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September 20, 2008

Thoroughly Modernized Milton And Corporate Social Responsibility

Jeff Hittner
Corporate Social Responsibility Consulting Leader
IBM Global Business Services

Roughly 38 years ago, Nobel Prize-winning economist Milton Friedman wrote that the only societal responsibility a business has is to increase profits.

There is still an element of truth to that statement – the primary function of a company is produce profit, and those that don’t aren’t around for long. But the context for how businesses must operate and the path to profit have changed substantially enough to remove this as a company’s sole objective.

In the business world Friedman wrote about, businesses operated in relatively flat dimensions – provide a product or service, find willing buyers, and generate revenue and profit.

Stakeholders such as employees, shareholders and most of all customers, rarely – if ever – talked with one another, nor were there any practical means for them to do so.

Any notions of corporate social responsibility beyond generating profit fell into two categories. The first was to stay out of trouble – make sure your products were safe (or safe enough) and keep on the right side of the law. The second was benevolent philanthropy – designed primarily as a publicity ploy, usually targeting a pet cause of the CEO.

Friedman acknowledged the first as necessary and appropriate, but viewed the second as a complete misuse of corporate resources – an ill-conceived attempt at social engineering, wasting shareholder money. In his view, the responsibility of the CEO was to increase profit, benefiting employees and shareholders, who could then choose what to do what they wanted with those gains – such as contributing to social causes, if they wished.

Likewise, customers could use their money to support social causes if they wished, but were ill-served by subsidizing it through increased prices for the products and services they bought.

But today, all those constituencies see the world and how companies act within it differently. As a result, that “stay of trouble and do a little good” model is no longer sufficient.

Stakeholders of all types – and customers in particular — have high and rising expectations for the societal impact of business. They are watching corporate conduct closely, sharing information and organizing through technology, and making decisions on what to buy, where to invest and who to work for based on what they see.

These folks don’t hand out “good conduct” awards to companies anymore – if they ever did – for simply meeting the minimum standard. Instead of “social responsibility” being layered onto business in the form of legal compliance and superficial philanthropy, they expect it to be interpolated throughout a company’s strategy and evident in all of its actions.

Under those rules, CSR is no longer an expense, but a necessary investment to attract shareholders, talent, and customers.

Business leaders worldwide are stepping up to this as an opportunity. IBM’s biennial CEO study, which polled more than 1,100 senior executives worldwide, showed that companies are planning to increase their investments in CSR by 25 percent over the next three years.

As they decide where to make those investments, here are three things they should consider.

“Green” is the rising tide

The magnitude of climate change concerns – and consequent press attention – is advancing the awareness of a much broader array of challenges-turned-opportunities.

In fact, consumers and other stakeholders have turned their attention to a full range of social issues, from the need for healthcare to healthier (and safer) products, from managing water as a global resource to strategies for workers to gain new skills.

Of course, with so many potential issues to tackle, a company’s first true challenge may be choosing the best jumping-off point. By starting with its strategic objectives and core capabilities, and then exploring the potential CSR implications of each one, a company can, at the very least, automatically change the lens with which it focuses on its business strategy.

Then it can evaluate those initiatives against the impact on various stakeholder groups and the costs, as well as returns or savings.

For example, microfinancing – providing small business loans to individuals so they can create sustainable income – has tremendous potential to help reduce poverty in Africa. But among the major costs and obstacles for organizations providing this service are the systems and software needed to support them. But among the major costs and obstacles for organizations providing this service are the systems and software needed to support them. So my company is partnering with those organizations, drawing on our expertise in banking applications and systems to provide them with access to the technology they need.
Companies no longer own their brands

In today’s world there is simply an unprecedented amount of information—and opinion—about a company’s business, its products, and its partners. The upshot of this is diminished control over the reputation.

In effect, thanks to instant connectivity and the ease of creating “activist” communities, customers and other stakeholders are becoming the new brand managers. The key then is to persuade them work with you instead of against you.

So companies should push the “openness” envelope. In the first place, it’s always better to be open than pried open. Openness, of course, doesn’t mean disclosing trade secrets to competitors.

Instead, it entails creating relationships with all constituencies: shareholders, consumers, clients, regulators, and more. Rather than waiting for these constituencies to impose change, businesses can gain by listening and responding, even soliciting ideas and concerns in advance.

For example, after customers became concerned about avian flu outbreaks in Asia, the Mall Group of Thailand began providing customers with detailed information on poultry. By scanning a barcode, customers could determine that the chickens they were about to purchase came from regions free of the virus, with detail right down to the farms the birds came from.

Engage and empower employees at every level

All too often in corporate life, a CEO announces a vision and the average employee is mystified or indifferent. But with CSR, companies can engage with employees at every level on things that matter to them. It’s a priceless opportunity to rally the company – from bottom to top – and a powerful recruitment and retention tool in a world where the war for talent is shaking up whole industries.

But the HR implications are only half the picture. A CSR growth platform is a transformational strategy best served by open collaboration. By ensuring that all of employees are part of the solution, companies can tap into new opportunities for innovation, drawing out talents and abilities from they may not even know their employees have.

That might take the form of grand challenges where groups collaborate to innovate around a common goal, like developing a new product that has societal or environmental benefits. Or it might be a program in that rewards employees to take individual actions that collectively make a significant difference.

For example, 3M’s Pollution Prevention Pays (or 3P) program rewards employees who have breakthrough ideas that eliminate pollution at the source. Since its inception, nearly 6,000 3P projects have prevented the creation of more than 2.2 billion pounds of pollutants and generated savings of nearly $1 billion in the first year alone.

What does all this lead to? If done properly, greater market share, higher revenues, better employee engagement – and ultimately greater profit. My guess is Milton Friedman would approve of the results.

Jeff Hittner is the corporate social responsibility consulting leader for IBM Global Business Services. IBM’s biennial global CEO study can be found here.

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