations, and socially responsible investors are prodding companies to pursue a variety of social and environmental goals.
At the same time, CSR has provoked a backlash. Critics denounce the idea as wrongheaded or worse, and some argue that companies should focus narrowly on maximizing shareholder value.
What does the sound and fury over CSR signify? Does it truly herald a sea-change in corporate priorities? Two experts who published books on the subject in 2005 offer very different answers to these questions. One is Steven D. Lydenberg, chief investment officer of Domini Social Investments, a prominent socially responsible investing (SRI) firm. His book, Corporations and the Public Interest: Guiding the Invisible Hand, proposes strategies for making CSR an essential part of corporate management.
The other expert is David Vogel, a professor of business ethics at the University of California's Haas School of Business. Vogel is deeply skeptical of CSR, and his book, The Market for Virtue: The Potential and Limits of Corporate Social Responsibility, is a thoroughgoing critique of CSR's assumptions and influence. CFO recently interviewed Lydenberg and Vogel about the future of CSR, and here is some of what they had to say.
Creating Long-Term Wealth
For Lydenberg, CSR is "a major secular development, driven by a long-term reevaluation of the role of corporations in society." This reevaluation, he says, is clearer in Europe, where it is commonly assumed that companies have duties to stakeholders as well as shareholders. U.S. managers may be wary of this assumption, "but I think that [the European] influence will be very hard to resist over the long run," says Lydenberg.
European institutional investors are leading the way. National pension funds in Sweden and Denmark "now have what I would call social and environmental screens," says Lydenberg. Two large pension funds in the Netherlands have pilot investment programs with environmental screens, while France's state pension reserve fund is incorporating social and environmental issues in some investments.
Socially responsible investing in the United States has been driven primarily by the retail sector, notes Lydenberg, but institutions are getting involved. Last year, for example, the California Public Employees Retirement System agreed to invest up to $500 million in environmentally screened stock funds. And in July, financial-services giant Wells Fargo & Co. announced it would provide at least $1 billion over the next five years to environmentally beneficial business opportunities. These are relatively small sums, but Lydenberg believes that institutional SRI may snowball.
An "immensely influential" development on the horizon, says Lydenberg, is guidance from the International Organization for Standardization (ISO) for implementing CSR programs. Similar to the ISO 9000 standard for quality, the ISO 26000 standard for social responsibility is due out in 2008. There is a general expectation, says Lydenberg, that companies concerned with sustainability issues will adopt the standard and ask their suppliers and vendors to follow suit.
Another spur to CSR, he says, is the Securities and Exchange Commission's 2003 rule that money and mutual-fund managers must disclose their proxy votes and explain their voting policies. More than 100 social and environmental issues are put on proxy ballots every year in the United States, Lydenberg points out. "To me this says that the SEC sees the evaluation of social and environmental issues as part of the fiduciary duty of [investment managers]," he says.
For public companies, comprehensive disclosure of social and environmental performance "has already passed the tipping point," says Lydenberg. So far more than 700 organizations have published sustainability reports using part or all of the Global Reporting Initiative's guidelines for such reporting, in which companies disclose a "triple bottom line" of economic, social, and environmental performance. In France, listed companies must now include some 40 CSR indicators in their financial annual reports.
Such disclosure will help educate consumers and investors, who in turn will help steer companies to the public interest, hopes Lydenberg. His goal: a market that encourages creation of "long-term wealth." "Corporations create long-term wealth," he writes in Corporations and the Public Interest, "when, in addition to generating productivity gains, they preserve natural resources for future generations, create value in their relationships with their stakeholders, and do not externalize costs onto society."
A Picasso in the Office
David Vogel readily acknowledges the influence of CSR. In fact, he does so on page one of his latest book, citing examples such as Nike and numerous other apparel producers, which now monitor supplier working conditions; Starbucks and other coffee retailers, which now sell coffee with the Fair Trade label; and Home Depot and similar retailers, which no longer sell products using wood from endangered forests.
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