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Three rules can guide philanthropic companies that seek a profitable path toward a better world.
Matthew Bishop, CFO Magazine
September 1, 2008
"We must become a good company," the chief executive declares, having just returned from a conference featuring the philanthropic Google Guys, co-founders Sergey Brin and Larry Page. "And I don't just mean good in the business sense; I mean good in the 'Don't be evil' sense. You know about the One Percent Rule? One percent of profits, 1 percent of equity, and 1 percent of employees' time allocated to doing good. That's what they do at Google — so we are going to do 2 percent!"
What should you, the CFO, do? Hug the CEO, because deep down you always wanted to work for a charity? Protest or even resign, because frittering away shareholders' equity on good causes might breach your fiduciary responsibilities? (Google can get away with the One Percent Rule because that was part of its IPO prospectus, so shareholders bought into it.) Or is there a way you can ensure that your company does good in ways that maximize its long-term profitability and shareholder value?
A first impulse might be to urge the CEO to delegate good deeds to the public-relations department, since doing good can burnish a company's reputation. But much PR-driven corporate philanthropy or other spending on corporate social responsibility (CSR) has, frankly, wasted money. Done badly, CSR can actually spur greater criticism from activist nonprofits, so it is too risky to be left to PR.
Companies do have an important role to play in tackling some of society's biggest problems, but it is a role that needs to be well thought out and strategic. Those on the cutting edge of what is now being called "good corporate citizenship" apply three rules to get the best out of their philanthropy: one, be good with what you're good at; two, stick close to what matters to your business; three, don't be afraid of turning a profit by doing good.
Google does all three. The Internet search giant's core expertise is finding patterns in complex amounts of information, a skill it is now applying philanthropically to develop an early warning system against pandemics. This project also obeys the second rule, as Google's mission as a business is to organize the world's information. The philanthropic division of the company, Google.org, which is the main driver behind the One Percent Rule, is free to use the best available means to achieve virtuous goals, from giving money away to political lobbying to investing in for-profit business opportunities.
Other leading companies have begun to apply these rules. Wal-Mart, for example, leveraged its logistical expertise to assist relief efforts in the wake of Hurricane Katrina. The effort won plaudits for a speed of response far faster than the federal government's. "We didn't just get needed goods to Katrina victims — we did it less expensively than anyone," said Lee Scott, Wal-Mart's CEO, soon afterwards. Shortly after this turning point in Scott's thinking about how the company could do good, Wal-Mart harnessed its core business assets to fighting climate change. As Scott explained with a twist on the retailer's popular marketing slogan, "The environment is begging for 'Every Day Low Cost' — for the Wal-Mart business model."
Today, one of Wal-Mart's main campaigns features a 5 percent reduction in overall packaging by 2013. Slightly smaller packaging for just one of its own-brand toys will use 497 fewer transport containers, save 3,800 trees, and conserve more than 1,000 barrels of oil. Less waste should also boost Wal-Mart's bottom line. Likewise, the company hopes, sales of its new eco-friendly products will make money and a difference. It has calculated that selling 100 million compact fluorescent light bulbs in the United States by the end of 2007 saved consumers $3 billion off their electricity bills, and reduced greenhouse-gas emissions by 20 million tons a year — equivalent to taking 700,000 cars off the road.
The Short and Long of It
Cynics may protest that Wal-Mart's new green initiatives are not philanthropic or even virtuous, precisely because they fatten the bottom line. What is virtuous about making money? they may ask. But the initiatives are good for the planet, which is surely praiseworthy. Certainly, Wal-Mart's shareholders are not complaining about how the green initiatives have improved the company's previously shaky ethical reputation among social activists.
The challenge for CFOs is to inject much-needed rigor into the pursuit of enlightened self-interest and ensure that it really does maximize the long-term value of the company's shares. When a philanthropic proposal is accompanied by a quick financial payback, as is the case with Wal-Mart's low-energy light bulbs, such evaluation is relatively easy. But when the payback is less immediate or not as readily translated into dollars and cents, analyzing a proposed investment in doing good is far harder.
Does this mean that companies should limit themselves only to strategies for doing good that promise a quick payout? Not necessarily. Just look at the damage to the brand reputation, and presumably the share price, of companies such as Nestlé, Nike, and Shell after the public outcry over some of their less savory business practices. Perhaps some effort and money spent on scrutinizing labor practices in supply chains and marketing techniques in poor countries would have spared these companies such costly PR disasters. That would have been a great investment, even without a quick short-term profit.
So how should a CFO devote corporate resources to doing good? An innovative approach proposed by Harvard management gurus Michael Porter and Mark Kramer advises companies to treat philanthropy as akin to spending on research and development — an investment in the future. Just as well-run companies know they cut back on R&D at their own peril, so they should be reluctant to reduce their philanthropy if they believe it has long-term bottom-line benefits.
Echoing Porter and Kramer, Klaus Schwab, founder of the World Economic Forum, considers "global corporate citizenship to be a long-term investment. Because companies depend on global development, which in turn relies on stability and increased prosperity, it is in their direct interest to help improve the state of the world."
Well, maybe. But how can companies weigh the value of a philanthropic bent? With the "triple bottom line" or "blended value," to name just two of many tools now available. Top accounting firms can now furnish a consolidated picture of financial, social, and environmental performance. Admittedly, this is still more art than science, though the trend may soon give science an edge. Alert CFOs measure what they can and confirm internal verdicts with independent audits, particularly when reputational risk hangs in the balance.
Is doing good really worth doing? Plenty of critics express doubts about companies that seek credit for good citizenship. Charges range from putting lipstick on a pig to brazen betrayals of shareholders. Yet, good corporate citizenship has shades other than black and white. With ample resources, the ability to innovate, and a sound sense of balance, CFOs can help direct healthy companies toward significant roles in solving the big problems facing the world.
Matthew Bishop is chief business writer of The Economist. He is co-author (with Michael Green) of the book Philanthrocapitalism: How the Rich Can Save the World, to be published by Bloomsbury Press on October 1.