Religion

1. What is the role of the for-profit firm in society? 2. Does the firm have broader social responsibilities (beyond making a profit)?

CHAPTER ONE WHAT IS CSR? People build organizations to leverage their collective resources in pursuit of common goals. As organizations pursue these goals, they interact with others inside a larger context called society. Based on their purpose, organizations can be classified as for-profit, government, or nonprofit. At a minimum, for-profits seek to make a profit, governments exist to define the rules and structures of society within which all organizations must operate,1 and nonprofits (including NGOs— nongovernmental organizations) emerge to fill the gaps when the political will or the profit motive is insufficient to address society’s needs.2 Aggregated across society, each of these different organization types represents a powerful mobilization of resources. In the United States alone, for example, there are more than 1.5 million “tax-exempt organizations” working to fill needs not met by either government or the private sector.3

Within society, therefore, there is a mix of these organizational forms. Each performs different roles, but each also depends on the others to provide the complete patchwork of exchange interactions (of products and services, financial and social capital, etc.) that constitute a well-functioning society. Whether labeled as corporations, companies, firms, or proprietorships, for example, for-profit businesses interact constantly with government, trade unions, suppliers, NGOs, and other groups in the communities in which they operate, in both positive and negative ways. Each of these groups, therefore, can claim to have a stake in the operations of the firm. Some benefit more, some are involved more directly, and others can be harmed by the firm’s actions, but all are connected in some way to what the firm does on a day-to-day basis. Definitions of who qualifies as a firm’s stakeholder vary (discussed in detail in Part II). For now, it is sufficient to note that it includes those individuals and groups that have a stake in the firm’s operations.4

While stakeholders exist symbiotically with companies, the extent to which managers have paid attention to their interests fluctuates. Depending on factors such as the level of economic and social progress, the range of stakeholders whose concerns a company seeks to address has shifted—from the earliest view of the corporation as a legal entity that exists at the behest of governments in the 19th century, to a narrower focus on shareholder rights early in the 20th century, to the rise of managerialism by mid-century, and back again in the 1970s and 1980s to a distorted focus on shareholders due to the rise of agency theory.5 Since then, as the expectations of business in society evolve, firms are again adopting a broader stakeholder outlook, extending their perspective to include the communities in which they operate and social issues about which they feel passionate. As a result, managers are more likely to recognize the interdependence between the firm and each of these groups, leaving less room to ignore their separate and pressing concerns.

Just because an individual or organization meets the definition of an “interested constituent,” however, this does not compel a firm (either legally or logically) to comply with every demand that stakeholder may make. Deciding which demands to prioritize and which to ignore, however, is a challenge—even more so as social media provides individuals with the power to disseminate their grievances worldwide. If ignored long enough, affected parties may take action against the firm (such as a product boycott), or turn to government for redress, or even write a song and post it to YouTube.6 Such protests can cause significant brand damage (and even revenue loss), particularly if the grievance remains unaddressed once it becomes widely known.7

In democratic societies, laws (e.g., antidiscrimination statutes), regulations (e.g., tax-exempt status for nonprofits), and judicial decisions (e.g., fiduciary responsibilities of directors)8 provide a minimal framework for business that reflects a rough consensus of the governed. However, because (1) government cannot anticipate many issues, (2) the legislative process takes time, and (3) a general consensus is often slow to form, laws often lag behind social convention and technological progress. This is particularly so in areas of high complexity and rapid innovation, such as bioethics or artificial intelligence. Thus, we arrive at the discretionary area of decision making between legal sanction and societal expectation that business leaders face every day—an area of ambiguity that generates two questions from which the study of CSR springs:

CSR, therefore, is both critical and controversial. It is critical because the for-profit sector is the largest and most innovative part of any free society’s economy. Companies intertwine with society in mutually beneficial ways, driving progress and affluence—creating most of the jobs, wealth, and innovations that enable society to prosper. They are the primary delivery system for food, housing, healthcare, and other necessities of life. Without modern corporations, the jobs, taxes, donations, and other resources that support governments and nonprofits would decline significantly, further diminishing general well- being. Businesses are the engines of society that propel us toward a better future, which suggests an interesting thought experiment: If you wanted to do the most social good in your career, would you enter public service (politics or nonprofits), or would you go into business? Fifty years ago, the best answer would probably have been “public service.” Today, business is the more effective vehicle for social good.

At the same time, CSR remains controversial. People who have thought deeply about Why does a business exist? or What does profit represent? do not agree on the answers. Do firms have obligations beyond the benefits their economic success provides? In spite of the rising importance of CSR, many still draw on the views of the Nobel Prize–winning economist Milton Friedman to argue that society benefits most when firms focus purely on financial success.9 Others look to the views of business leaders who have argued for a broader perspective, such as David Packard (cofounder of Hewlett-Packard):

groups that maintain an ongoing interest in the firm’s operations.

CSR

A responsibility among firms to meet the needs of their stakeholders and a responsibility among stakeholders to hold firms to account for their actions.

The Corporate Social Responsibility Hierarchy

Archie Carroll was one of the first academics to make a distinction between different kinds of organizational responsibilities. He referred to this distinction as a firm’s “pyramid of corporate social responsibility” (Figure 1.1):13

Description

Figure 1.1 The Corporate Social Responsibility Hierarchy

Source: Archie B. Carroll, “The Pyramid of Corporate Social Responsibility: Toward the Moral Management of Organizational Stakeholders,” Business Horizons, July–August 1991, p. 42.

Fundamentally, a firm’s economic responsibility is to produce an acceptable return for investors.

An essential component of pursuing economic gain within a law-based society, however, is a legal responsibility to act within the framework of laws and regulations drawn up by the government and judiciary.

Taken one step further, a firm has an ethical responsibility to do no harm to its stakeholders and within its operating environment.

I think many people assume, wrongly, that a company exists simply to make money. While this is an important result of a company’s existence, we have to go deeper and find the real reasons for our being. ...... A group of people get together and exist as an institution that we call a company so that they are able to accomplish something collectively that they could not accomplish separately—they make a contribution to society.10

This book navigates between these perspectives to outline a view of CSR that recognizes both its strategic value to firms and the social benefit such a perspective brings to the firm’s many stakeholders. The goal is to present a comprehensive assessment of corporate social responsibility that, on reflection, suggests that Friedman and Packard were not as far apart as their respective proponents assume.

A NEW DEFINITION OF CSR The entirety of CSR can be discerned from the three words this phrase contains. CSR covers the relationship between corporations (or other for-profit firms) and the societies with which they interact, focusing on the responsibilities that are inherent on both sides of these ties. CSR defines society in its widest sense, and on many levels, to include all stakeholder

Stakeholder groups range from clearly defined customers, employees, suppliers, creditors, and regulating authorities to other, more amorphous constituents, such as the media and local communities. For the firm, tradeoffs must be made among these competing interests. Issues of legitimacy and accountability exist, such as when a nonprofit claims expertise in an area, even when it is unclear exactly how many people support its vision. Ultimately, therefore, each firm must identify those stakeholders that constitute its operating environment and then prioritize their level of importance. Increasingly, firms need to incorporate the concerns of those key stakeholder groups within their strategic outlook or risk losing societal legitimacy. CSR provides a framework that helps firms embrace these decisions and adjust the internal strategic planning process to increase the long-term viability of the organization.

This framework is broad, however, and definitions regarding the mix of interests and obligations have varied considerably over time.11 In 1979, for example, Archie Carroll defined CSR in the following way: “The social responsibility of business encompasses the economic, legal, ethical, and discretionary expectations that society has of organizations at a given point in time.”12

CSR Definitions across Cultures

European Union (EU): “Corporate social responsibility (CSR) refers to companies taking responsibility for their impact on society. The European Commission believes that CSR is important for the sustainability, competitiveness, and innovation of EU enterprises and the EU economy. It brings benefits for risk management, cost savings, access to capital, customer relationships, and human resource management.”16

Association of Southeast Asian Nations (ASEAN): The Mission of the ASEAN CSR Network is to “promote and enable responsible business conduct in ASEAN to achieve sustainable, equitable and inclusive social, environmental and economic development.”17

United Nations (UN): “CSR is presented as a management concept and a process that integrates social and environmental concerns in business operations, and a company’s interactions with the full range of its stakeholders.”18

While useful, however, this typology is not rigid.14 One of the central arguments of this book is that what was ethical or even discretionary in Carroll’s model is becoming increasingly necessary due to the shifting expectations placed on firms. Yesterday’s ethical responsibilities can quickly become today’s economic and legal necessities. In order to achieve its fundamental economic goals today, therefore, a firm must incorporate a stakeholder perspective within its strategic outlook. As societal expectations of the firm rise, the penalties imposed for perceived behavior lapses will become prohibitive.

Definitions, therefore, can and do evolve. It seems that, in terms of CSR, the variance is considerable, with at least five dimensions identified: environmental, social, economic, stakeholder, and “voluntariness.”15 And, of course, there is variance not only within countries over time, but also across countries and cultures.

While these definitions may seem similar on the surface, the debate around CSR is most apparent in the detail of implementation. The potential danger is that, to the extent that CSR means different things to different people (in reality), action can be ineffective or, at worst, counterproductive:

Right now we’re in a free-for-all in which “CSR” means whatever a company wants it to mean: From sending employees out in matching t-shirts to paint a wall for five hours a year, to recycling, to improving supply-chain conditions, to diversity and inclusion. This makes it difficult to have a proper conversation about what [CSR] should be.19

For the purposes of this book, it is important to emphasize that CSR is both a means and an end. It is an integral element of the firm’s strategy—the way the firm goes about delivering its products or services to markets (means). It is also a way of maintaining the legitimacy of the firm’s actions in the larger society by bringing stakeholder concerns to the foreground (end). Put another way, CSR is both a process and an outcome. At any given moment, CSR describes the process by which firms react to their stakeholders’ collective set of needs. CSR is also the set of actions that are defined by what stakeholder demands require. Over time, while the process remains the same (firms should always seek to respond to the interests of their stakeholders), the actions that are required to do this will necessarily evolve in response to shifting norms, values, and societal expectations. As such, references to “CSR” in this book will sometimes be to the process and sometimes to the outcomes. The underlying principles that determine the relationship between the two, however, remain consistent. Either way, a firm’s success is directly related to its ability to incorporate stakeholder concerns into its business model. CSR provides a means to do this by valuing the interdependent relationships that exist among firms and their stakeholders. The challenges associated with managing these relationships were apparent to Peter Drucker as far back as 1974:

The business enterprise is a creature of a society and an economy, and society or economy can put any business out of existence overnight. ....... The enterprise exists on sufferance and exists only as long as the society and the economy believe that it does a necessary, useful, and productive job.20

As such, CSR covers an uneven blend of different issues that rise and fall in importance from firm to firm over time. In other words, while the stakeholders stay the same, the issues that motivate them change. Whether the concern is wages, healthcare, or same-sex partner benefits, for example, a firm’s employees are central to its success. A firm that consistently ignores its employees’ legitimate claims is a firm that is heading for bankruptcy. CSR is a vehicle for the firm to discuss its stakeholder obligations (both internal and external) and a way of developing the means to meet these obligations, as well as a tool to identify the mutual benefits that result. Simply put, CSR encourages a firm to manage its

Finally, firms have a discretionary responsibility, which represents more proactive, strategic behaviors that benefit themselves or society, or both.

As a firm progresses toward the top of Carroll’s pyramid, its responsibilities become more discretionary in nature. In Carroll’s vision, a socially responsible firm encompasses all four responsibilities within its culture, values, and day- to-day operations.

One day . . . it dawned on me that the way I had been running Interface is the way of the plunderer, plundering something that is not mine; something that belongs to every creature on earth. And I said to myself, . . . the day must come when this is illegal, when plundering is not allowed [and] . . . people like me will end up in jail. The largest institution on earth, the wealthiest, most powerful, the most pervasive, the most influential, is the institution of business and industry—the corporation, which also is the current present day instrument of destruction. It must change.31

stakeholder relations because these ties are essential to its success and, ultimately, its survival. Implementing CSR, therefore, requires the firm to acknowledge:

That markets operate successfully only when they are embedded in communities; that trust and co-operation are not antithetic to a market economy, but essential to it; that the driving force of innovation is pluralism and experiment, not greed and monopoly; that corporations acquire legitimacy only from the contribution they make to the societies in which they operate.21

CSR encompasses the range of economic, legal, ethical, and discretionary actions that affect a firm’s economic performance. At a minimum, of course, firms should comply with the legal or regulatory requirements that relate to day-to- day operations. To break these regulations is to break the law, which does not constitute socially responsible behavior. But legal compliance is merely a minimum condition of CSR.22 Taking these obligations as a given, the framework presented in this book focuses on the ethical and discretionary concerns that are less precisely defined and for which there is often no clear societal consensus, but that are essential to address. Firms do this (minimizing competitive risk while maximizing potential benefit) by fully embracing CSR and incorporating it within the firm’s strategic planning process.

THE EVOLUTION OF CSR The call for social responsibility from businesses is not new. While specific issues may change, societies have always made demands of firms. In short, “the pursuit of profit has been ‘unloved’ since Socrates declared that ‘the more [men] think of making a fortune, the less they think of virtue.’”23 As a result, ancient Chinese, Egyptian, and Sumerian writings often delineated rules for commerce to facilitate trade and ensure broader interests were considered. Ever since, public concern about the interaction between business and society has grown in proportion to the growth of economic activity:24

There has been a tradition of benevolent capitalism in the UK for over 150 years. Quakers, such as Barclays and Cadbury, as well as socialists, such as Engels and Morris, experimented with socially responsible and values-based forms of business. And Victorian philanthropy could be said to be responsible for considerable portions of the urban landscape of older town centres today.25

Evidence of social activism intended to influence firms’ behavior stretches back across the centuries. Such efforts mirrored the legal and commercial development of corporations as they established themselves as the driving force of market- based societies. Periodically, society stepped in when business was deemed to be causing more harm than good: “The first large-scale consumer boycott? England in the 1790s over slave-harvested sugar.”26 Although crude and lacking the efficient communication that social media enables today, it is clear that these early consumer-led protests paved the way for today’s “politics of consumption.”27 Protests could be effective—initially in terms of raising awareness, but soon after in terms of tangible, legislative change:

Within a few years, more than 300,000 Britons were boycotting sugar, the major product of the British West Indian slave plantations. Nearly 400,000 signed petitions to Parliament demanding an end to the slave trade. ....... In 1792, the House of Commons became the first national legislative body in the world to vote to end the slave trade.28

More recently, early academic interest in the topic of CSR in the 1950s was quickly followed by broader societal awareness that resulted in pressure on firms to respond. In particular, books such as Silent Spring (1962), Unsafe at Any Speed (1965), and The Feminine Mystique (1963) were “credited with being catalysts for the environmental movement, the consumer movement, and the feminist movement, respectively.”29 While the extent to which these external forces influence corporate decisions will vary, it is clear that CEOs have always faced pressure to conform to societal expectations. What is notable today is how quickly such issues emerge and diffuse. The experience of the late Ray Anderson, founder and chairman of Interface Carpets,30 in relation to the environmental practices of his company, is instructive:

Leaders such as Anderson face a balancing act that addresses the tradeoffs among the firm’s primary stakeholders, the society that enables the firm to prosper, and the environment that provides the raw materials to produce products and services of value. When elements of society view leaders and their firms as failing to act appropriately, activism results. That was just as true of 18th-century Britain as it is today. Current examples of social activism in response to firms’ perceived lack of responsibility are in this morning’s news and online social media. Whether the response is government regulation of products that are hazardous, consumer boycotts of firms that advocate overtly religious principles, or NGO- led campaigns to eradicate sweatshops abroad, societal concerns have become an increasingly relevant topic in corporate

Malden Mills

Aaron Feuerstein, CEO of Malden Mills (founded in 1906, family-owned),33 was an excellent employer. He operated “a unionized plant that was strike-free, a boss who saw his workers as a key to his company’s success.”34 In 1995, however, a fire destroyed the firm’s main textile plant based in Lawrence, Massachusetts, an economically deprived area in the north of the state. Feuerstein then had a decision to make:

With an insurance settlement of close to $300 million in hand, Feuerstein could have, for example, moved operations to a country with a lower wage base, or he could have retired. Instead, he rebuilt in

boardrooms, business school classrooms, and family living rooms. Figure 1.2 illustrates some of the key events that have defined the progress of CSR over the centuries.

This ongoing evolution ensures that meeting society’s expectations is not a static target. Widespread industry practices, which were previously considered discretionary or ethical concerns, can be deemed illegal or socially unacceptable due to aggressive prosecution or novel activism. In recent years, for example, the growing criticism of investors who use high- frequency trading algorithms to gain unfair advantages when trading32 indicates the danger of assuming that yesterday’s accepted practices will continue to be acceptable. Tomorrow, it could be continued opposition to the legalization of marijuana that draws the ire of stakeholders, and beyond that, the spread of artificial intelligence. Firms operate against an ever-changing background of what is considered socially responsible. These ever-changing standards compound the complexity faced by corporate decision makers. Worse, these standards vary from society to society, even among cultures within a given society. Faced with a kaleidoscope of evolving expectations, the challenge for a manager is to understand what the firm’s stakeholders want today and, perhaps more importantly, what they will want six months from now.

Nevertheless, the pursuit of economic gain remains a necessity. CSR does not repeal the laws of economics under which for-profit firms must operate (to society’s benefit). The example of Malden Mills demonstrates that, unless a firm is economically viable, even the best of intentions will not enable stakeholders to achieve their goals.

Description

Figure 1.2 The Evolution of CSR

Santiago, Chile

In the 1980s, air pollution in downtown Santiago, Chile, was an important issue, just as it was in Los Angeles, California. The problem, however, was addressed differently due to the varying level of economic development in these two pollution-retaining basins.

While stringent laws went into effect in Los Angeles, in Chile, necessities (including low-cost transportation) got a higher priority because of widespread poverty. After more than a decade of robust economic growth, however, Chileans used democratic processes to limit the number of cars entering Santiago and imposed increasingly stringent pollution standards. This shift in priorities reflected their changing societal needs, along with the growing wealth to afford new rules and legal actions.

The Polartec example demonstrates vividly the complexity of CSR. While an imperfect measure of a firm’s success, profit is clearly essential. If the goal is to create value, the firm needs to stay in business. Would Malden Mills have avoided bankruptcy if it had initially fired half its employees and relocated the factory elsewhere? What is the firm’s responsibility to continue delivering a valued product to its customers, and does this outweigh the firm’s duties to its employees? The answers to these questions are difficult and will change depending on the issue at hand. What is clear is that good intentions do not replace the need for an effective business model, and no firm, whatever the motivation, can or should indefinitely spend money it does not have. Which actions should be pursued depend on many factors specific to the firm, its industry, and the society in which it is based. Manufacturing offshore in a low-cost environment, for example, remains a valid strategic decision, particularly in an increasingly globalized world. This choice is strategic because it can provide a competitive advantage for some firms (such as Apple),40 even while other firms (such as Zara)41 see strategic value in onshoring operations due to rising costs and a shorter, more responsive supply chain:

Offshore production is increasingly moving back to rich countries not because Chinese wages are rising, but because companies now want to be closer to their customers so that they can respond more quickly to changes in demand. And some products are so sophisticated that it helps to have the people who design them and the people who make them in the same place.42

All business decisions have both economic and social consequences. The trick to success is to manage the conflicting interests of stakeholders in order to meet their ever-evolving needs and concerns. As societies rethink the balance between economic and social progress, CSR will continue to evolve in importance and complexity. And although this complexity muddies the wealth-creating waters, an awareness of these evolving expectations holds the potential to create a competitive advantage for those firms that do it well. The previous examples indicate that the cultural context in which the concept of social responsibility is perceived and evaluated is crucial.

Different societies define the relationship between business and society in different ways. Expectations spring from many factors, with wealthy societies having greater resources and, perhaps, more demanding expectations that emerge from the greater options wealth brings. The reasoning is straightforward: In poor democracies, general well-being is focused on the necessities of life—food, shelter, transportation, education, medicine, social order, jobs, and so on. Luxuries, such as a living wage or environmental regulations, add costs that may cause them to be delayed. As societies advance, however, expectations change and general well-being is redefined. A corresponding shift in the acceptable level of response by firms quickly follows, as this example of air pollution and public transportation in Chile indicates.

Lawrence and continued to pay his employees while the new plant was under construction.35

His decision to keep the factory open and continue meeting his obligations to his employees when they needed him most was applauded in the media:

The national attention to Feuerstein’s act brought more than the adulation of business ethics professors —it brought increased demand for his product, Polartec, the lightweight fleece the catalogue industry loves to sell.36

In addition to full pay, Feuerstein continued to provide all employees with full medical benefits and guaranteed them a job when the factory was ready to restart production:

“I have a responsibility to the worker, both blue-collar and white-collar,” Feuerstein later said. “I have an equal responsibility to the community. It would have been unconscionable to put 3,000 people on the streets [at Christmas] and deliver a death blow to the cities of Lawrence and Methuen. Maybe on paper our company is [now] worth less to Wall Street, but I can tell you it’s [really] worth more.”37

But the increased demand for Polartec clothing wasn’t enough to offset the debt he had built up waiting for the plant to be rebuilt: $100 million.38 This situation was compounded by an economic downturn, as well as cheaper fleece alternatives flooding the market. Malden Mills filed for bankruptcy protection in November 2001.39

Different expectations among rich and poor societies are a matter of priorities. The need for transportation, for example, evolves into a need for nonpolluting forms of transportation as society becomes more affluent. Though poor societies value clean air just as advanced ones do, there are other more pressing concerns (such as keeping costs low). As a society prospers, new expectations compel producers to make vehicles that pollute less—a shift in emphasis. In time, these expectations evolve from a discretionary option to a mandatory (legal) requirement.

In short, it is in the best interest of any organization (for-profit, nonprofit, or governmental) to anticipate, reflect, and strive to meet the changing needs of its stakeholders. In the case of a for-profit firm, the primary stakeholder groups are its employees and customers, without whose support the business fails. Other constituents, however, from suppliers to shareholders to the local community, also matter. Firms must satisfy these core constituents if they hope to remain viable over the long term. When the expectations of different stakeholders conflict, CSR enters a gray area, and management has to negotiate among competing interests. An important part of that conflict arises from different expectations, which, in turn, reflect different approaches to CSR.

FOUNDATIONS OF CSR Strategic CSR represents an argument for a firm’s economic interests, where satisfying stakeholder needs is central to retaining societal legitimacy (and achieving financial viability). Much debate (and criticism) in the CSR community, however, springs from well-intentioned parties who argue from perspectives that differ along philosophical and ideological lines. Understanding these different arguments (ethical, moral, rational, and economic), therefore, is essential to comprehend the full breadth and depth of CSR.

An Ethical Argument for CSR

The danger of promoting a perspective of CSR that focuses primarily on its strategic value to the firm is that the ethical and moral foundations on which much of the CSR debate rests are ignored. The advantage of making the business case for CSR is that it is more convincing to those most skeptical of broadening the firm’s responsibilities and, as a result, is more likely to be implemented. In other words, the business case is expedient—it offers the greatest potential gain because it will appeal to the widest possible audience of people who need to be convinced. The danger in downplaying an ethical or moral component to CSR, however, is that doing so ignores an intellectual philosophical foundation that many believe is essential to understanding CSR.

There are three essential components encapsulated within the concept of business ethics: normative, descriptive, and practical ethics. Normative ethics draws on moral philosophy to categorize individual actions as either right or wrong in specific situations. Descriptive ethics explains why individuals make these right or wrong decisions. And practical ethics applies ethical principles that determine right and wrong actions to day-to-day decision making. Underpinning each of these three core components, of course, is the assumption that right and wrong can be determined. This assumption glosses over the issue of whether ethical values are relative or absolute. An ethical argument for CSR states that, rather than being relative constructs (i.e., varying from individual to individual and culture to culture), ethical values are absolute (i.e., inalienable rights that are consistent across cultures and applicable to all humans). Absolute values are easily definable and, as such, exist as a standard against which behavior can be assessed.

Although many discussions around CSR assume an ethical component, the precise relationship between ethics and CSR is often unspecified. As such, the late Rushworth Kidder poses an essential question when he asks: “Can a socially responsible company be unethical?”43 In constructing an answer, Kidder conceptualizes CSR as a subset of ethics:

Responsibility . . . is one of five distinct core values that define, globally, the idea of ethics. A necessary but not sufficient condition for ethics, it needs to be fleshed out by the other four values: honesty, respect, fairness, and compassion. Ethics requires all five. So can an individual or a corporation have a strong sense of responsibility without necessarily being honest? Yes. The opposite can also arise, where a deeply honest person proves to be irresponsible. These are two big, different ideas.44

An ethical argument for CSR essentially rests on one of two philosophical approaches—consequentialist reasoning or categorical reasoning.45 Consequentialist (or teleological) reasoning locates ethicality in terms of the outcomes caused by an action. This stream of thought is closely aligned with utilitarianism, which was most famously advocated by the 18th- century English political philosopher Jeremy Bentham:

An action is considered ethical according to consequentialism when it promotes the good of society, or more specifically, when the action is intended to produce the greatest net benefit (or lowest net cost) to society when compared to all the other alternatives.46

In contrast, categorical (or deontological) reasoning “is defined as embodying those activities which reflect a consideration of one’s duty or obligation.”47 As such, categorical reasoning represents more of a process orientation than the outcome- oriented focus of consequentialist reasoning. This perspective closely maps to Immanuel Kant’s categorical imperative, but it also includes guiding principles such as religious doctrine and core values such as trustworthiness, honesty, loyalty, accountability, and a broad sense of citizenship (i.e., acting out of a sense of responsibility to the common good).

An Ethical Argument for CSR

A Moral Argument for CSR

CSR is an argument of moral reasoning that reflects the relationship between a company and the society within which it operates. It assumes that firms recognize they do not exist in a vacuum and that their ability to operate and achieve success comes as much from societal resources (e.g., infrastructure, rule of law, educated employees) and consent (e.g., social contract, license to operate) as it does from internal factors.

The violation of a society’s cultural heritage and ethical principles regarding issues of social justice, human rights, or environmental stewardship, for example, is unethical and socially irresponsible. This logic is the foundation of the social contract, which is based on societal expectations that bind firms because compliance is directly related to a social license to operate. In terms of application, therefore, the two ethical perspectives are realized in norms: “those standards . . . which have been accepted by the organization, the industry, the profession, or society as necessary for the proper functioning of business.” They are institutionalized within the firm in the form of a code of conduct or code of ethics, which acts as a guide in determining whether the firm “is acting ethically according to the conventional standard.”48 Remaining within these implicit ethical boundaries is directly related to the firm’s societal legitimacy and long-term viability.

A Moral Argument for CSR

Although profits are necessary for any business to survive, firms are able to obtain those profits only because of the society in which they operate. All of the firm’s stakeholders (even internal stakeholders, such as employees) exist primarily as members of a society. Without that social context, there is no marketplace in which firms can compete. CSR emerges from this symbiotic relationship between business and society. It is shaped by individual and societal standards of morality that define contemporary views of right and wrong.49 As Howard Bowen said about managers in his famous 1953 book:

They must accept the social implications of their calling. They must recognize that ultimately business exists not for profits, for power, or for personal aggrandizement, but to serve society ........ [The freedom and power that comes with managing a business] must be used moderately, conscientiously, and with a view to the interests of society at large.50

Given this, to what extent is a firm obliged to repay the debt it owes society for its opportunity to conduct business (and its continued success)? That is, what moral responsibilities do firms possess in return for the benefits society grants? Also, to what extent do the profits the firm generates, the jobs it provides, and the taxes it pays meet those obligations? As an academic study, CSR represents an organized approach to answering these questions. As an applied discipline, it represents the advantage to the firm of meeting its obligations as defined by evolving societal expectations.

Peter Drucker expresses this sentiment—that there is no moral justification in pursuing profit alone—by suggesting that “profit for a company is like oxygen for a person. If you don’t have enough of it, you’re out of the game. But if you think your life is about breathing, you’re really missing something.”51 Charles Handy similarly suggests that firms have a moral obligation to move beyond a narrow focus on profit:

The purpose of a business . . . is not to make a profit, full stop. It is to make a profit so that the business can do something more or better. That “something” becomes the real justification for the business. ....... It is a moral issue. ...... It is salutary to ask about any organization, “If it did not exist, would we invent it?” “Only if it could do something better or more useful than anyone else” would have to be the answer, and profit would be the means to that larger end.52

On one level, the moral argument for CSR reflects a give-and-take approach based on a realization of the interdependent relationship between business and society. Society makes business possible and provides what firms need to succeed, ranging from educated and healthy workers to a safe and stable physical and legal infrastructure, not to mention a vibrant consumer market for their products. Because society’s contributions make business possible, the moral argument for CSR presumes that firms have a reciprocal obligation to operate in ways that are deemed socially responsible and beneficial. And because businesses operate within a social context, society has the right to define the expectations for those organizations that operate within its boundaries:

[Free-market economists] like to portray “wealth-producing” businesses as precarious affairs that bestow their gifts independently of the society in which they trade. The opposite is the case. The intellectual, human and physical infrastructure that creates successful companies . . . is a social product ....... shaped by the character of that society’s public conversation and the capacity to build effective social institutions and processes.53

CSR is an argument based on two forms of ethical reasoning—consequentialist (utilitarian) and categorical (Kantian). Consequentialist reasoning justifies action in terms of the outcomes generated (the greatest good for the greatest number of people), while categorical reasoning justifies action in terms of the principles by which that action is carried out (the application of core ethical principles, regardless of the outcomes).

Affirmative Action

Prior to the 1960s, businesses could discriminate against employees on the basis of race, gender, religion, age, national origin, disability, sexual orientation, or any other non-merit-based criteria. Doing so was a discretionary right that was legal, if far from ethical. Social activism moved these discretionary decisions into the arena of public debate and, in time, imposed legal prohibitions. The result for many firms that were guilty of discrimination was affirmative action plans to redress imbalances among employees. Those firms that lagged quickly found themselves the test case in litigation focused on institutionalizing the new legislation. As Robert Kennedy said during the civil rights movement to firms that were reluctant to change, “If you won’t end discriminatory practices because it’s the right thing to do; then do it because it’s good for business.”59

Similar resistance is apparent today among those firms unwilling to embrace same-sex partner benefits or gender fluidity among employees. While there may be short-term value for some in holding out, the direction in which society is moving is clear. Firms that resist normative compliance will ultimately be coerced to conform to society’s evolving standards, and could potentially pay a higher price for their resistance.

A Rational Argument for CSR

For many, a sole focus on money as the motivation for business is dispiriting—“as vital as profit is, it seems insufficient to give people the fulfillment they crave.”54 It follows that money is a social good that is accompanied by a moral obligation to return to the collective a percentage of the proceeds of economic gain earned on advantages conferred by society to the firm. As Adam Smith55 wrote in The Wealth of Nations:

The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state. The expense of government . . . is like the expense of management to the joint tenants of a great estate, who are all obligated to contribute in proportion to their respective interests in the state.56

At a deeper level, societies rest upon a cultural heritage that grows out of a confluence of religion, traditions, and norms. This heritage gives rise to a belief system that defines the boundaries of socially acceptable behavior by participants. The moral argument for CSR claims that all members of society have a responsibility to uphold these rules in the interests of the common good.57

A Rational Argument for CSR

A loss of societal legitimacy can lead to a rise in the countervailing forces of strikes (employees), activism (NGOs), boycotts (consumers), legislation (government), or bad press (media) that constrain the firm’s ability to act. Violations of stakeholder expectations are material and, as such, should be avoided whenever possible, which suggests a rational argument for CSR.

Efforts to comply with stakeholder expectations are rational, regardless of ethical or moral reasoning. While compliance with ethical or moral expectations can be based on subjective values, the rational argument rests on sanction avoidance— it may be more cost-effective, for example, to address issues voluntarily. Waiting for society to impose legally mandated requirements and only then reacting allows firms to ignore their ethical and moral obligations and concentrate on generating profits in the short term; however, it also inevitably leads to strictures being imposed that not only force compliance, but often do so in ways that the firm may find neither preferable nor efficient.58

Worse, if the required actions are a complete surprise, or the firm needs time to build a competency in the relevant area, compliance can be extremely costly in terms of both immediate investment and longer-term reputational damage. By ignoring the opportunity to influence the debate in the short term through proactive behavior, a firm is more likely to find its operations and strategy constrained over the long term. One need only consider the evolution of affirmative action in the United States to see this rationale in action.

While lobbying to ensure that discrimination remains legal is theoretically an option for firms, attempts to subvert societal consensus around a particular issue represent an ethical and moral lapse that places the firm’s legitimacy at risk. Instead, the rational argument advocates the benefits of avoiding the inevitable confrontation.

The rational argument for CSR is summarized by the Iron Law of Social Responsibility, which states: In a free society, discretionary abuse of societal responsibilities leads, eventually, to mandated reprisals.60 Restated: In a democratic society, power is removed from those who abuse it. The history of social and political uprisings—from Cromwell in England, to the American and French Revolutions, to the overthrow of the shah of Iran or the Communist government of the Soviet Union—underscores the conclusion that those who abuse power or privilege sow the seeds of their own destruction. Parallels exist in the business arena. Financial scandals around the turn of this century at Enron, WorldCom, Adelphia, HealthSouth, and other icons of US business provoked discretion-limiting laws and rulings, such as the Sarbanes-Oxley Act (2002). Similarly, the most recent Financial Crisis gave rise to the Dodd-Frank Wall Street Reform and Consumer Protection Act, passed by the US Congress in 2010.

An Economic Argument for CSR

CSR is an argument of economic self-interest for business. CSR adds value because it allows firms to reflect the needs and concerns of their various stakeholder groups. By doing so, the firm is more likely to create greater value and, as a result, retain the loyalty of those stakeholders. Simply put, CSR is a way of matching corporate operations with stakeholder values and expectations that are constantly evolving.

The rational argument for CSR therefore underpins the idea that firms voluntarily seek to meet the needs and concerns of their stakeholders. Firms that wait until they are forced to comply may find that the costs of doing so quickly become prohibitive. In the finance industry today, for example, the global bank HSBC has announced that “nearly 25,000 of its 258,000 employees, almost 10%, work in compliance” and that “compliance was a major driver in the 5% increase in operating expenses reported.”61 Eventually, corporate transgressions result in heightened oversight that forces previously discretionary and ethical issues into the legal arena.

By adopting a rational argument for CSR, firms seek to interpret evolving societal values and stakeholder expectations and act to avoid future sanctions. Sensing that the tide of public opinion in the United States was moving in favor of regulating carbon emissions, for example, firms formed groups to lobby the government for change. The group BICEP (Business for Innovative Climate and Energy Policy)62 was established by five firms with proactive records—Levi Strauss, Nike, Starbucks, Sun Microsystems, and Timberland. Similarly, the NACB (National Association of Cannabis Businesses) markets itself as “the first and only self-regulatory organization in U.S. cannabis.” The organization claims that membership for a firm “tells regulators, consumers and the industry that you go beyond state compliance and operate at the highest levels of ethics and responsibility.”63 Implementing a rational perspective, these firms realize it is in their interests to engage with regulators, rather than form a barrier to progress they see as inevitable. As the CEO of Duke Energy, the late Jim Rogers, succinctly put it when addressing the role of fossil fuels in fostering climate change, “If we are not at the table, we will be on the menu.”64 In other words, genuine and proactive engagement to avoid unwelcome intrusion or help shape prospective legislation is an act of rational business.

An Economic Argument for CSR

Building on the previous three arguments for CSR is the economic argument. In addition to avoiding ethical, moral, legal, and other societal sanctions, incorporating CSR into a firm’s operations and strategic planning offers a potential point of differentiation and competitive market advantage upon which future success can be built.65

CSR influences all aspects of day-to-day operations. Everything a firm does causes it to interact with one or more of its stakeholder groups. As a result, companies are best served by building positive relationships with as many stakeholders as possible. Whether the firm is acting as an employer, a producer, a buyer, a supplier, or an investment, its attractiveness and success are increasingly linked to its values and culture. Concerning socially responsible investments (SRI), for example, “more than one out of every five dollars under professional management in the United States—$8.72 trillion or more—[is] invested according to SRI strategies.”66 Even for those who believe that the only purpose of a firm is to increase its shareholders’ wealth, being perceived as socially irresponsible risks losing access to a significant (and growing) segment of investors and their capital.

This book expounds the economic argument for CSR. It is the strongest of the four (ethical, moral, rational, and economic) arguments supporting CSR, due partly to its reliance on what we know about human psychology and economic theory. Rather than seeking to subvert patterns of exchange that have evolved over centuries, the economic argument for CSR operates at the intersection of the firm’s self-interest and the broader well-being of society. Ultimately, indeed, there is no difference between the two. If stakeholders are willing to reward the behavior they seek from firms, then it is those firms’ best interests to provide stakeholders with what they want. As long as this basic formula holds on both sides, value will be optimized and distributed broadly across society.67 Of course, what is simple to say is often difficult to put into practice. This book exists to build a framework that firms can use to address the complex process of listening to, and seeking to meet, the conflicting interests of all their stakeholders.

An important distinction that helps explain the particular value of the economic argument is between an effective business model and a broader, more sustainable model for (all) business. In other words, rather than focusing on what works in isolation, it is more effective to establish what works economy-wide. The Body Shop, for example, has implemented a successful business model that subscribes to a moral argument for CSR. This activist organization is able to draw on support from the small percentage of the population that is aware and sufficiently responsive to a progressive social agenda, translating this support into economic success. It is a wonderful business, but its model is not one that all businesses can emulate. Ben & Jerry’s is another example, as is Patagonia. These are all great firms, but they will not introduce meaningful change across the economy or globe. For that, we need to rely on corporations that operate on a sufficiently large scale to make a difference. In contrast, an economic argument for CSR seeks to build a broad model for business that recognizes the limited application of moral activism and, instead, searches for a standard that can be applied across all for-profit firms. The result is an approach to business that highlights the strategic benefits to the firm of seeking to create value for its stakeholders, broadly defined.

CSR is a rational argument that focuses on the benefits to performance of avoiding external constraints. Adopting the path of least resistance with regard to issues of concern makes common and business sense. In today’s globalized world, where firms are empowered to enact change, CSR represents a means of anticipating and reflecting societal concerns to minimize operational and financial sanctions.

QUESTIONS FOR DISCUSSION AND REVIEW

1. What is the purpose of the for-profit firm? What value does it create for society? 2. Define corporate social responsibility. What arguments in favor of CSR seem most important to you? Are these

factors prevalent among firms today, or are they rare? 3. What are the four responsibilities of a firm outlined in Archie Carroll’s pyramid of CSR model? Illustrate your

definitions of each level with corporate examples. 4. Milton Friedman stated that “few trends could so thoroughly undermine the very foundations of our free society

as the acceptance by corporate officials of a social responsibility other than to make as much money for their

stockholders as possible.”68 What are two arguments in support of his assertion and two against? 5. Why does this book favor the economic argument for CSR? Why is this argument better than the ethical, moral,

or rational arguments for CSR? Do you agree?

Descriptions of Images and Figures Back to Figure

There are four boxes in a step-like arrangement, labeled economic responsibilities, legal responsibilities, ethical responsibilities and discretionary responsibilities, from bottom to top. An arrow on the right points from the bottom to the top boxes.

Back to Figure

The time line seen in this figure is tabulated below:

Year Event

1759

Publication of Adam Smith’s Theory of Moral Sentiments.

1790s

First consumer boycott of slave-harvested sugar.

1750 – 1850

Industrial Revolution.

1840s

Victorian philanthropy (Quakers, Cadbury, Barclays) in the UK.

1886

Santa Clara County v. Southern Pacic Railroad.

1911

Standard Oil.

1919

Dodge v. Ford Motor Company.

1929

Wall Street crash

1930s

Great Depression.

1962

Santa Clara County v. Southern Pacic Railroad.

1960s – 1980s

Environmentalism.

1982

Tylenol recall.

1984

Bhopal disaster.

1989

Exxon Valdez.

Strategic CSR Debate

MOTION: There are no absolute ethical or moral standards.

1990 Launch of Internet by Tim-Berners Lee.

1990s

Nike sweatshop.

1991

Kyoto protocol.

1995

Brent Spar, Ken Saro–Wiwa.

2001

Enron bankruptcy.

2002

SOX

2007

Housing crisis.

2008

Lehman bankruptcy.

2010

Deepwater Horizon Oil spill.

2011

Occupy Wall Street.

2015

COP21, UN Climate Change conference, VW Diesel emissions scandal.

2016

Facebook and “fake news”.

2017

#MeToo.

John D. Rockefeller was the richest man the world had ever seen. But for most of his adult life he didn’t have electric lights, air conditioning, or sunglasses. And he never had penicillin, sunscreen, or Advil. This is not ancient history: One in twenty Americans were born before Rockefeller died.4

If the world’s wealth were divided equally, each household would have $56,540. Instead, the top 1% own more than half of all global wealth. The median wealth per household is just $3,582; if you own more than that, you are in the richest 50% of the world’s population.6

This matters because the relationship between inequality and social stability is strong, with one reinforcing the other—as inequality rises, stability falls:

CHAPTER TWO THE DRIVING FORCES OF CSR CSR is essential because it is synonymous with all aspects of business operations. Consumers want to purchase products from firms they trust; suppliers want to work with firms on which they can rely; employees want to work for firms that make them proud; large investment funds want to support firms that are well managed; and nonprofits and NGOs want to partner with firms seeking practical solutions to common goals. Satisfying each of these stakeholder groups (and others) allows firms to achieve their ultimate purpose, which is to create value and contribute to society.

This is an abstract argument, however. In order for CSR to be convincing, it is necessary to place it in a contemporary context and make a practical case for its application. CSR is crucial to business success because it provides firms with a set of operating principles around which their multiple stakeholders can rally. Indeed, there is a confluence of forces that make this argument particularly relevant. In particular, CSR is an integral component of strategy that is increasingly relevant due to five identifiable trends—trends that will continue to grow in importance throughout the 21st century. Any one of these drivers (affluence, sustainability, globalization, communication, or brands) might be ignored by managers unconvinced of the strategic value of CSR. Collectively, however, these forces are reshaping the operating environment by empowering stakeholder groups. And because they overlap, the interactive effects ensure that this complex context will not only continue to change, but do so at an increasingly rapid rate.

AFFLUENCE Social issues tend to gain a foothold in societies that are more affluent—societies where people have jobs, savings, and security, and can afford the luxury of choosing between, for example, expensive sports cars that pollute and expensive electric cars that do not. A poor society, in need of inward investment and economic development, is simply looking to provide basic transportation solutions to its population, so it is less likely to enforce strict regulations and penalize firms that might otherwise take their business elsewhere. Consumers in developed societies, on the other hand, have a higher standard of living and, as a consequence, expect more from the firms whose products they buy.1

In short, societal affluence raises expectations. Firms operating in affluent societies, therefore, face a greater threshold to demonstrate they are creating value for their stakeholders. In less affluent societies, a manufacturer may be able to externalize some of its production costs to society by polluting the environment. When the majority of people are desperately focused on the need for jobs to feed their families, an externality such as pollution is of limited concern, while higher-level concerns are a luxury. As societies become increasingly affluent, however, the collective understanding of social issues like pollution grows, as does society’s ability to afford effective solutions.

While affluence drives CSR, the concept of being better off is relative. In other words, we judge our own wealth by comparing it to the wealth of others—“people’s sense of well-being depends much more on their relative purchasing power than on how much they spend in absolute terms.”2 Although we can clearly measure affluence on an objective scale (i.e., we know we are wealthier today than we were 100 years ago), this relative measure matters to us.3 As globalization enables a greater awareness of the living standards of people elsewhere, inequality is rising as an issue (both within and among countries) and driving action.

Inequality within Countries

The world today is remarkably richer than it has ever been. The best way to illustrate this is in terms of absolute progress:

As a result of our wealth and progress, we have evolved to the state where, for the first time, “more people die . . . from eating too much than from eating too little; more people die from old age than from infectious diseases; and more people commit suicide than are killed by soldiers, terrorists and criminals combined.”5 In spite of the unprecedented wealth worldwide, however, it is not evenly distributed. And, as noted previously, relative wealth is perceived to be as important as (if not more important than) absolute wealth. As such, the increasingly apparent discrepancies tend to create hostility rather than contentment:

Fewer Americans are marrying over all, and whether they do so is more tied to socioeconomic status than ever before. .......Currently, 26 percent of poor adults, 39 percent of working-class adults and 56 percent of middle- and upper-class adults ages 18 to 55 are married.7

What is important is for public policy to stop the trend from spiraling out of control. The firm (or, more specifically, CSR) has a role to play in that process. While growing affluence increases the demands societies place on firms, decreasing affluence (e.g., during a recession) is also an important driver of CSR.8 In particular, decreasing relative affluence (or income/wealth inequality) greatly increases resentment among segments of the population, which can lead to altered power balances within a country. In the US, at least, data suggest that inequality has not been this severe since the Great Depression and that this is shaping current politics.9 Worse, evidence suggests the Internet and globalization are aggravating this social bifurcation, rather than bridging it:

The digital revolution is opening up a great divide between a skilled and wealthy few and the rest of society. In the past new technologies have usually raised wages by boosting productivity, with the gains being split between skilled and less-skilled workers, and between owners of capital, workers and consumers. Now technology is empowering talented individuals as never before and opening up yawning gaps between the earnings of the skilled and the unskilled, capital-owners and labour.10

As such, it is shortsighted to assume that CSR is applicable only where there is affluence. Serious corporate transgressions fuel the sense of “them and us” and are always resisted by local stakeholders. Protests against international petroleum companies, for example, occur when operating standards are construed as being particularly harmful to the immediate community. In Nigeria, residents of the Niger Delta continue to attack oil workers and sabotage equipment because the Nigerian government is failing to distribute the wealth generated by the petroleum industry, while pollution and deforestation continue. Though Shell and other companies comply with Nigerian law, they have been attacked (both at home and in Nigeria) by those who believe the firm is doing harm.

Inequality among Countries

In addition to reflecting local concerns, such protests demonstrate that stakeholders living in affluent societies are willing to impose their values on firms that operate overseas. As a result of such domestic pressure, firms such as Nike, GAP, and Apple now require their subcontractors to provide wages and working conditions above local norms. Even so, activists continue to advocate for higher standards, criticizing the pay and conditions of subcontractors that are below those in developed countries, such as the United States.11

Due to such activism, developed-country living standards (and the expectations that accompany them) are rapidly diffusing throughout the world. As the world’s population continues to grow (projected to rise from 7.2 billion in 2015 to 9.5 billion in 2060)12 and more people clamor to enter the middle class (estimated to increase by “two or three billion people” over the next 40 years,13 driven primarily by economic advances in China and India),14 people expect more from the firms (often multinationals) that operate locally. Naturally, all people want the same living standards or, at least, the same opportunity to achieve those standards. It is not clear, however, that people realize the limits they face in seeking to progress along the same path as developed economies. This applies to environmental damage (“Delhi has become the world’s most polluted mega-city, supplanting Beijing”)15 but also to restricting economic growth:

[Pollution] not only damages a country’s image and hurts its ability to attract talent, tourists and investors; air pollution also exacts heavy losses in health expenditures, labor losses, agricultural activity and premature deaths. (The W.H.O. estimates that air pollution causes close to a million deaths per year in both India and China.) Over all, the World Bank estimates that air pollution already drains at least $55 billion worth of labor output alone from the Indian economy every year.16

The obvious conclusion is that competitive strategies must consider the ever-shifting pattern of expectations placed on firms by the greater choices (and challenges) that affluence affords societies. As society becomes more complex, this task will become more difficult:

A look back at 2000 shows how much the world can change in a [short period]. Back then, about 30 percent of people in developing countries lived in extreme poverty, compared with less than 15 percent today. Only 12 percent of people owned a mobile phone; now, more than 60 percent do. Facebook . . . hadn’t launched yet. These and other developments have changed how consumers live, think, and shop—and the changes are only going to accelerate.17

In short, affluence leads to a more engaged civil society, which leads to shifts in public attention to issues of concern. The pace at which societal attitudes can evolve on issues that previously were thought to be intractable has caught many firms unaware. In the US, for example, issues as diverse as “interracial marriage, prohibition, women’s suffrage, abortion, same- sex marriage, and recreational marijuana” show that the country has moved from rejection to “widespread acceptance in a short amount of time.”18 Firms need to understand this and adapt, particularly on those issues that pose the gravest threat to their success and, in the worst cases, their survival.

SUSTAINABILITY The impact of heightened affluence and changing societal expectations is enhanced by a growing concern for the environment. When the Alaskan pipeline was built in the 1970s, crews could drive on the hardened permafrost year-round.

The first billion people accumulated over a leisurely interval, from the origins of humans hundreds of thousands of years ago to the early 1800s. Adding the second took another 120 or so years. Then, in the last 50 years, humanity more than doubled, surging from three billion in 1959 to four billion in 1974, five billion in 1987 and six billion in 1998. ....... The United Nations Population Division anticipates 8 billion people by 2025, 9 billion by 2043 and 10 billion by 2083.24

The Argument in Favor of Action on Climate Change

This video condenses the convoluted, passionate, and often partisan debate about climate change into a straightforward argument: https://youtu.be/zORv8wwiadQ.29

The goal of the presentation is to remove the conflict over the science behind climate change and global warming from the debate and, instead, reduce the argument to one of risk management. In other words, whether you believe in the science or not (and you should), the dangers of not acting far outweigh any dangers associated with acting.

Today, climate changes are causing the permafrost to thaw at record rates,19 research reveals that almost 30 percent of the Arctic ice cap has melted since 1981,20 and shipping firms anticipate a day in the not-too-distant future when they can regularly transport goods between the Atlantic and Pacific oceans via the previously impassable Northwest Passage.21

Greater instances of extreme weather events, droughts, forest fires, and shrinking biodiversity all support what is intuitive— our planet has ecological limits.22 The speed at which we are approaching those limits and the potential consequences of our actions are complicated issues about which experts do not agree. What is not in doubt, however, is that human economic activity is depleting the world’s resources and causing dramatic changes to the Earth’s atmosphere—changes that could become irreversible in the near future. Already, the latest data indicate “that humanity has transgressed four of the nine boundaries—climate, biodiversity, deforestation and the linked nitrogen and phosphorous cycles”23—that have been set as “red lines” that the human race crosses at its peril. Our prognosis does not look good. A fixed supply of resources (we have only one planet) faces rapidly growing demand. In the autumn of 2011, the world’s population passed 7 billion people—and its growth shows no signs of letting up:

The scale and pace of this population growth place an enormous strain on the world’s resources (from fresh water to energy provision, to affordable food, to the rare earths necessary to produce consumer electronics), causing commentators like Paul Ehrlich to predict “a collapse of global civilization.”25 This is because the world’s population is not only becoming larger but also becoming more concentrated. According to the United Nations, we recently became “a predominantly urban species. ....... Having taken around 200,000 years to get to the halfway mark, demographers reckon that three-quarters of humanity could be city-dwelling by 2050.”26 As this concentration of humanity increases, the natural environment will bear the brunt of the associated resource depletion. In particular, climate change is an issue that has gained visibility in recent years, peaking in the intergovernmental commitment at the COP21 United Nations meeting in Paris in 2015 (see Chapter 11), but being advanced more aggressively by cities, counties, and states around the world.27 As a result of this heightened awareness, sustainability will increasingly drive CSR. And firms that are perceived to be indifferent to their environmental responsibilities will be punished by stakeholders. The backlash against BP’s Deepwater Horizon disaster in 2010 (“$61 billion in cleanup costs, federal penalties and reparations to individuals and businesses”)28 is only the most prominent example of the dangers firms face if they ignore the emerging consensus around the need to act.

What is also clear is that internalizing the nature of the problem and the extent of action necessary to effect meaningful change has implications for our entire economic system. In particular, we need to be more efficient in our resource utilization—extracting fewer raw materials and recycling (ideally upcycling) a much higher percentage of the resources we use.30 Because waste is inherent to GDP growth (our economic model prefers us to replace our cars every three years rather than ten and buy disposable products rather than ones we can reuse), and because the supply of raw materials is finite, it is essential that we use resources more effectively.31 Some CSR advocates see waste as a fault in our economic model and call for a revolution. The argument presented in this book, however, seeks evolution—reforming the current system to create value broadly by integrating a CSR perspective into firm strategy and throughout operations. But it is only by focusing on the system as a whole that lasting change can occur.

In response to the threat, firms as diverse as Starbucks (Sustainable Solutions),32 Unilever (Sustainable Living),33 and Tesla (Sustainable Energy Ecosystem)34 recognize the advantages of innovating to meet stakeholder needs. Along similar lines, Apple has declared it is “now globally powered by 100 percent renewable energy,”35 while Disney, Shell, and General Motors (part of “more than 1,200 global companies”) are embracing carbon pricing in their internal budgeting models.36 Further, in the build-up to COP21, firms as diverse as Alcoa, Apple, Bank of America, Berkshire Hathaway, Cargill, Coca-Cola, General Motors, Goldman Sachs, Google, Microsoft, PepsiCo, UPS, and Walmart committed “to invest more than $140 billion in efforts to cut carbon emissions.”37

While there is much progress still to be made, stakeholder awareness of sustainability will ensure that progressive firms can secure market share and competitive differentiation by integrating CSR throughout strategic planning and day-to-day operations.

GLOBALIZATION

Increasingly, firms think globally. Operating in multiple countries and cultures magnifies the complexity of business exponentially. There are not only more laws and regulations to interpret, but also many more social norms and cultural subtleties to navigate. In addition, the range of stakeholder expectations to which multinational firms are held accountable increases, as does the potential for conflict among competing demands. While globalization has increased the potential for efficiencies gained from operations across borders, it has also increased the potential to be exposed on a global stage if a firm’s actions fail to meet the needs and expectations of its stakeholders.

Globalization is, therefore, another force propelling the strategic value of CSR. Large corporations, due to their scale and scope, are positioned better than most to take advantage of the potential globalization offers, whether FAANGs (Facebook, Amazon, Apple, Netflix, and Google) or BATs (Baidu, Alibaba, and Tencent in China). Such firms stand to gain significantly from globalization; however, they present a bigger target for stakeholder concerns. The Internet, which drives this global environment, is a powerful enabling tool for communication, transportation, trade, and international capital flows. In the process of connecting over large distances, however, the Internet initially reduced our sense of an immediate community. This, in turn, affected business’s sense of self-interest and loosened the self-regulating incentive to maintain strong local

In Adam Smith’s view of the 18th-century world,39 all competition was local—the vast majority of products were produced and consumed within the same community. As a result, Smith reasoned, it is in producers’ self-interest to be honest because to do otherwise would threaten the reputations and goodwill on which ongoing trade in their community depends. As firms grew in size, began selling to ever more distant markets, and started dividing operations across geographic locations in order to increase efficiencies, Smith’s fundamental assumption broke down. Firms were free to be bad employers in Vietnam or polluters in China because they sold their products in the US or EU, and there was no way for Western consumers to know the conditions under which the products they were buying were made. Disgruntled employees in Vietnam and local villagers in China were no threat to this business model, especially when even the worst jobs in the factories of multinational firms were often the best source of local jobs and economic progress.

As globalization progresses, information is communicated more efficiently. It took “radio 38 years and television 13 years to reach audiences of 50 million people, while it took the Internet only four years, the iPod three years and Facebook two years to do the same.”40 As a result, the world grows smaller, and societies return to the conditions under which Smith first suggested that self-interest effectively regulates action. Once again, “all business is local,”41 with widespread Internet access allowing anyone with a phone to broadcast what they witness worldwide. China alone “now has 731m people wielding smartphones,”42 while “every second three more Indians experience the internet for the first time. By 2030 more than 1 billion . . . will be online.”43

These ideas are expressed in Figure 2.1, via the four phases of stakeholder access to information—from industrialization, to internationalization, to globalization, to (most recently) digitization. While globalization was driven by computers and the Internet, which fostered the free flow of people and ideas worldwide in the late 20th century, the current phase (digitization) is being driven by big data, virtual reality, and artificial intelligence. Adam Smith lived in a simpler time, when all information was local and kept firms honest. Industrialization and international trade depressed stakeholder access to information due to the increasing distances over which transactions were conducted. Gradually due to globalization and more rapidly due to digitization, however, access to information has returned to a micro level. As technological innovation empowers individuals to communicate and mobilize, the ability of firms to manipulate stakeholder perceptions of their activities has decreased and will continue to do so.

Description

Figure 2.1 The Four Phases of Stakeholder Access to Information

Globalization, therefore, transforms the CSR debate because a domestic context is no longer the only lens through which the business should be viewed. Today, no multinational can afford to ignore its broad range of stakeholders, wherever they may be. European consumers, for example, are just as likely to look to a firm’s operations elsewhere in the world when judging whether to buy its products. This is a lesson the British bank Barclays learned when it continued to do business in

ties:

In the capitalist utopia envisioned by Adam Smith in the 18th century, self-interest was tempered by the competing demands of the marketplace and community. But with globalization, the idea of doing business with neighbors one must face the next day is a quaint memory, and all bets are off.38

Discrimination

Discrimination based on gender is generally prohibited in developed societies, albeit with varying degrees of enforcement; however, in some cultures, like Saudi Arabia, women are segregated from male workers and encounter gender-based limitations on the type of work available to them. A firm operating in Europe and Saudi Arabia may well be considered socially irresponsible and culturally insensitive if it applies the same human resource policies across all operating locations. Yet if women are treated differently in Saudi Arabia, criticisms may arise in Europe or elsewhere.

The Swedish furniture giant IKEA learned this lesson when it airbrushed women out of photos in the Saudi version of its catalog out of respect for local cultural sensitivities.47 Ignoring inconsistencies in company practices can place multinational firms in awkward positions. On the one hand, they must adapt their strategies to local expectations; on the other hand, strategies based on varying standards can leave the firm open to negative publicity, lawsuits, or other harmful outcomes at home.

apartheid-plagued South Africa in the 1980s;44 the oil multinational Shell learned a similar lesson due to its involvement with the Nigerian regime that executed writer and activist Ken Saro-Wiwa in the 1990s;45 and it was a lesson that Siemens, the German engineering group, also learned when it was forced to pay approximately $1.6 billion in fines to settle allegations of bribery and corruption used to win overseas contracts in the 2000s.46

Globalization enables stakeholders across different cultures to express their concerns directly. Actions that are acceptable, even required, in one culture may be prohibited in another. Fairly or not, firms are increasingly expected to meet these varying standards.

This process of globalization can be visualized as progressing through two distinct phases. Initially, globalization empowered corporations (Phase I of Figure 2.2), enabling them to expand worldwide, shift manufacturing offshore, reform supply chains, and develop powerful global brands. Merger and acquisition activity blossomed (because it was a quick way for firms to grow), further increasing their influence. As business transcends national boundaries, the power of large firms grows, even to the point where they feel free to incorporate offshore or relocate their official headquarters via accounting inversions—both methods to avoid paying higher tax rates in their home country.

Globalization (and now digitization), however, eventually created countervailing forces that are curtailing the power of business (Phase II of Figure 2.2). Firms are rapidly losing control over the flow of information that empowers stakeholders to communicate and mobilize (see Figure 2.3). Social media campaigns give “customers a huge megaphone with which to shape corporate ethics and practices. ....... suddenly what matters isn’t what an ad says about a company, but what your friends think about that company.”48 There is a growing list of firms that are no longer able to control the quality and quantity of information about their operations and how they affect the social debate. GAP,49 Coca-Cola,50 and Google51

are just a few examples of firms that have been damaged as global information flows force them to react to complaints in minutes rather than days. The answer is greater communication with stakeholders to better understand and anticipate their needs before the free flow of information turns against them:

In a world where our demand for Chinese-made sneakers produces pollution that melts South America’s glaciers, in a world where Greek tax-evasion can weaken the euro, threaten the stability of Spanish banks and tank the Dow, our values and ethical systems eventually have to be harmonized as much as our markets. To put it differently, as it becomes harder to shield yourself from the other guy’s irresponsibility, both he and you had better become more responsible.52

Description

Figure 2.3 The Free Flow of Information

This self-feeding cycle of globalization suggests that CSR will increasingly become a mainstay of strategic thinking for businesses, especially global corporations.

COMMUNICATION Globalization demonstrates that the pace at which information spreads is determined by communication technologies, which increasingly define the environment in which firms operate. This information exchange has risen to a level that is

difficult to comprehend:

Every day about 300m digital photographs, more than 100 terabytes worth, are uploaded to Facebook. As estimated 204m emails are sent every minute and, with 5bn mobile devices in existence, the generation of new

Description Figure 2.2 Globalization in Two Phases of Empowerment

To put this another way, it is estimated that “the ‘digital universe’ (the data created and copied every year) will reach 180 zettabytes (180 followed by 21 zeros) in 2025.”54 This revolution is driven by communication that is instant and global. It has ramifications not only for the latest fashions but also for social movements, as popular unrest can be spread as easily as trendy designs. In such an environment, to the extent that a firm is out of touch with local concerns, it will face a backlash from stakeholders. Similarly, those firms that adapt and appear responsive to societal claims will be ever more successful. The growing influence of the Internet makes sure that any lapses by firms are brought rapidly, often instantaneously, to the attention of the worldwide public. Scandal is news, and yesterday’s eyewitnesses are today armed

This technology enables communication among activist groups and like-minded individuals, empowering them to spread their message and providing the means to coordinate action. Such technologies are decentralizing power in a way that allows mobilization and protest in places such as Iran and in Lebanon, where “the more secular forces of moderation have used technologies like Facebook, Flickr, Twitter, blogging and text-messaging as their virtual mosque, as the place they can now gather, mobilize, plan, inform and energize their supporters, outside the grip of the state.”56

As presented in Figure 2.2, Phase II of globalization suggests a shift in the balance of power concerning control over the flow of information back toward stakeholders in general and two important constituent groups in particular. First, the Internet has greatly empowered individuals because of the access it provides to massive amounts of information, particularly when an issue achieves a critical mass in the media. It is estimated, for example, that “every two minutes, we snap as many photos as the whole of humanity took during the 1800s.”57 Today, the Internet has “as many hyperlinks as the brain has synapses. .......It is already virtually impossible to turn the Internet off.”58 And second, globalization has increased the influence of NGOs and other activist groups because they, too, are benefiting from easily accessible and affordable communications technologies. These tools empower NGOs by enabling them to inform, attract, and mobilize geographically dispersed individuals and consumer segments, helping ensure that socially nefarious corporate activities are exposed worldwide. The combination of empowering these two groups ensures that firms today are unable to hide behind the fig leaves of superficial public relations campaigns:

We are approaching a theoretical state of absolute informational transparency ....... It is becoming unprecedentedly difficult for anyone, anyone at all, to keep a secret. . . . Truths will either out or be outed ....... the future, eventually, will find you out. . . . In the end, you will be seen to have done that which you did.59

It is increasingly apparent that two trends will dominate future Internet growth and social discourse: First, people will access the Internet via mobile devices, and second, they will share information via social media.

Mobile Devices

Smartphones and other mobile devices are approaching ubiquity. They are proliferating worldwide because they provide people with their preferred means of accessing the Internet: wireless technology (text messaging, blogs, and social media):60

Smartphone makers are running out of new customers ....... there are just under 100 smartphones per 100 people in the U.S. and about 92 smartphones per 100 people in Europe. (Many people own more than one phone.) By 2020, there will be about 84 smartphones per 100 people globally.61

While a number of social ills have become associated with the use of mobile devices, such as texting while driving,62 an increase in emergency room visits by children of distracted parents,63 and loneliness,64 these devices are also highly attractive because they make life so convenient. So much so that “nearly half of American adults say they could not live without their smartphones [and] young adults were found to use their smartphones more than 80 times a day.”65 Increasingly, mobile devices are becoming the primary way we get our news, access the Internet, and run many aspects of our lives.66

Mobile devices spread so quickly not only because they are convenient, but also because the infrastructure necessary to support them (wireless antennas) is much cheaper than the desktop computers and land telephone lines that were the foundation of the Internet in developed economies. Developing countries that struggle to provide the basic infrastructure of society, therefore, nevertheless see the rapid diffusion of mobile devices—India, for example, “has more mobile phones than toilets.”67 This is particularly advantageous for e-commerce (which is “expanding at an average rate of 20% a year”68 and, in China alone, is now worth “$11trn in transactions, ...... twice the size of America’s credit- and debit-card industry”69) and, in developing economies, for financial transactions among populations that were previously “unbanked”:

with video cameras and smartphones with sophisticated cameras and video capability that were unimaginable only a decade ago:

The transformative power of smartphones comes from their size and connectivity ........ Even the most basic model has access to more number-crunching capacity than NASA had when it put men on the Moon in 1969.55

content looks set to continue its rapid growth.53

With billions of people glued to Facebook, WhatsApp, WeChat, Instagram, Twitter, Weibo and other popular services, social media has become an increasingly powerful cultural and political force . . . because these services allow people to communicate with one another more freely, they are helping to create surprisingly influential social organizations among once-marginalized groups . . . from “alt-right” white supremacists in the United States to Brexiters in Britain to ISIS in the Middle East to the hacker collectives of Eastern Europe and Russia. But each in its own way is now wielding previously unthinkable power, resulting in unpredictable, sometimes destabilizing geopolitical spasms.76

Mobile-money services have taken off over the past decade in Africa; 1 in 10 adults across the continent—about 100 million people—use them. In Kenya, . . . M-Pesa, broadly considered the first major and most successful mobile-money technology platform, counts 26 million users, roughly half the population. More than half of the world’s 282 mobile-money platforms are in sub-Saharan Africa.70

Another growing application is “digital philanthropy,” where sites like GoFundMe, CrowdRise, and YouCaring aim to disrupt the traditional philanthropy model by building a personal relationship between donor and cause via “a storytelling platform” that is “redefining the business of disaster relief.”71 In all cases, though, mobile devices are enabling connections that were previously not possible, but have quickly become indispensable. In addition to transactions of goods, services, and money, for example, the principal way in which mobile devices are connecting people is via social media.

Social Media

As people access the Internet via their mobile devices, they are using social media to exchange information. Social media is perhaps more accurately described as “social technologies,” of which there are two types—websites that “allow people to broadcast their ideas” (e.g., Twitter and its Chinese equivalent, Sina Weibo) and websites that allow people to “form connections” (e.g., Facebook and its corporate equivalent, LinkedIn).72 The amount of data these platforms distribute is staggering, with Facebook registering 2.25 billion active users in 2018, while “Twitter’s 320m monthly users send hundreds of millions of tweets a day.”73 While much of this information is trite, some of it has the power to drive revolutions.

The Twitter Revolution

Social media in general, and Twitter in particular, has played an important role in almost all of the major social movements of the 21st century. The hashtag (#) has become shorthand for extremely complex issues that capture the attention of an online population. What is less clear is how consequential these movements are. While #MeToo has led to upheaval in several creative industries, and #BlackLivesMatter has raised awareness (if not produced much change), #BoycottUnited, which emerged after a passenger was dragged off an overbooked United flight, resulted in profits that “shot up 49 percent” in the quarter immediately following the so-called campaign.74 Similarly, #BoycottUber, which followed a series of highly public PR disasters for the firm, led to net revenue that “jumped to $1.75 billion,” while ride requests “increased 150 percent” from the previous year.75 The contradiction between passionate online protests and tepid real-world consequences suggests limits to social media campaigns. What is indisputable, though, is that Twitter provides a way for dissatisfaction to spread and protesters to mobilize. In recognition of this, here are some important hashtags and the cause that produced them:

March 2006: The first tweet (“just setting up my twttr”), Jack Dorsey, CEO of Twitter, @jack

June 2009: Iran’s Green Movement (#iranelection)

January 2011: Tunisia’s Jasmine Revolution (#jasminerevolution)

February 2011: Tahrir Square, Egypt (#Jan25 #Tahrir)

September 2011: Occupy Wall Street (#occupywallstreet)

July 2013: Black Lives Matter (#BlackLivesMatter)

August 2014: Ferguson, Missouri (#Ferguson)

January 2015: Oscar nominees (#OscarsSoWhite)

January 2017: Boycott Uber (#BoycottUber)

April 2017: Boycott United (#BoycottUnited)

October 2017: Me Too (#MeToo)

As these examples indicate, the interaction of these two technologies (mobile devices and social media) offers the potential for change. Whether it is using Facebook and Twitter to overturn decades of totalitarianism in the Middle East or GPS technology to play Pokémon Go, the power of technology to mobilize strangers and unite them in pursuit of a common agenda is growing daily:

All of these drivers of CSR overlap in terms of the importance of a firm’s reputation and brand. Brands are a focal point of corporate success. Firms try to establish popular brands in consumers’ minds because doing so increases their competitive advantage, which results in higher sales and margins—consumers are more likely to pay a premium for a brand they know and trust. However, due to growing societal expectations, combined with the complexity of business in a global environment and the ability of stakeholders to spread missteps instantaneously to a global audience, a firm’s reputation is increasingly precarious—hard to establish and easy to lose. Brands therefore drive CSR because they raise the stakes—those that are trusted by stakeholders will be more successful in the market than those that are not:

This power results from an ever-widening free flow of information in a globalizing world that portends danger for entrenched interests everywhere (as presented in Figure 2.3). As firms scramble to formulate a “social media policy,” they are being forced to react to rumors and complaints that can quickly spread beyond their control:

In the two weeks after the 1989 Exxon Valdez oil spill in Prince William Sound, in Alaska, Exxon’s shares dropped 3.9% but quickly rebounded. In the two months after the Gulf of Mexico oil spill in 2010, BP’s shares fell by half.77

Harnessing this power and directing it at a corporate target has the potential to inflict significant damage. It is easy to imagine how Copwatch (http://www.copwatch.com/), a website that monitors police activity to guard against abusive behavior,78 easily becomes Corpwatch (http://corpwatch.org/), a website using the same technology and community motivation to build campaigns against specific firms. The danger no longer lies in insufficient information, but in being able to detect “whispers of useful information in a howling hurricane of noise.”79 And the interaction between stakeholders and the growing pool of information is iterative. As stakeholders gain access to larger amounts of information and communicate among each other, they build support for issues and disseminate their opinions to other stakeholders.80 This trend is already reflected in the rapid growth of websites with user-generated content, such as YouTube and Flickr. It is taken a step further with the development of the sharing economy (think Uber, Airbnb, or BlaBlaCar), which allows users to rate and review the services provided, even as governments struggle to regulate these new forms of economic exchange.81

The result is that more and more consumers are interacting with firms in real time in ways that shape purchase decisions. Consumers are informed, and just as they are willing to spread good news, they are also willing to share their horror stories with millions of others.82 Consequently, firms have an even more precarious hold on their reputations and need to be more responsive to stakeholders’ concerns in order to protect them:

This is the era of internet-assisted consumer revenge, and as scorned customers in industries from dentistry to dog-walking have used digital platforms to broadcast their displeasure, the balance of power has tipped considerably in the buyer’s favor.83

While this growth in information and communication is clearly “shifting power from a few Goliaths to many Davids,”84 it is less clear how fully stakeholders will take advantage of these capabilities. For example, while Change.org calls itself the “world’s leading platform for change,” it is hard to know how firms should respond to the stakeholder concerns that are registered there. If five thousand people sign an online petition, what does that mean? Will they refuse to buy from that company anymore? Will they protest at stores? And if so, so what? For a large brand, five thousand people widely diffused is a small percentage of the firm’s customers, and clicking a mouse is hardly an indication of personal conviction or willingness to sacrifice on behalf of a cause.

Nevertheless, it is a brave manager who ignores the dramatic shift in engagement that has emerged online in the last decade (Apple’s iPhone was launched in 2007). Going forward, those firms that can respond to external pressures for greater transparency and engagement by rethinking their strategy will be best placed to operate in a business context in which they no longer control the flow of information. In short, for firms to enjoy sustained success, CSR will increasingly form a central component of strategy and operations because it is also central to a firm’s reputation and brand management.

BRANDS

If you were to treat the world’s ten most valuable brands from the past ten years . . . as a stock portfolio, it would have outperformed the S&P 500 index by almost 75% and the MSCI World index by more than 400%.85

The value of brands to firms is quantified by Interbrand in its annual brand survey, which reveals that these assets are more valuable than ever. Apple’s brand, for example, is estimated to be worth more than $184 billion (Interbrand’s number- one global brand).86 Facebook’s brand is estimated to be worth just more than $48 billion, while its tangible assets are worth only $14 billion (less than one-third of the value).87 In other words, firms need to take ever greater steps to protect an investment that is central to their continued success. The best way to protect a brand is for the firm to integrate a CSR perspective throughout operations. Doing so can help firms build their brand,88 insure their brand,89 and repair their brand in the event of a crisis.90

Brands are integral to CSR because of the way they are built—based on perceptions, ideals, and concepts that appeal to customers. In particular, firms with lifestyle brands (which base more of their appeal on aspirational values) need to live the

Promoting civic harmony represents a way for Starbucks to define itself without reference to its coffee or tea— and, let’s face it, there was nothing particularly virtuous about a $5 Frappuccino in the first place. Rather, the company is encouraging consumers to focus on its ethos—its good intentions. That is the brand, not the flavoured water in the paper cup with the plastic top.91

Strategic CSR Debate

MOTION: A CEO has a responsibility to advance a social agenda.

ideals they promote. A CSR perspective allows firms to match operations to stakeholder values at a time when these values are constantly evolving. As such, brands are a way for firms to communicate directly with their stakeholders in general, but their customers in particular. Of course, this works only if the narrative the firm seeks to build matches the mood of the moment, which can shift quickly. Nevertheless, one of the firms that has done this most effectively is Starbucks, driven by the values of Howard Schultz:

Brands with Attitude

In recent years, however, the relationship between firms and their stakeholders has changed, with increasing pressure for CEOs to take stands on divisive social issues. This may be a result of the polarized, partisan political environment in which we currently live, or it may be because of growing affluence in the West. Either way, CEOs are being forced to take positions on subjects they would have been free to ignore previously:

On politics, business leaders are risk-averse. They prioritize stability and the status quo. What has changed is the definition of the status quo. Gay and transgender rights, and action on climate change, were once liberal causes. They are now largely mainstream, particularly in big cities that are home to corporate head offices and the educated workers [businesses] covet.92

As a result, a refinement of the lifestyle brand seems now to embrace controversy. This is not superficial controversy such as, for instance, the hypersexualized advertising of firms like Guess or American Apparel in the past, but instead a more substantive stand on issues that matter in people’s lives. The purpose of firms is to create value for their stakeholders. As such, when expectations shift, firms have to realign themselves with the new reality. What began with the social activism of the Body Shop and Ben & Jerry’s in the 1970s to 1980s,93 and continued with the radical advertising of Benetton in the 1980s to 1990s,94 has come full circle with Nike’s 2018 ad campaign to commemorate the thirtieth anniversary of its game- changing “Just Do It” slogan:

In an era rife with divisive political discourse, most major public companies try to avoid taking stances that could make customers angry, particularly when rabid social media campaigns can cast any decision into a larger social statement. Yet Nike has signed Mr. Kaepernick, perhaps the most divisive American athlete of his generation, to a lucrative new contract and will produce branded apparel with his name and image.95

The campaign slogan was “Believe in something. Even if it means sacrificing everything,” and the ads featured Colin Kaepernick, the ex–San Francisco 49ers’ quarterback who has essentially been denied employment by the NFL for his social activism:

In 2016, Mr. Kaepernick began kneeling during the national anthem to protest racism, police brutality and social injustice, and a handful of other players followed suit, kneeling, locking arms or raising their fists during “The Star-Spangled Banner.”96

By courting controversy—not only featuring Kaepernick in its ads, but signing him to a long-term endorsement contract— Nike took a calculated risk that its stance would attract more customers to Nike than it would repulse:

Nike’s strategy risks alienating countless consumers who believe the national anthem protests that Mr. Kaepernick began are disrespectful. ....... However, it could pay off among Nike’s base of young customers and fans ....... and signals that political stances could be seen as winning issues by some brands. Nearly two-thirds of individuals who wear Nike in the United States are under 35 years old, and are much more racially diverse than the baby boomer population.97

Businesses today need to build a watertight brand with respect to all stakeholders. The attractiveness of a firm—whether as an employer, producer, supplier, or investment—is directly linked to the strength of its brand. CSR affects all aspects of operations because of the need to consider the interests of constituent groups. Each functional area builds on the others to create a composite image of the firm (via its brand) for its stakeholders. Given the massive resources firms invest in creating brands, understanding that asset from a CSR perspective has become a vital component of generating a return on that investment—an essential means of crafting market appeal for the long term.

Descriptions of Images and Figures Back to Figure

The graph seen here shows the passage of time/extent of globalization on the x axis and is divided into four parts. The y axis shows the stakeholder access to information.

The four phases seen here are labeled I through IV which are demarcated by dotted lines, parallel to the y axis. They are:

I. Industrialization.

II. Internationalization.

III. Globalization.

IV. Digitization.

A trend line seen on this graph starts halfway up the y axis in stage I before sloping down and then rising up again in stage III and continuing steeply up. The end of the trend line is a dotted line.

Back to Figure

This flow chart starts with a box labeled phase I.

An arrow from this box points to a box that reads empowered corporations below.

An arrow from this box points to a box labeled phase II.

An arrow from this box points to a box that reads empowered stakeholders below.

Three arrows from the empowered stakeholders box point to three boxes below that read:

Empowered individuals.

Empowered NGOs.

Empowered media.

Back to Figure

This diagram has a small circle with three concentric rings around it. A box labeled firm; internal stakeholders, is in the inner most circle.

There are four boxes – each on the outer most ring of the diagram, on top, below, to the right and to the left of the box labeled firm, in the center.

The box on top reads, internet; social media. A double-sided arrow connects this box to the box labeled firm, in the center.

The box below reads, Media (TV/radio). A double-sided arrow connects this box to the box labeled firm, in the center.

The box on the left reads, E-mail; IM. A double-sided arrow connects this box to the box labeled firm, in the center.

The box on the right reads, phones; texts. A double-sided arrow connects this box to the box labeled firm, in the center.

The five boxes described above are in a dark color.

There are also four other boxes in a lighter color, that read external stakeholders, between the second and third rings in this diagram, at the top and bottom right and left corners of the box labeled firm, in the center.

QUESTIONS FOR DISCUSSION AND REVIEW

1. List the five forces driving CSR for firms today. Of these five forces, is there one that you feel is more important than the others? Defend your choice with examples from your own experience and knowledge.

2. For each of these five forces, can you think of a firm that is strategically well positioned to take advantage of the changes being propelled by that force?

3. For each of the five forces, can you think of a firm that is vulnerable to these shifting dynamics? 4. Ten years from now, do you think these five forces will still be driving CSR? Do you see any other emerging

forces (e.g., religion, technology) that might reshape CSR in the future to the same extent as the five forces discussed in this chapter?

5. Is social media helping society advance, or is it holding us back?

CASE STUDY RELIGION A good illustration of the range of stakeholder interests that encompass CSR is the role of religion in the workplace. To what extent is religion a unifying force for firms? How can firms incorporate religion into their operations and strategic outlook? What does it mean for a firm to be socially responsible with respect to religion? Beyond tolerance, how can a firm respond to its stakeholders’ religious needs without shifting its position from issue to issue or seeming to favor one constituency over another? And when people disagree about religion, how can firms respect that diversity to the satisfaction of all?

In the United States, it is hard to collect definitive statistics about the nation’s religious profile. Religion is a sensitive subject. US federal law, for example, prohibits the Census from asking about someone’s religious affiliation on anything other than a voluntary basis. As such, what data there are tend to be self-reports, which are unreliable indicators of actual behavior.1 Detailed statistics available from other sources, such as Gallup, however, can be used to piece together a religious profile of the United States:2

Protestants continue to make up the largest religious group in America, totaling 49% of U.S. adults interviewed. ...... Catholics are the next-largest group, at 23% of the population, with Mormons accounting for about 2%. This means that about three-quarters of Americans, overall, identify with a Christian faith.3

In addition to these numbers, Gallup reports that 6 percent of American adults identify themselves as belonging to a non- Christian religion, and around 20 percent report having no religion. Gallup concludes from this “that the shifts seen in previous years have stabilized, particularly the growth among those with no religious identity.”4 While this may be true in more recent years, Figure I.1 suggests that, when looking over the last 15 to 20 years, the largest identifiable trend is the reduction in people identifying themselves as Protestants and Catholics, and a corresponding increase in the numbers of people reporting no religious affiliation. In spite of this, and in contrast to voices of the past that claimed “the end of Christian America,”5 it is also true to say that religion plays a larger role in public life in the US than in many other developed countries. The number of American adults who report that religion is a “very important” influence in their life has remained consistently above 50 percent over the past 35 years, registering a high of 61 percent in 1998 and 2003, but declining to 51 percent (the lowest point recorded by Gallup) in the most recent year for which data are available, 2017.6

Description

Figure I.1 Religion in the United States (2001–2017)

Source: Gallup, Religion, https://news.gallup.com/poll/1690/religion.aspx.

Note: Survey of adult population in answer to the question “What is your religious preference?”

In a country where “over one-third of Americans, more than 100m, can be considered evangelical”7 and “more than half of American adults (55%) say they pray daily,”8 religion is deeply embedded in the social fabric. While numbers tell the story in the abstract, a comparison with the role of religion in another country paints a more detailed picture. In the United Kingdom, for example, the Census includes questions about religious affiliation. As such, an accurate profile of the religious affiliation of the population is more readily available (the next Census is due in 2021)—and it does not make easy reading for the Church of England:

Around 3% of English people attend an Anglican service at least once a month. Perhaps more significantly, according to the 2011 census, only 59% call themselves Christian, representing a drop of 13 points in a decade. ....... The concept of Christendom, a Christian realm that has endured since the time of Constantine the Great, is dying in Britain. In the most godless continent, it is one of the most secular countries.9

As the most recent Census data in Figure I.2 indicate, a significant number of people in the UK identify themselves as having no religion (41.5 percent). And these numbers may be conservative, as a 2017 British Social Attitudes survey

Description

Figure I.2 Religion in the United Kingdom (2001–2018)

Sources: Office for National Statistics (UK), Census 2011, December 11, 2012, http://www.ons.gov.uk/ons/rel/census/2011-

A plaque at Chick-fil-A’s headquarters in Atlanta says the company’s mission is to “glorify God,” which it does by serving chickenburgers and closing its 1,600 outlets on Sundays. The founder, Truett Cathy, once said that while “you don’t have to be a Christian to work at Chick-fil-A . . . we ask you to base your business on Biblical principles because they work.”14

As the firm’s CEO, Dan Cathy,15 has stated in the past in answer to a question about Chick-fil-A’s “closed-on-Sunday” policy:16

It was not an issue in 1946 when we opened up our first restaurant. But as living standards changed and lifestyles changed, people came to be more active on Sundays. ....... We’ve had a track record that we were generating more business in six days than the other tenants were generating in seven [days]. ....... We intend to stay the course. ...... We know that it might not be popular with everyone, but thank the Lord, we live in a country where we can share our values and operate on biblical principles.17

Ironically, it is the United States (with its constitutionally defined separation of church and state)18 that is overtly religious, while the UK (where the head of state, the Queen, is also the head of the Church of England) is more agnostic and atheist.19 In spite of this, religion causes as many issues in the UK as in the US; they just tend to be of a different nature. In the UK, for example, religion is detrimental to a successful political career. As Alastair Campbell, Tony Blair’s press secretary, famously intervened when the prime minister was asked a question about his Christianity, “We don’t do religion!”20 By contrast, in the United States, it is hard to imagine a candidate being elected president unless that person is willing to state publicly (and often) a belief in God. After all, “over 40% of Americans say they would never vote for an atheist presidential candidate,” and “several states still ban atheists from holding public office.”21 The prevalence of religion in political life in the US applies particularly to Catholics:

In 1986 Antonin Scalia became the seventh Catholic appointed to the Supreme Court bench in almost two centuries. Brett Kavanaugh [was] the sixth appointed since then (or seventh if you count Neil Gorsuch, who was brought up Catholic but attends an Episcopal church). ....... One in three members of the House of Representatives is Catholic, a record high. Six Catholics contested the Republican presidential nomination in 2016.22

“found that 53% of all adults [in the UK] had no religious affiliation, up from 48% in 2015.”10 Over the last decade and half, “church baptisms are down by 12%, church marriages are down by 19% and church funerals by 29%.”11 But perhaps most worryingly for the Church of England:

Only 3% of adults under 24 [years old] describe themselves as Anglican—fewer than the 5% who identify as Catholic. Almost three out of four 18- to 24-year-olds say they have no religion, a rise of nine percentage points since 2015.12

census/key-statistics-for-local-authorities-in-england-and-wales/rpt-religion.html. Data for 2018 are from “Counting Religion in Britain,” British Religion in Numbers, January 2018, http://www.brin.ac.uk/2018/counting-religion-in-britain-january-2018/. In the United States, by comparison, although the number of people claiming no religion, plus the very few willing to label themselves as atheists or agnostics, is growing,13 it is still much lower. This difference is reflected in everyday life, where religion plays a role in the United States to a degree that many British people find difficult to understand:

[There is] a battle in the United States over religious freedom, a series of skirmishes that include a Kentucky clerk’s refusal to issue marriage licenses to same-sex couples and a Muslim woman’s being passed over for a job at Abercrombie & Fitch because she wore a headscarf.24

While in the US, the sensitive nature of the religious debate means that even a minor slight can have major ramifications, in the UK, it is a lack of sensitivity to issues surrounding religion that tends to be the problem. Previously, for example, British Airways (BA) has found itself in the media spotlight for suspending an employee for wearing “a small crucifix.” In an attempt to rebut accusations of “religious discrimination,” BA parroted its “uniform policy,” looking somewhat ridiculous in the process:

BA says that, under its uniform policy, employees may wear jewelry—including religious symbols—but it must be concealed underneath the uniform. However, the airline says that items such as turbans, hijabs and bangles can be worn “as it is not practical for staff to conceal them beneath their uniforms.”25

At around the same time, a government minister drew attention to the secular nature of British society by criticizing a Muslim teacher who wore a veil during school lessons.26 The minister suggested the veil helped create “parallel communities” within Britain27 and that if he could choose, “he would prefer Muslim women not to wear veils which cover the face.”28 Similar debates over religious symbols have emerged in multiple countries in Europe,29 in Quebec in Canada,30 and in Russia.31 The ensuing confrontations produce elevated complaints about discrimination to bodies such as the Employment Opportunity Commission (US) and the Equality and Human Rights Commission (UK).32

Part of the explanation for the lack of religious sensitivity in the UK is the large (and growing) percentage of the population who do not believe in God. In contrast, when issues arise in the US, they tend to concern the overbearing influence of religion rather than a lack of sensitivity or awareness. While the political influence of the Christian Right is widely reported, this same lobby also seeks to influence corporate policy. The resistance to what has been termed the “War on Christmas” by Fox News and other right-wing commentary,33 for example, seems to ensnare Starbucks every year:

Controversy over the design of seasonal Starbucks cups is just one front in an annual culture war over the role of religion and liberalism in the five-week period between Thanksgiving and New Year’s Day ........ In 2015, Starbucks announced it would remove traditional holiday symbols, like reindeer and Christmas trees, from its holiday cups in favor of a more minimalist red design. In a statement released at the time, the company said it wanted to “create a culture of belonging, inclusion and diversity.” ....... That decision was met with an angry online backlash from [those] who saw it as an example of political correctness run amok.34

In the United States, however, the role of religion in CSR also has its lighter side, with commentators using humor to convey their message. A good example of this was the “What Would Jesus Drive?” campaign, organized and sponsored by the Evangelical Environmental Network, a biblically orthodox Christian environmental organization, and intended to reduce the environmental impact of SUVs, vans, and pickups on US roads:

Transportation is now a moral choice and an issue for Christian reflection. ....... So what would Jesus drive? We call upon America’s automobile industry to manufacture more fuel-efficient vehicles. And we call upon Christians to drive them. Because it’s about more than vehicles—it’s about values.35

Extending the transportation theme, the Atheist Bus Campaign in the UK launched a series of advertisements on London’s famous red buses to promote atheism. Gaining the support of high-profile atheists, such as Richard Dawkins (The God Delusion),36 the text of the ads read: “There’s probably no God. Now stop worrying and enjoy your life.”37

RELIGION AND CAPITALISM Whether strongly embedded or loosely coupled, religion is something firms find hard to ignore because it matters to so many of their stakeholders. In terms of the CSR debate, therefore, an important question is this: To what extent are religion and business compatible?

Pope Francis has inserted himself into this discussion with his first Apostolic Exhortation, Evangelii Gaudium (“The Joy of the Gospel,” 2013)38 and his encyclical on the environment, Laudato Si (“Be Praised,” 2015)39 in which he was critical of what he sees as the exploitative effects of capitalism. This continues a tradition within the Catholic Church that stretches back to Pope Leo XIII’s encyclical Rerum Novarum (“The Rights and Duties of Capital and Labor,” 1891),40 which stated

The fervor with which many people welcome a strong role for religion in everyday life naturally extends into controversial political and social debates. As such, when the government oversteps the bounds of religious liberty, the courts can intervene to reinstate constitutional rights. A high-profile example occurred in the Supreme Court case Burwell v. Hobby Lobby (573 U.S., 2014), in which the Court allowed closely held companies based on religious convictions to exclude contraception from employee health plans.23

that “To misuse men as though they were things in the pursuit of gain, or to value them solely for their physical powers— that is truly shameful and inhuman.”41

Others are more willing to see the potential overlap between the consequences of market economies and the goals of the majority of the world’s religions. Responding to Pope Francis’s Laudato Si, for example, David Brooks of The New York Times offers a more inspiring view of the power of capitalism to deliver social progress:

Hardest to accept . . . is the moral premise implied throughout the encyclical: that the only legitimate human relationships are based on compassion, harmony and love, and that arrangements based on self-interest and competition are inherently destructive. ....... You would never know from the encyclical that we are living through the greatest reduction in poverty in human history. A raw and rugged capitalism in Asia has led, ironically, to a great expansion of the middle class and great gains in human dignity. You would never know that in many parts of the world, like the United States, the rivers and skies are getting cleaner. The race for riches, ironically, produces the wealth that can be used to clean the environment.42

In practice, religion has had a long and complicated association with business. A good example in the UK is the Quakers (the Religious Society of Friends), who were

banned from careers in government, the church or law and with their pacifism barring a military career, they were forced into commerce. ....... Their high ethical standards meant they couldn’t be involved with alcohol, gambling or making armaments. The grocery trade became a natural outlet for their energies. All the great English chocolate dynasties: Cadbury, Fry, and Rowntree were Quakers. Their belief in the brotherhood of man led to paternalistic employment practices. They built garden towns for their employees with crèches, sporting facilities and healthcare. ....... They believed that cooperation and social provision were a necessary and natural adjunct to making money.43

In the United States, “New England’s Puritan settlers brought with them two ideas that have driven American society ever since: Calvinism and capitalism.” As a result, many believe today that businesses are entitled to the “same religious protections as people,”44 and companies are pressured to accommodate religious diversity in the workplace:

The federal Civil Rights Act requires public and private employers to accommodate their workers’ religious needs as long as doing so won’t impose more than a minimal cost to their business. ....... Accounting giant EY ....... has found success in building an inclusive environment for its workers. The firm has created “quiet rooms” at its New York headquarters and in all of its Canadian offices, which are open to all employees to take a quick break, to reflect, pray or even to take medication. The company also includes major religious and cultural holidays on its calendar to help set work schedules, as well as a tip sheet that outlines dietary restrictions that should be considered at meetings or events.45

Tom Chappell, the CEO of Tom’s of Maine, is a good example of how to incorporate religion into everyday working life.46 In his case, the time he spent at Harvard Divinity School during a break from running his company provided him with “‘a worldview that I could use everywhere in life.’ ...... He no longer felt he had to apologize for wanting to incorporate values more thoroughly into his business.”47 Similarly, the late moral and social philosopher Michael Novak was quite comfortable making “the theological and moral case for capitalism”:

In The Spirit of Democratic Capitalism (1982) he mounted a defense of capitalism as a morally superior system based on liberty, individual worth and Judeo-Christian principles. It was, he insisted, the only economic system capable of lifting the poor from misery and of encouraging moral growth.48

This debate over whether there is a conflict between capitalism and religion extends into aspects of business that raise moral challenges for believers. Some commentators, for example, suggest finance is a particularly challenging industry in which to be successful, yet remain true to a strong moral and religious compass. The experiences of people such as Ken Costa,49 who worked as a vice chairman of UBS, suggested that, in his experience, over “the last 30 years, being a Christian at work has, if anything, become more difficult. ....... The work place is the coal-face where faith is tested and sharpened by day-to-day encounters with ambiguities and stresses of modern commerce.”50 Similarly, the Right Reverend Justin Welby, Archbishop of Canterbury, noted while chairing a government inquiry into banking standards that “coming from a Christian point of view on human sinfulness and failure, the efficient market system doesn’t work. ....... People don’t make rational decisions in markets more than anywhere else.”51 Rather than being discouraged that religion and finance are incompatible, however, Costa of UBS finds plenty of support for his career choice in the Bible—in particular, in the

parable of the talents (Luke 19: 11–27) it is the two servants who put the master’s money to work who are rewarded, while the one who preserved the capital and took no risks is punished. And he quotes the great Methodist John Wesley, who told his followers: “Gain all you can, without hurting either yourself or your neighbor.”52

Based on biblical passages—fallen man must live “by the sweat of his brow” (Genesis 3:19), Jesus’ appeal to his followers to “lend, expecting nothing in return” (Luke 6:35)—medieval theologians considered the lending of money at interest to be sinful. Thomas Aquinas, based on Aristotle, considered usury—like sodomy—to be contrary to nature because “it is in accordance with nature that money should increase from natural goods and not from money itself.”65

More broadly, Dave Evans, cofounder of the videogame company Electronic Arts, believes that “all of work—not just church work—is holy ........ Work itself has value. It is a huge countercultural behavior to train yourself to value work for its own sake and to see it as a service to God.”53 But it is in finance where different religions have strived most overtly to overcome religious hurdles to participation and fulfillment.

ISLAMIC FINANCE Evidence that the worlds of religion and finance are compatible (or, at least, that the market is capable of adapting to religious needs when there is sufficient potential profit at stake) can be seen in the rapid growth and acceptance of faith-

In some ways, therefore, religion and capitalism are well matched. This is particularly true in the US, where capitalism is framed within a Judeo-Christian ethos and considered to be “a moral endeavor.”55 In addition, there is always the money— with global populations of 2.2 billion Christians56 and 2 billion Muslims,57 religion can be highly profitable. The Muslim population in the US, for example, is predicted to expand to 8.1 million people by 2050 and already has “spending power . . . [of] about $100 billion.”58 This has encouraged companies to release tailored products that appeal to Muslims, such as halal food59 and “Islamic fashion.”60

Religion and finance, however, have not always happily coexisted. Usury (the charging of excessive interest) has traditionally been rejected by the major religions. The early Christian church, for example, banned the collection of interest, on punishment of excommunication,62 with Dante’s third rung of hell reserving a special distaste for the work of usurers.63 When lenders charged others for borrowing money over a defined period, it was felt that the lenders “were not trading in goods but in time, and this was God’s”:64

How much interest is too much, of course, is a relative question that varies among cultures and across time. As such, the topic of “how much is enough” is open to debate:

Hammurabi, a ruler of ancient Babylon, set an annual limit of 33.5%. Brutus, Julius Caesar’s assassin, was rebuked for charging a rate of 48% when the legal limit was 12%. Aristotle argued that since coins do not “bear fruit,” unlike cattle, which might bear calves while on loan to a neighbour, no interest should be paid at all when borrowing money.66

The corrupting influence, of course, is money (or the pursuit of it), which serves three essential purposes—it must be exchangeable, it must be stable (retaining value over time), and it must be a measure of worth. In different forms (“Tea, salt and cattle have all been used as money”),67 money has been used by human societies for millennia. While societies in what is now western Turkey used gold and silver as a means of exchange as far back as 650 BC, paper money began circulating in China only around 1000 AD.68 As long as money has existed, however, there has been antipathy toward those who control access to it:

Jesus expelled the moneychangers from the Temple. Timothy tells us that “the love of money is the root of all evil.” Muhammad banned usury. The Jews referred to interest as neshek—a bite. The Catholic church banned it in 1311. Dante consigned moneylenders to the seventh circle of hell—the one also populated by the inhabitants of Sodom and “other practisers of unnatural vice.”69

The partner of interest is credit. Today, interest is charged on loans made on the basis of credit, which is extended on the understanding that the borrower has an obligation to repay the loan. While Jesus might have appealed “to his followers to ‘lend, expecting nothing in return’ (Luke 6:35),”70 financiers today are not so altruistic. In addition to their commitment to repay the debt, borrowers agree to pay a fee to the lender that reflects the risk the lender is accepting in loaning the money

based mutual funds:

Faith-based mutual funds typically screen out stocks of companies that violate the tenets of a given religion or religious denomination. A Muslim fund is likely to screen out companies related to pork production, for example, while a Catholic fund can avoid a maker of contraceptives.54

Ramadan is now big business for Britain’s supermarkets; it is probably the third biggest sales period for them after Christmas and Easter. Tesco has led the way in targeting the Muslim consumer market in recent years and is reaping the benefit. It sells about half of all halal food in Britain’s supermarkets, and expects to make about £30m ($43m) this year on Ramadan sales.61

Financial Etymology

The value of understanding the root of words we currently take for granted is that it gives us insight into their original meaning. In other words, irrespective of how a word is used today, it is instructive to understand how it was originally intended to be used:

Bank: “This word originates from the old Italian word banco, meaning table or bench, referring to how financiers once huddled together to conduct transactions on tables.”71

Company: The word company comes from the Latin word companio, the literal translation of which originally meant “breaking bread together.”72

Credit: “The root of [the word] credit is credo, the Latin for ‘I believe.’”73

Finance: This word “comes from the French finir (to end).” Originally, money “was seen as a means to an end —a one-off transaction to conclude a deal or create restitution for a wrong. Only over the past few centuries has the money business turned into an end in itself.”74

Money: This word comes from the Latin moneta, meaning “place for coining money, mint; coined money, money, coinage,” from Moneta, a title or surname of the Roman goddess Juno, in or near whose temple money was coined.75

Risk: This term “derives from the Tuscan rischio, the amount considered necessary to cover costs when lending money, i.e., a euphemism for interest.”76

Salary: “Being so valuable, soldiers in the Roman army were sometimes paid with salt instead of money. Their monthly allowance was called ‘salarium’ (‘sal’ being the Latin word for salt).”77

to the borrower. This risk fluctuates based on variables such as the size of the loan, the likelihood of repayment, and competing demands for the funds. In addition, however, there is an unspoken element of mutual trust—I lend money to you because I trust that you will pay it back; I pay you with this banknote because you trust that the Treasury will honor its face value.

Without trust, our economic system breaks down, as the most recent Financial Crisis demonstrated only too clearly. Today, the global economic system is underpinned by an interlocking financial system founded on credit. While trust underpins this model, however, it is also true that the profit incentive has distorted the relationship between lender and borrower. Some commentators have gone as far as to argue that it was “the legalization of usury” that was the cause of the financial crisis.78 The root of the problem, according to this argument, is a 1978 US Supreme Court case that prevented Minnesota from enforcing strict limits on the amount of interest charged on a credit card loan by an out-of-state bank.79 In response, other states quickly repealed similar laws in an attempt to prevent banks from relocating elsewhere, which led to the situation today where banks and credit card companies have an incentive to offer unlimited credit and charge high interest rates to customers who are unable to repay the principal:

You know, if you are Mr. Potter in It’s a Wonderful Life and can only get six percent, seven percent on your loan, you want the loan to be repaid. Moral character is important. You want to scrutinize everybody very carefully. But if you’re able to charge 30 percent or, in a payday lender case, 200 or 300 percent, you don’t care so much. . . . In fact, you actually want the loan not to be repaid. You want people to go into debt.80

In contrast to modern-day Western finance, Islamic or sharia (literally, “the way,” and also known as shariah or shari’a)81 law forbids the charging of interest (or riba).82 Money should be used only as a facilitator of business and the trade of goods; it cannot be used as a commodity to be traded or a tool for speculation. In other words, money should be used to create things, not just to create more money because “the Prophet Mohammed said debts must be repaid in the amount that was loaned. Money proffered must be backed by collateral, and if financial instruments are traded, they generally have to sell for face value, which deters banks from repackaging debt.”83 As a result, with a global population of 2 billion believers in 112 countries and a global halal market reported to be worth “trillions of Euros,”84 there is a significant market of devout Muslim investors who previously were forced either to compromise their principles or to avoid modern finance because of its conflict with their beliefs.

Islamic finance, therefore, provides a way for Muslims to participate in modern finance while staying true to their religious principles.85 Banks enable this by developing sharia-compliant instruments that, although based on alternatives to interest, aim to deliver similar returns. These alternatives “are technically based on profit-sharing, leasing or trading—all activities permissible in Islam because they involve entrepreneurial work rather than simply moneylending.”86 To determine whether an investment is sharia-compliant, banks appoint boards of sharia scholars (Muslim clerics) who help develop these products and certify them as compliant when issued: “At present, devout Muslims will only buy such instruments if a recognized sharia scholar, such as a mullah, has issued a fatwa to approve it.”87

Like all financial products, sharia-compliant investments run the spectrum from mortgages to bonds (sukuk),88 to mutual funds and stocks, each with their own set of rules that enable them to remain compliant with Islamic law. A common method for devout Muslims to take out a sharia-compliant mortgage, for example, is ijara. With ijara, instead of the bank lending the home buyer the money to buy the property and charging a fee (interest) until the loan is repaid, a bank buys the property on behalf of the home buyer, who then pays back the principal over time, while also paying a “lease payment” to use the property in the meantime.89 Similarly, in order for Islamic bonds to be sharia-compliant, it is essential that they “don’t pay interest, but instead give investors profits from an underlying business that backs a bond.”90 For stocks, Muslim investors can invest in firms (directly or indirectly) only through sharia-compliant mutual funds:

To be sharia-compliant, companies can’t run casinos or sell tobacco, alcohol, pork, or pornography, and debt can’t exceed 30% of equity. Such rules leave more than half the companies in the Standard & Poor’s 500-stock index—including Microsoft, Southwest Airlines, and Nike—in compliance.91

Even though the principles underpinning Islamic finance are drawn from the 7th century, contemporary sharia-compliant instruments were first developed in the 1960s.92 Since then, the size of the Islamic finance market has grown exponentially, retuning “10 to 12 percent annually over the past decade to hit $2 trillion.”93 One reason why growth projections are so strong is because “at less than 1 percent, they remain only a small fraction of global financial assets.”94

The rapid growth of the Islamic finance industry was initially fueled by money from the expanding oil countries of the Persian Gulf,95 with Western banks (such as Citigroup, HSBC, and Goldman Sachs) only becoming interested once the potential market became apparent and growing awareness prompted Muslim communities in the West to push for change. Among Muslim countries, however, even though the Dubai Islamic Bank was established in 1975 (“the world’s first Islamic bank”),96 it is Malaysia that is credited with being the leading source of expansion and product innovation.97 In 1983, the Malaysian government passed an Islamic banking law and established Bank Islam, “which gave out the nation’s first Islamic loans . . . more than a decade before Saudi clerics followed suit.”98 In many ways,

[Malaysia] is the world’s most important Islamic-finance centre. Just over a fifth of the country’s banking system, by assets, is sharia-compliant; the average for Muslim countries is more like 12%, and often a lot less. Malaysia dominates the global market for sukuk, or Islamic bonds. The country issued the world’s first sovereign sukuk in 2002. Malaysia is also home to the Islamic Financial Services Board, an international standard-setting body.99

In the West, Britain has worked hard to market itself as the “world centre for the Islamic finance industry.”100 The UK, which has been completing sharia-compliant transactions since the 1980s, “was the first European Union member to adapt its fiscal legislation to place conventional and Islamic finance on a level playing field”; opened “the first 100% Sharia- compliant retail bank in a non-Muslim country, ....... the Islamic Bank of Britain (IBB)”;101 and, in 2014, became the first country outside the Muslim world to issue an Islamic bond.102 Along with a rapidly growing market for Islamic finance comes a corresponding growth in organizations seeking to cater to an Islamic clientele, including the FTSE (which launched a series of Sharia-compliant indices, “fully certified as Shariah-compliant”):103

The government of Singapore was one of the earliest non-Muslim entrants into the space, followed by the United Kingdom, Luxembourg and Hong Kong, which issued their first sukuk in 2014. ...... Companies haven’t been far behind, with the likes of Goldman Sachs and General Electric’s GE Capital also selling Islamic bonds in the past few years.104

In the aftermath of the Financial Crisis, Islamic finance was heralded by advocates as offering a way forward for those wishing to remodel a global financial system founded on credit and the collection of interest.105 Although Islamic banks, like the financial industry worldwide, were negatively affected by the global recession, “no Islamic bank has failed during the [financial] crisis.”106 Along these lines, Islamic finance is growing not only in terms of size, but also in terms of products (e.g., “Islamic microfinance”),107 technology (e.g., “Islamic fintech”),108 and geography (e.g., “Islamic baking in Africa”):

Sub-Saharan Africa accounts for less than 2% of [the total Islamic finance sector], yet it should be especially fertile territory. The continent’s Muslim population is 250m and growing. And, according to the World Bank, as many as 350m Africans do not have a bank account.109

Others contend, however, that the Islamic finance industry is really no different from Western finance and merely subverts the rules in search of profit.110 Critics suggest that Muslim clerics who certify products as sharia-compliant are acting in line with steps taken throughout the ages to subvert the inherent tension between religion and capitalism:

In about 1220 a canonist named Hispanus proposed that, although usury was prohibited, a lender could charge a fee if his borrower was late in making repayment. The period between the date on which the borrower should

QUESTIONS FOR DISCUSSION AND REVIEW

1. What role does religion play in your life? Do you feel that the society in which you live is becoming more or less religious? Is this good or bad? Does it matter?

2. Search online for an image of the Atheist Bus Campaign’s advertisements that ran on London buses (see also https://humanism.org.uk/about/atheist-bus-campaign/). What is your reaction? Do you find the buses to be provocative? Why or why not?

3. Are you interested in a career in finance? Would you have any religious or moral concerns about working in the finance industry? Are there any jobs or industries that you would avoid based on your religious or moral values?

4. What is your reaction to the accusation that the Islamic finance industry is generating “interest-bearing loan[s] in

all but name”?116 From what you have learned in this case study, do you agree that Islamic financial products are sharia-compliant?

5. Have a look at the full-page ad for the campaign “What Would Jesus Drive?” (https://adage.com/images/random/jesus_ad.gif). What car would Jesus drive? Why?

have repaid and the date on which he did repay, Hispanus termed interesse, literally that which “in between is.”111

This line of thought suggests the Islamic finance industry is merely the latest evolution of financial products that are designed to conform to strict limitations on the surface, but, in fact, generate “window-dressing pseudo-Islamic financial instruments that [are] mathematically equivalent to conventional debt and mortgage contracts.”112 This critique suggests that, rather than remaining true to the principles of Islamic finance, the industry today is “dominated by conventional bankers . . . focused on ‘reverse engineering’ of conventional financial products into their sharia-compliant counterparts.”113 Beyond blatant symbolism, the main barrier to legitimacy seems to be that “Islamic finance still lacks shared standards”:114

There is no global standard or overarching authority for sharia compliance. Some countries, like Malaysia, have a central sharia board for finance. Others, including the UAE, do not, leaving issuers and investors to rely on the guidance of learned scholars to vet transactions. Inevitably, they sometimes disagree. [Recent doctrinal conflicts have] highlighted the need to move faster towards agreed and consistent standards.115

Descriptions of Images and Figures Back to Figure

The x axis shows the religious preferences of respondents and the y axis shows the percentage of respondents under each religion seen on the x axis. Each religious preference on the x axis has a set of three bars that show the percentage of respondents for that religion in 2001, 2011 and 2017.

The table below shows these values:

Religious Preference

Percentage of respondent in 2001

Percentage of respondent in 2011

Percentage of respondent in 2017

Protestant

53%

42%

38%

Catholic

25%

23%

21%

Christian (non- specific)

4%

10%

9%

Jewish

2%

2%

2%

Mormon

2%

2%

2%

Other religion

4%

5%

5%

Strategic CSR Debate

MOTION: Religion is a private matter that does not belong in the workplace.

No religion 8% 13% 20%

No reply

2%

3%

4%

Back to Figure

The x axis shows the religious preferences of respondents and the y axis shows the percentage of respondents under each religion seen on the x axis. Each religious preference on the x axis has a set of three bars that show the percentage of respondents for that religion in 2001, 2011 and 2018.

The table below shows these values:

Religious Preference

Percentage of respondent in 2001

Percentage of respondent in 2011

Percentage of respondent in 2018

Christian

71.8%

59.3%

50.7%

Muslim

2.8%

4.8%

2.5%

Hindu

1.0%

1.5%

0.7%

Sikh

0.6%

0.8%

0.3%

Jewish

0.5%

0.5%

0.6%

Buddhist

0.3%

0.4%

0.6%

Other

0.3%

0.4%

1.5%

No religion

15.1%

25.1%

41.5%

No reply

7.8%

7.2%

1.6%

NEXT STEPS Beyond defining CSR and identifying the five driving forces that propel its importance to firms, it is necessary to demonstrate that a CSR perspective can work in practice. It must allow firms to prosper, as well as act as a conduit for stakeholder concerns. But how are firms supposed to identify key stakeholders and prioritize among their competing interests? Under what circumstances are stakeholders willing to engage and impose their views on firms? In other words, to what extent are stakeholders responsible for shaping corporate actions? And how should firms begin to integrate a CSR perspective into their strategic planning and day-to-day operations? The importance of stakeholder theory to the arguments presented in this book is explored in Part II.

A legal perspective on CSR will be explored in Part III, followed by an exploration of a behavioral perspective in Part IV (including a discussion of important concepts such as nudge economics and lifecycle pricing). Following this, Part V considers CSR from a strategic perspective, expanding on the growing importance of CSR and its impact on corporate strategy. Finally, Part VI explores a sustainable perspective on CSR. It discusses how firms can embed a CSR perspective throughout the organization and build a business model of sustainable value creation—the ultimate goal of strategic CSR.