Business professor calls for radical new definition of CSR

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Current definitions of CSR allow companies to get away with insincere ‘greenwash’ promises by ticking the right boxes. Governments need to regulate more strongly, starting with redefining the concept, according to Professor Aneel Karnani from the University of Michigan’s Ross School of Business. David W. Smith reports

After 34 years teaching business in the United States, the veteran Indian professor, Aneel Karnani, declares himself reluctantly to be a “cynic”. Karnani has heard too many insincere CSR protestations from corporates eager to protect their images. The best way to avoid such “greenwash”, he says, is to insist on proof that a company’s CSR policies have “improved the public good, but reduced their profits in the process”.

It should not count as CSR when companies say they are doing great things for the environment, but actually raise their profits in the process. “Walmart brought in LED lights at their stores and trumpeted their sustainability credentials, but they are saving money by reducing energy costs,” he said. “It’s a self-interested action that pleases their shareholders. The reality is that Walmart remains a furiously anti-union company that refuses to raise wages.”

Companies – quite rightly – consider their bottom lines and rarely indulge in the types of environmental policies that reduce profits. “We should not be fooled by the promises of big business,” Karnani said. “The directors have fiduciary responsibilities to shareholders. If they don’t fulfil them they get fired. But to address the most important environmental problems, it is necessary for companies to take a financial hit.”

Government regulators, however, are not stringent enough and allow companies to make extravagant and improbable CSR claims. A good example of an outlandish statement, Karnani says, was when Coca-Cola said they were replenishing the ground with 15 times as much water as they sourced near their bottling plant in Kala Dera, Rajasthan, India.

The Indian Government declared Kala Dera’s groundwater resources “overexploited” in 1998, but Coca-Cola went ahead and built a new plant and started operations in 2000. The company has done similar things at several water-stressed places in India, extracting unsustainable quantities from rivers and wells. Environmentalists say such selfish actions could force mass migrations in search of clean water.

‘When CSR is defined as ‘a company’s responsibility to voluntarily undertake socially desirable behaviour that decreases the firm’s profits’, only then does it become the business equivalent of altruism, and help avert destruction to the environment,’ Professor Karnani, Ross School of Business

In the absence of a Government investigation into Coca-Cola’s actions at Kala Dera, Professor Karnani did his own research. On completing his project, he deemed Coca-Cola’s statements to be “preposterous”. “There is absolutely no evidence to support the claim that it recharges 15 times the amount of water it withdraws,” he said. “The results show CSR does not avert damage to nature in this water-deprived and over-exploited area. To prevent such a ‘tragedy of the commons’ – the destruction of nature belonging to all – we need regulatory regimes with the ability to enforce sanctions.”

The lax regulatory environment allowed Coca-Cola to make their big statements without having to back them up. The company did not install meters to measure the amount of water recharged, even though they are quite cheap. Instead, they say they are using a mathematical model to measure the “recharge potential”. But when Professor Karnani demanded to see the model, he was told that that the calculations shown in the spread sheet were “an internal document and not meant for external usage”.

Another unsubstantiated Coca-Cola assertion was that they had conducted a “due diligence report” prior to setting up the plant, but they again refused to share it with professor Karnani. “We do not share due diligence reports externally. These reports may contain sensitive information of both – business and legal nature,” the company said.

Universal lessons

There are universal lessons to be learned from the Kala Dera study, according to the professor. “Unless we regulate the commons, tragedy looms for Kala Dera, for Rajasthan, for India, and for the world, with regard to water and other common property regimes,” he said.

Government regulators would find it easier to call companies to account if they were empowered by Professor Karnani’s radical definition of CSR. “When CSR is defined as ‘a company’s responsibility to voluntarily undertake socially desirable behaviour that decreases the firm’s profits’, only then does it become the business equivalent of altruism, and help avert destruction to the environment,” he said.

Persuading governments to enforce CSR more strongly is difficult, however. One of the issues is that big business bends the ear of those in power, especially in the US, through large donations and lobbying. Governments have their hands tied and produce weak legislation.

Meanwhile, although NGOs are doing an important job in exposing damaging business practices, they are not doing enough to pressurize governments into action. “The old line that ‘sunshine is the best disinfectant’ applies to some of their work exposing corrupt practices, which should be applauded. But there’s a point where I disagree with many NGOs. They have abandoned the political fight, so they go after individual companies to force them to be socially responsible. Then they declare they have won the battle and they go home, but the fact is they are losing the war,” he said.

‘Governments have regulated to prevent child labour, race discrimination and water pollution. They could do the same for the environment. But with the new problems we face, like climate change, massive global child poverty and obesity, for the moment they are doing too little,’ Professor Karnani, Ross School of Business

“Climate change is real and society should do something, but we still don’t have a carbon tax of any significance in any country and we don’t have significant cap and trade schemes on a large-scale basis. So people like me are losing the fight and we need the NGOs to continue campaigning for political solutions.”

One issue that needs addressing urgently is the growing rate of obesity. Some NGOs are calling for sugar taxes, but pleading with Coca-Cola and Persi-Co to be socially responsible will not work. Reduced sugar in all their drinks would mean reduced profits.

Leading causes of obesity

“It’s a good example of the contradictions inherent in CSR. Coca-Cola and Pepsi talk about how responsible they are, but they are both among the leading causes of obesity,” he said. “To distract from the damage they do, they indulge in ‘greenwash’, making claims like in Rajasthan. And they protest that they produce diet coke and tell kids to exercise more. But no amount of exercise is going to compensate for having a cheeseburger, a coke and French fries. So we need intervention in the public arena.”

‘Coca-Cola and Pepsi protest that they produce diet coke and tell kids to exercise more. But no amount of exercise is going to compensate for having a cheeseburger, a coke and French fries. So we need intervention in the public arena,’ Professor Karnani, Ross School of Business

Karnani says he remains a cynic, but there are some grounds for optimism. “Governments have regulated to prevent child labour, race discrimination and water pollution. They could do the same for the environment. But with the new problems we face, like climate change, massive global child poverty and obesity, for the moment they are doing too little,” he said.

The problems run deep. Since the neo-liberal economic transformations of Ronald Regan and Margaret Thatcher, there has been a distrust of the power of the interventionist state. “There’s been a growing political view that governments are incompetent, useless and corrupt, and they get in the way. So we should just do things without government. That’s the triumphant capitalistic point of view. But it’s gone too far. Capitalism is undoubtedly a good thing, but we need restraints on We cannot have a sort of Ayn Rand style of capitalism and leave the world alone and hope everything will be okay.”

Please share your experiences and views in the comment section

PHOTO CREDIT: Marcel Münich on flickr

 

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  • http://www.triplepundit.com/ RPSiegel

    By all means demand accountability, but it’s preposterous to insist that only corporate endeavors that lose money should be considered socially responsible. We should not care why companies take actions that improve the sustainability of the economy, only that they do so. Indeed, making sustainability economically attractive, is one of the much powerful tools out there for achieving it. The professor needs to learn the difference between nobility and sustainability.

  • Tony Cooke

    Surely, if a business can deliver a net positive social and environmental impact AND increase its profits, then it should be applauded for developing a business model that has succeeded in doing so. To argue otherwise suggests, at best, a belief that a trade off between profit and impact is inevitable, or at worst (whether actually proven correct or simply having won the debate) that no rational capitalists will voluntary embrace a vision for sustainable business as it is at odds with serving their self-interest. This should be of greater concern as self-interest is about the only human motive capable of being mobilised at sufficient scale to mainstream sustainability.

    The majority of incumbents’ business models were developed back when negative social and environmental externalities weren’t acknowledged, let alone accounted for. As such, doing less harm (rather doing net good) is about as good as it gets, but of course it doesn’t go far enough. Until such businesses address the ‘sacred cows’ in their business model to achieve an alignment between their for-profit mission and their social/environmental mission (and to be fair, some big companies are trying), then the regulation that Prof Karnani calls for could end up protecting the dominance of the very companies he wants to reform by raising a barrier to entry for disruptive new entrants that are ‘born sustainable’. In the long run, a capitalist economy will divert scarce resources from areas of lower productivity into areas of higher productivity. Sustainable businesses could yet prove that they are capable of being more profitable than the unsustainable incumbents. If this happens, then the flight of capital alone will be enough to persuade reluctant incumbents that CSR greenwash is no longer enough. So perhaps in the end, being unsustainable will prove to be unsustainable?