For some investors, "responsibility" has a rotten reputation. Critics have begun to step forward against those who pressure corporate America to do business in more conscientious ways.
Last month, The Wall Street Journal ran a piece by Aneel Karnani that called corporate social responsibility, or CSR, ineffective or even harmful. Karnani essentially repeats the traditional -- and simplistic -- line about the pursuit of profits being corporations' only responsibility, arguing that this relentless focus will magically increase social welfare. (Except, of course, when it absolutely doesn't.)
Capitalism has been a force for social welfare over the long term, allowing individuals to enjoy an enhanced standard of living amid innovative business activity and economic growth. However, the lessons of the financial crisis alone show that many corporate managers need to seriously question their methods for achieving sustainable profitability.
Doing well and doing good
In his article, Karnani asks:
Can companies do well by doing good? Yes -- sometimes. But the idea that companies have a responsibility to act in the public interest and will profit from doing so is fundamentally flawed. ... Very simply, in cases where private profits and public interests are aligned, the idea of corporate social responsibility is irrelevant: Companies that simply do everything they can to boost profits will end up increasing social welfare. In circumstances in which profits and social welfare are in direct opposition, an appeal to corporate social responsibility will almost always be ineffective, because executives are unlikely to act voluntarily in the public interest and against shareholder interests.
One of his supporting examples is the fast-food industry, which he claims started offering healthier menu options because it finally could do so profitably, not because of social activism or the public good. This made me wonder whether Karnani's writing in a vacuum. In the real world, these things are all related.
McDonald's (NYSE: MCD ) and other big fast-food companies were surely influenced by what the market wanted: healthier menu options. But why did customers demand better food? Because the media and social activists spent years helping to educate the public about the unhealthiness of fast-food diets. Stories about America's obesity epidemic fill the news, and the government has begun criticizing diet-related illnesses for driving up health-care costs.
Without healthier choices on their menus, those fast-food giants would have looked like a huge part of a social health problem. When faced with such a long-term risk, companies must innovate. If they behave in ways that make customers doubt their good intentions, those customers will walk away, endangering the financial well-being of even the most powerful brands.
The good, the bad, and the ugly
Acting in the public interest is ultimately good for shareholder interests.
BP's (NYSE: BP ) and Massey Energy's recent deadly disasters revealed that both companies may have placed short-term profits ahead of worker safety. Considering the painful roller-coaster ride their shareholders have endured after BP's oil spill and Massey's mine explosion, the companies might have been better off playing it safe.
Meanwhile, in light of the financial crisis, Goldman Sachs (NYSE: GS ) , Bank of America (NYSE: BAC ) , and Citigroup (NYSE: C ) all earned potential spots on the list of sin stocks to avoid. When corporate managers sow the seeds of public distrust with irresponsible or self-serving behavior, they're doing shareholders no favors.
The lawsuits and regulatory changes that spring from reckless companies' high-profile debacles can hamper their long-term profitability. Worse yet, bad public relations breed unhappy customers, prone to defect to rivals and spread the kind of brand-busting ire that can decimate an offending business's market share.
In contrast, conscious capitalism, or stakeholder capitalism, takes into account more than simply short-term profits. Companies like Whole Foods Market (Nasdaq: WFMI ) and Google (Nasdaq: GOOG ) have social responsibility built into their missions, and both are profitable, successful companies with solid brands.
Folks whose arguments match up with Karnani's may have it backward. Companies that build trust and goodwill foster loyal customers and attract less public ire and regulatory scrutiny. These businesses will ultimately enjoy far greater chances of survival and success than their less responsible counterparts. Acting in the interest of various stakeholders, including society at large, isn't antithetical to acting in the interest of shareholders.
Signs of corporate irresponsibility are a major, red-flag risk factor that investors shouldn't ignore. Myopic managers who ignore the possible ramifications of their actions may find themselves at a competitive disadvantage over the long haul.