Foolish Book Review: Corporate Responsibility, Part 3

In our previous articles highlighting essays from Harvard Business Review on Corporate Responsibility, we've looked at two important pieces on the topic of corporate social responsibility. First we saw how corporations are able to serve the world's poor, and do so profitably. Next we learned that Canon uses a spirit of cooperation to positively affect communities and the environment. Turning our attention to "The Competitive Advantage of Corporate Philanthropy" by Michael Porter and Mark Kramer, now we will learn how an alignment of corporate charity with corporate competitiveness benefits both the corporation and the community.

Corporate social responsibility (CSR) has been a topic of great interest over the past handful of years. There are a number of reasons why this is so, not the least of which is the fact that investors are increasingly demanding more from their investments. Many of my colleagues at The Motley Fool have devoted their time to educating the public on socially responsible investing (SRI), because for us, simply making a profit is not enough of a contribution to society in light of increasing environmental concerns and social stability issues.

Famed economist Milton Friedman (who recently passed away, leaving behind a rich legacy on issues of monetary policy) is known for, among other things, his staunch position on the role of the corporation in society. In a New York Times Magazine article published in 1970, he argues that the "social responsibility of business" is to "increase its profits," and nothing more. In Capitalism and Freedom he adds that if charitable contributions are to be made, they must come from individual stockholders or employees, and not from the corporation.

Porter and Kramer's essay challenges Friedman on two points. First, they say, his argument assumes that "social and economic objectives are separate and distinct, so that a corporation's social spending comes at the expense of its economic results." Second, they question the assumption that "corporations, when they address social objectives, provide no greater benefit than is provided by individual donors."

Charitable efforts can improve competitive context
Earlier this week, we investigated the latest conference call for Gap (NYSE: GPS  ) . The apparel retailer has struggled mightily over the past few years, but we learned that the company may have found new hope from the most unlikely of sources -- its charitable efforts. Teaming up with (Product) Red and launching a new apparel line called Gap (Product) Red, it has seen an overwhelming response by consumers to the edgier and more premium product. The response by the public has been so strong that the company is now planning to apply a similar look throughout the Gap brand. It just may be that the long-awaited turnaround that investors have anticipated will actually come about in part as a result of Gap's charitable efforts.

Porter and Kramer contend, "Corporations can use their charitable efforts to improve their competitive context." They add, "Using philanthropy to enhance [competitive] context brings social and economic goals into alignment and improves a company's long-term business prospects."

Many examples were offered. Cisco Systems (Nasdaq: CSCO  ) , for instance, in cooperation with the U.S. Department of Education and the United Nations, launched an educational program called Cisco Networking Academy, which trains youth residing in at-risk communities to become computer network administrators. The program not only gives youth key skills for an important and growing job market, it also benefits Cisco by providing it with a greater pool of viable job candidates.

Similarly, DreamWorks Animation (NYSE: DWA  ) initiated a program that provides low-income students in Los Angeles with skills needed in the entertainment industry. The company's various divisions are working in cooperation with local community colleges. DreamWorks and others in the entertainment industry benefit economically from a "greater availability of specially trained graduates." The social benefit is an "improved educational system," as well as "better employment opportunities" for the urban youth.

Corporate leverage to maximize impact
The second of Friedman's assumptions targeted by Porter and Kramer is that corporations are not as capable as individual donors and foundations when it comes to philanthropy. On the contrary, they argue that a company can "leverage its capabilities and relationships in support of charitable causes," producing social benefits that far exceed those "provided by individual donors, foundations, or even governments."

When philanthropy is connected to a company's business model, the corporation is freed up to use its vast resources -- including R&D initiatives, management and technical expertise, external relationships ranging from suppliers to governments, finances, and of course labor power -- toward the philanthropic goal. These are qualities that corporations can bring to the philanthropy table that foundations and individuals are not able to match.

Bank of America (NYSE: BAC  ) leverages its enormous capabilities as it pursues community and economic development initiatives in the inner cities of the United States. The banking giant profits from these efforts, and so to do urban communities.

Exxon Mobil (NYSE: XOM  ) has devoted a substantial amount of resources over the years to building out infrastructure in developing nations. Building roads, for instance, improves commerce opportunities for these communities, while also giving Exxon Mobil access to an expanding market.

Drug manufacturers have often used their enormous R&D funds to develop needed treatments, and subsequently have donated the drugs to communities in need. But Pfizer (NYSE: PFE  ) has also teamed up with other organizations to "create the infrastructure needed to prescribe and distribute [treatments] to populations that previously had little access to health care, much less modern pharmaceuticals." This action provides an obvious social benefit, and it also benefits Pfizer, in that the company now has a functional distribution network in place which it can tap into for future for-profit endeavors.

A new era of corporate philanthropy
The days of corporate philanthropy for the sole purpose of gaining goodwill are quickly coming to an end. We are entering a new era in which corporate interests, social interests, and environmental interests are not seen as separate and self-serving, but as interdependent and mutual beneficiaries. Even more, investors are increasingly looking for corporations that not only meet their fiduciary responsibility to shareholders, but also meet their social and environmental responsibilities to stakeholders -- folks like you and me who have a public interest in what a company does.

Porter and Kramer have shown that corporations are prime candidates to do more in the fight against some of the most pressing issues facing society today. By leveraging their resources and aligning competitive objectives with philanthropic efforts, corporations have the power to make great contributions to the world.

Other articles with social responsibility messages:

The Motley Fool has its own philanthropic endeavor, which we fondly call Foolanthropy. The 2006 campaign has begun. Click here to read up on our reader-nominated charities and to donate.

We're proud to partner with Hilton Family Hotels in our Foolanthropy 2006 campaign.

Gap is both aMotley Fool Stock Advisorand aMotley Fool Inside Valuerecommendation. Pfizer is aMotley Fool Inside Valuerecommendation. Bank of America is a Motley Fool Income Investor recommendation. DreamWorks is aMotley Fool Stock Advisorrecommendation.

Fool contributor Jeremy MacNealy is writing a law and ethics thesis paper on corporate social responsibility as part of a graduate program at Duke University. He has a player rating of 97.50 and is ranked 348th out of 13,861 participants in Motley Fool CAPS. He has no financial interest in any company mentioned. The Motley Fool has a disclosure policy.


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