CSR and Profitability – Cause and Effect or Chicken and Egg?
Many studies have established a link between profitability and CSR.Â Early work focused on a fundamental question â would socially responsible behavior interfere with profit maximization.Â The answer was a resounding no, at least if you were willing to look at the long term.Â The good corporate citizen makes more over the long term because responsible behavior builds a reputation that attracts customers and quality employees and leads to a corporate mindset that identifies opportunities.Â Everyone reading this column knows the story.Â Just look at any list of companies selected as ethical, green or sustainable â it will be chock full of blue chips that have rewarded investors with years of growth and profitability.Â
OK, I'm sold, but maybe there's a little more to this.Â Most of those ethical blue chips have patents, copyrights, know-how, brands built on decades of expensive advertising or other special characteristics (in addition to sustainable behaviors) that give the companies an element of market power, an ability to set prices well above marginal cost and earn high profit margins.Â Do those higher profit margins actually allow companies to start down the path of social responsibility?Â Maybe most of those ethical blue chips were already highly profitable before they started worrying about social responsibility.Â Could profitability even be a necessary precondition to corporate social responsibility as well as a result of social responsibility?Â Imagine Goodco, a small electronics retailer living in a Walmart world.Â How much can Goodco spend on health insurance for its employees?Â How much can Goodco spend flying overseas to make sure its suppliers aren't sweatshops?Â Even with the best of intentions, Goodco willÂ go broke trying to earn that Michelin star for ethics.
What shouldÂ Goodco do, aside from rooting for a health care bill andÂ finding a niche where it's not competing with Walmart?Â What, if anything,Â should society do to help Goodco get started?Â If you say eliminate Walmart you will haveÂ some company, but Walmart is making the cost of living a lot lower for a lot of customers who don't have much extra cash to throw around.Â You can make an individual choice to shop at Goodco, even if it means paying more than you would for the same item at Walmart.Â It will cost you a few bucks, but it won't be enough to get Goodco started on the CSR path unless quite a few of your neighbors do the same thing.Â So far most of your neighbors seem to actually like Walmart, even though it scares the heck out of me (I've actually been diagnosed with Walmartphobia).
If the customers won't help Goodco get on the path to sustainability, what about the manufacturers?Â If it wants to, Sony can compel all its buyers to resell its televisions at the manufacturers suggested retail price (well, that would be a very strong suggestion in this example).Â Goodco no longer has to worry about beating Walmart's price.Â Â Maybe this produces that extra profit Goodco needs to set up employee health insurance.Â The consumer gets some protection from inter brand competition â Sanyo is still making tvs and underselling Sony.
Nice theory, perhaps.Â In real life, Walmart has so much clout it can push around most suppliers, although not necessarily Sony.Â Even if Walmart is happy to accept Sony's suggested retail price, a manufacturer who set resale retail prices was breaking antitrust law in the US until 2007, when the Supreme Court decided to overrule an early Sherman Act case and apply the rule of reason toÂ resale price maintenance.Â Â Â Now the House Judiciary Committee has reported legislation which, if adopted,Â will make resale price maintenance illegal once again.Â OK, but just suppose resale price maintenance stays legal, becomes popular in the electronics business and results in prices that allow Goodco to make a reasonable profit, there is always at least one other issue â will Goodco's owner buy that employee health insurance, or take an extended vacation in the Bahamas instead?Â Socially responsible behavior might improve long-term profitability, but what if Mr.Â Goodco is a short-term kind of guy, just like Crazy Eddie.