Does it pay to be good?
A.J.Vogl, Across the Board Magazine - Jan/Feb 2003

Yes, say advocates of corporate citizenship, who believe their time has come - finally.

Corporate citizenship: For believers, the words speak of the dawning of a new era of capitalism, when business, government, and citizen groups join forces for the greater good, to jointly tackle such problems as water shortages and air pollution, to do something about the 1.2 billion people who live on less than a dollar a day.
Corporate citizenship: For critics of today's capitalism, the words smack of hypocrisy, big business' cynical response to charges of greed and corruption in high places, intended to mollify those who say corporations have too much power and that they wield it shamelessly. Critics charge that corporate citizenship is a placebo to the enemies of globalization, a public-relations smoke screen, capitalism's last-ditch attempt to preserve itself by co-opting its opposition.
Corporate citizenship: For many, it remains a diffuse concept, but generally it speaks to companies voluntarily adopting a triple bottom line, one that takes into account social, economic, and environmental considerations as well as financial results. Though some associate corporate citizenship with charity and philanthropy, the concept goes further-it embraces a corporate conscience above and beyond profits and markets. David Vidal, who directs research in global corporate citizenship at The Conference Board, comments, "Citizenship is not, as some critics charge, window dressing for the corporation. It deals with primary business relationships that are part of a company's strategic vision, and a good business case can be made for corporate citizenship."
Whether you are a critic or believer, however, there is no question that corporate citizenship - a term that embraces corporate social responsibility (CSR) and sustainability - is no longer a concept fostered by idealists on the fringe. It has entered the mainstream.
But why now? Though the era of corporate citizenship was ushered in with the fall of the Berlin Wall and the rise of market capitalism worldwide, current sentiment against big business has given new weight to the cause. Virtually every opinion survey shows that people think corporations have too much power, and that they will do anything in the pursuit of profits. And now, to add to public distrust, we have a flagging economy, a shambolic stock market, and what have been called "pornographic" CEO salaries. These circumstances have given citizenship's champions new planks for their platform, such as accounting and compensation practices. At the same time, attacks on the very nature of business have sent corporate leaders searching for a bright spot, and that spot may very well be the concept of corporate citizenship.
But that makes corporate enthusiasm for citizenship sound like a calculated, even cynical stance that is likely to last only as long as the environment remains hostile. There are grounds for believing that it is more than that, that it speaks to deeper changes in the greater world that make it necessary for large corporations to do good. Some of these changes include:

Tightening regulatory pressures.
France, for instance, requires all companies listed on the Paris Stock Exchange to include information about their social and environmental performance within their financial statements; the Johannesburg Stock Exchange requires compliance with a CSR-based code of conduct; and the United Kingdom (the first nation with a minister for corporate social responsibility) requires pension-fund managers to disclose the degree to which social and environmental criteria are part of their investment decisions.

Expect citizenship proponent to make corporate governance itself the issue.
Will there be more national legislation? "If you had asked me that three or four years ago, I would have answered, 'Unclear, or probably not,"' says Allen White. White is acting chief executive of Global Reporting Initiative, an Amsterdam-based organization that has developed uniform guidelines for CSR reporting. "But in 2002 we've seen developments that could not have been anticipated several years ago, developments that have challenged companies to reconstruct or restore credibility, challenges to markets to demonstrate to investors that available information is accurate. Governments have taken note and are considering legislative and regulatory action."

Changing demographics.
A socially engaged and better-educated population demands that the companies with which they do business - as consumers, employees, or investors - conform to higher standards. Both consumers and employees tell researchers that they prefer to purchase from and work for a company that is a good corporate citizen. On the investor front, activists-including individuals, socially responsible mutual funds, public pension funds, and religious groups-submitted 800 resolutions in 2002, according to Meg Voorhes, director of the social-issues department at Investor Responsibility Research Center, a Washington, D.C.- based organization that tracks proxies.

More opportunity for investors to back their convictions with money.
Socially aware investors can choose among some 230 mutual funds, and, according to Steven J. Schueth of the nonprofit Social Investment Forum, more than 800 independent asset managers identify themselves as managers of socially responsible portfolios for institutional investors and high-networth individuals. Indexes of social and environmental performance - like the DowJones Sustainability World Indexes and FTSE4Good-are becoming significant market factors in screening for good citizenship. These indexes have teeth in them: They will and do drop companies that fail to meet social responsibility standards.

The most prominent corporate citizens
rarely receive commensurate rewards.

Pressure from nongovernmental organizations.
Not only are international NGOs growing in number -at last count, there were 28,000 worldwide - their visibility and credibility are on the rise. Last year, PR executive Richard Edelman told the World Economic Forum, "NGOs are now the Fifth Estate in global governance-the true credible source on issues related to the environment and social justice." While Americans generally trust corporations more than NGO "brands," the opposite is true in Europe. A study conducted by Edelman's firm found that Amnesty International, the World Wildlife Fund, and Greenpeace outstripped by a margin of nearly two to one the four highest-rated corporations in Europe: Microsoft, Bayer, Shell, and Ford. As in other areas, it appears, European public opinion affirming social responsibility is ahead of that of the United States.

Greater transparency.
If good news travels fast, bad news moves faster. The internet has given a platform to critics who, if they existed before, could be ignored; now they will be heard. There is the by-now-classic story of MIT graduate student Jonab Peretti, who submitted the word sweatshop to Nike's personalize-your-shoes iD program. Nike refused the order, terming the word "inappropriate slang." Peretti replied, "I have decided to order the shoes with a different iD, but I would like to make one small request. Could you please send me a color snapshot of the ten-year-old Vietnamese girl who makes my shoes?" His e-mail correspondence was forwarded around the world and picked up by the mass media. Nike, in its first annual "corporate responsibility report," responded convincingly to charges that it exploited workers - indeed, the company is generally known as a CSR innovator - but inevitably sounded defensive.
All of these factors have led to increasing corporate acceptance of the importance of citizenship. Every three years, BearingPoint, the consultancy formerly known as KPMG Consulting, surveys global Fortune 250 companies on corporate-responsibility issues. The latest survey found that 45 percent of the 250 companies surveyed issued environmental, social, and/or sustainability reports in 2001, up from 35 percent in 1998, and the number of U.S. companies that issued such reports increased 14 percent over the same period. Today, too, two-thirds of the world's largest companies use their Websites to trumpet their social and environmental activities.
Which is not to say that all these corporations have become true believers. "We have to acknowledge," writes Steve Hilton, a British CSR consultant, "that fear of exposure and the need for compliance are the most powerful forces galvanizing the majority of active corporate citizens."

No Good Deed Goes Unpunished.
As necessary as corporate citizenship may be, it still faces challenges from both inside and outside the corner office. Perhaps the most disheartening of these hurdles is that the most prominent corporate citizens rarely receive rewards commensurate with their prominence. As Hilton and Giles Gibbons, co-authors of the pro-CSR Good Business: Your World Needs You, point out, "Curiously, the companies whose hearts are most visibly fixed to their pinstriped sleeves tend to be the ones that attract the most frequent and venomous attacks from anti-business critics." Is this because critics feel that devious agendas lie behind the enlightened policies? Noreena Herts, a British critic of corporate citizenship, wonders whether Microsoft, by putting computers in schools today, will determine how children learn tomorrow.
Is it that corporations haven't gotten their stories across properly, or that they have - and are still being vilified? The experience of McDonald's in this arena is revealing. Last April, the fast-food chain published its first social-responsibility report, composed of 46 pages summarizing its efforts in four categories: community, environment, people, and marketplace. Those efforts have been rewarded in some courts of public opinion: In 2000 and 2001 Financial Times/Pricewaterhouse-Coopers surveys of media and NGOs, McDonald's placed 14th among the world's most respected companies for environmental performance.
At the same time, few corporations have been attacked as savagely as McDonald's for its "citizenship." It has been portrayed as an omnivorous monster that destroys local businesses and culture, promotes obesity, treats its employees badly, and despoils the environment. McDonald's goes to great lengths to answer these charges in its social-responsibility report - which was itself widely criticized - but, like Nike, it can't help looking defensive. It will take a great deal more than a report of its good works to diminish the Golden Arches as a symbol of "capitalist imperialism" in the eyes of antiglobalists or to stanch the vitriol on such Websites as Mcspotlight.
There's no question that the bar is set exceedingly high in the arena of corporate social involvement. Philip Morris Cos. spends more than $100 million a year , most conspicuously in a series of TV commercials, on measures to discourage underage smoking - and still critics charge that the Philip Morris campaign is a cynical PR stunt that actually encourages kids to smoke. The company has been accused of having "a profound conflict of interest that cannot be overcome.
Another tobacco company, BAT, the world's second-largest, put some members of the social-responsibility establishment in an uncomfortable position, when last July, it became the industry's first company to publish a social-responsibility report. Few knew what to think upon reading the tobacco company's blunt rhetoric - "(T)here is no such thing as a "safe" cigarette… We openly state that, put simply, smoking is a cause of certain serious diseases"- and the 18 pages devoted to the risks of smoking. BAT even had its report audited by an independent verifier. All this wasn't nearly enough to satisfy antismoking groups, of course-they continue to view the company with deep suspicion. Would anyone have predicted otherwise?
When accused of being overly suspicious, critics point to one company that, over the last six years, won numerous awards for its environmental, human rights, anti-corruption, anti-bribery, and climate-change policies; a company prominent on "most admired" and "best companies to work for" lists; a company that issued a report on the good deeds that supported its claim to be a top corporate citizen. That company was Enron.
No one would argue that Enron is typical, yet its debacle has tainted other companies. It also raises a difficult question about CSR: What is the link between how a company is managed - corporate governance - and corporate citizenship? Steve Hilton, speaking from London, says that the link is not really understood in the United Kingdom: "People here have not made the connection between the corporate-governance, executive-compensation, and accounting-fraud issues in the United States and operational issues that come under the heading of corporate citizenship. I would argue they're all part of the same thing."
So would Transparency International's Frank Vogl, co-founder of the anti-corruption NGO. He believes that CSR has been undermined because it has been disconnected from corporate conduct issues. "Foreign public trust in Corporate America has been diminished," he said, "and there is scant evidence that U.S. business leaders recognize the global impact of the U.S. scandals."
Vogl says that, for most countries in the world, corruption is much more of a social-responsibility issue than either the environment or labor rights. "What U.S. businesspeople see as a facilitating payment may be seen in developing countries as a bribe," he comments, "and I think that provides some insight into why the United States ranks behind 12 other countries on the Transparency international Bribe Payers Index. To me, corporate citizenship means you don't bribe foreign officials. That's the worst kind of hypocrisy."

Will They Be Good in Bad Times?

The specter of hypocrisy raises its head in another quarter as well: Do employees of companies claiming to be good corporate citizens see their employer's citizenship activities as a diversion or cover-up to charges of bad leadership and poor management practices? Certainly, if recent surveys are a guide, top management needs to restore its credibility with employees. In a recent Mercer Human Resource Consulting study, only a third of the 2,600 workers surveyed agreed with the statement, "I can trust management in my organization to always communicate honestly." And a Walker Information survey of employees found that only 49 percent believe their senior leaders to be "people of high personal integrity." If CSR is perceived by employees merely as puffery to make top management look good, it will not get under an organization's cultural skin.
Even if there is a genuine management commitment, corporations have other obligations that may take precedence, begging the question: Will corporations be good citizens in bad times as well as good? The experience of Ford Motor Co. brings the question to earth. In August, Ford issued its third annual corporate-citizenship report. Previous reports had drawn plaudits from environmentalists, but this one, coming at a time when the automaker faced financial difficulties, was attacked by the same environmentalists for failing to set aggressive goals for reducing greenhouse-gas emissions or improving gas mileage. Sierra Club's executive director called it "a giant step in the wrong direction for Ford Motor Co., for American consumers, and for the environment."

"Businesses needn't apologize for making
products that other Americans want to buy."

Lingering tough economic conditions may impel other companies to take their own "giant steps" backward. An old business saw has it that when times get tough and cuts have to be made, certain budgets are at the top of the list for cutbacks-advertising for one, public relations for another, For companies in which corporate citizenship is seen as an extension of public relations, of "image building" or "reputation management," it may suffer this fate.
Which is as it should be, say some critics. As 7he Wall Street Journal lectured CEO William Ford on its editorial page: "We also hope Mr. Ford has learned from his mistake of ceding the moral and political high ground to environmentalists.... Businesses needn't apologize for making products that other Americans want to buy. Their first obligation is to their shareholders and employees and that means above all making an honest profit."

Does the 'Business Case' Really Have a Case?
But hold on: What about the so called business case for corporate citizenship -that it contributes to making "an honest profit"? Unfortunately, it's difficult to quantify in cost-benefit terms what that contribution is. Not something to be concerned about, says Simon Zadek, CEO of AccountAbility, a London-based institute that has established CSR verification standards. "It is a fact that the vast majority of day-to-day business decisions are taken without any explicit cost-benefit analysis," he says, pointing to employee training as an example of a corporate expenditure that is difficult to quantify in cost-benefit terms. What he doesn't mention is that, when business is suffering, training is usually among the expenditures to be cut back or eliminated.
Ultimately, Zadek concedes that, in strictly quantifiable terms, one cannot make a cost-benefit case for corporate citizenship. "Although the question 'Does corporate citizenship pay?' is technically right, it is misleading in practice," he says. "Rephrasing the core question as "In what ways does corporate citizenship contribute to achieving the core business strategy?' is far preferable."
To some hardheaded corporate types, Zadek's reasoning may seem disingenuous, but even the hardheads can't be dismissive - at least publicly. Moreover, they would probably acknowledge that corporate citizenship, in concept and practice, has come too far to be ignored. In the future it may well become what Steve Hilton calls a "hygiene factor," a condition of doing business. Hilton's firm, Good Business, consults with firms on citizenship issues. "I think business leaders are coming to realize CSR's potential to go beyond a compliance/risk-management issue into a genuine business tool," he says. "That's been the rhetoric all along, but the reality has been that it's been a slightly marginal issue. With few exceptions, it's been seen as an add-on, without being incorporated into core business decisionmaking.

Expect citizenship proponents to make corporate governance itself the issue.
This is Zadek's point when he argues the case for what he calls "third-generation corporate citizenship." The first generation is defined by cause-related marketing and short term reputation management. The second occurs when social and environmental objectives become a core part of long-term business strategy; as an example, he points to automakers competing in the arena of emission controls. The third generation is based on collective action, where corporations join with competitors, NGOS, and government "to change the underlying rules of the game to ensure that business delivers adequate social and environmental results."
Changing the rules means, for one thing, a more level playing field. "In CSR," says AccountAbility COO Mike Peirce, "companies that are leaders might suffer a penalty if there's a big gap between themselves and laggards in the field, so they'd like everybody ticking along at at least a basic level." In other words, a socially responsible company does not want to be penalized financially for being socially responsible. Of course, a cynic might reply that if CSR indeed provides the competitive advantage that its proponents insist it does, then it is the laggards that should suffer the severest financial penalty.
To convince doubters, efforts are being made to schematically quantify corporate social responsibility. In a recent Harvard Business Review article titled "The Virtue Matrix: Calculating the Return on Corporate Responsibility," Roger L. Martin makes a point of treating corporate responsibility as a product or service like any other. According to Martin, who is dean of the University of Toronto's Rotman School of Management, his matrix can help companies sort out such questions as whether a citizenship initiative will erode a company's competitive position.
Even if Martin's formula seems overly clinical, it supports the trend toward closer analysis of what social responsibility means and what it brings to corporations practicing it. But analysis will take you only so far. "I[t is impossible to prove the direction of the flow of causality," writes Chad Holliday, chairman and CEO of DuPont and co-author of Walking the Talk: The Business Case for Sustainable Development. "Does a company become profitable and thus enjoy the luxury of being able to worry about environmental and social issues or does the pursuit of sustainability make a company more profitable?"
But for large public companies, the question of whether it truly pays to be good will be asked less and less; for them, it will be necessary to be good, if only to avoid appearing Neanderthal. That means that corporate social responsibility, itself nothing less than a growth industry today, will become "normalized" into corporate cultures.
Yes, there will be an effort to level the playing field in CSR, but, further, expect citizenship proponents to attempt to raise the field to a higher level by making corporate governance itself the issue. "Unless we make basic structural changes," says Marjorie Kelly, the editor of Business Ethics magazine and a frequent critic of CSR, "it'll be nothing but window dressing. The corporate scandals have given a real-world demonstration that business without ethics collapses, and that has given us an extraordinary opportunity to change the way we do business."