Winter 2006

The Power of Ideas

Is There A Market for Virtue?
Professor David Vogel Examines the Potential and Limits of Corporate Social Responsibility.

In his new book, The Market for Virtue: The Potential and Limits of Corporate Social Responsibility, Professor David Vogel appraises the corporate social responsibility (CSR) movement’s accomplishments and limitations. While he credits the past decade with substantial improvements in the social and environmental behavior of a number of global corporations, Vogel has also found that for most firms most of the time corporate social responsibility is irrelevant to financial performance. The most effective strategy for reconciling private business goals and public social purposes, he argues, is effective government regulation. In the following excerpt from his book, Vogel outlines the potential benefits and limitations of voluntary CSR efforts and gives a critical view of the business case for CSR.

At the end of last year, Vogel’s book was positively reviewed by both the Washington Post and the Financial Times. “...(Vogel) pokes holes in the standard business case for CSR: that it gives companies an edge in competition for workers, investors and customers,” said to Steven Pearlstein of the Washington Post . The Financial Times called it “a level-headed survey of the evidence.”  FT’s Simon London added, “In a world filled with hot air on the subject, it is refreshing to find such a clear – and, at less than 200 pages, concise – assessment of CSR’s pros and cons.”

Are Virtuous Firms Built to Last?
Corporate Social Responsibility (CSR) advocates assert that while CSR may not affect short-term earnings or share performance, in the long run the more responsible firms will perform better. One way of investigating this assertion is to examine the social performance of companies that have performed extremely well financially over an extended period of time.

Consider, for example, the USbased firms included in the 1994 best-seller Built to Last on the basis of their having attained “extraordinary long-term performance.” According to its authors, James Collins and Jerry Porras, these firms are “more than successful. They are more than enduring. In most cases, they are the best of the best in their industries, and have been that way for decades.” The firms that meet their criteria are 3M, American Express, Boeing, Citicorp, Ford, General Electric, Hewlett-Packard, IBM, Johnson & Johnson, Marriott, Merck, Motorola, Nordstrom, Philip Morris, Procter & Gamble, Sony, Wal-Mart, and Walt Disney. To this list of distinguished financial performers we can add the companies featured in the sequel Good to Great published in 2001, whose cumulative stock return was 6.9 times that of the market as a whole. These firms are Abbott, Circuit City, Fannie Mae, Gillette, Kimberly-Clark, Kroger, Nucor, Philip Morris, Pitney Bowes, Walgreens, and Wells Fargo.

Some of these twenty-eight firms do enjoy reputations for exhibiting above average levels of CSR on some dimensions, including American Express, 3M, Hewlett-Packard, IBM, Johnson & Johnson, Citicorp, and Merck. And it is possible that their social responsibility has contributed to their above average financial performance during the time frame considered in the two best-sellers, though it is unlikely to have been critical to it. But no one would confuse all or even most of these companies with firms that are also leaders on many dimensions of CSR. (Note that the only company featured in both studies is Philip Morris.) It is true that these firms have been built around values, visions, and goals other than profit maximization, and, according to Collins and Porras, these factors have contributed to their financial success. But only in a few instances do these values have anything to do with social responsibility.

Social responsibility and irresponsibility may well matter, but their impact on the long-term financial performance of companies is typically dwarfed by a host of other factors. Particular firms succeed or fail for many reasons, but exemplary or irresponsible social or environmental performance is rarely among them. And there is no evidence that the relative importance of CSR to financial success is increasing for most or even many companies. For all the claims that being responsible is a necessary condition for long-term business success, what is striking is how few responsible firms have been “built to last.” There are certainly firms that have been both relatively profitable and responsible over more than one or two decades, but the list is not long. More important, it does not appear to be growing. It is of course possible that in ten years the number of financially successful “responsible” companies will be much larger. But the historical record to date gives few grounds for such optimism.

Merck, a firm widely recognized for its decision in the 1980s to develop and distribute without charge a drug for river blindness and more recently for its work with the Gates Foundation to make AIDS drugs available in Botswana, began experiencing declining profits and an underperforming stock price after 2000, leading some analysts to question the continued validity of George Merck’s celebrated 1950 credo: “Medicine is for the people. It is not for the profits. The profits follow.” (The firm’s financial difficulties predated but were exacerbated by its withdrawal of the painkiller Vioxx from the market in late 2004.)

During the late 1990s, Chiquita Brands International (an outgrowth of the United Fruit Company), which produces a quarter of the world’s bananas and is the largest agricultural employer in Latin America, implemented a highly innovative program aimed at improving the environmental practices of its growers in Central America; more than 79 percent of its independent suppliers have been certified by the Rainforest Alliance. The funds spent by the company to bring its farms up to the Rainforest Alliance’s environmental standards have resulted in considerable cost savings by reducing pesticide use and recycling the wooden pallets used to transport the fruit. Nonetheless the firm was forced to declare bankruptcy in November 2001.

Some of the recent generation of ethical business “icons” have not fared any better. Both the Body Shop International and Ben & Jerry’s had strong financial results for several years. Yet both began to experience financial difficulties in the late 1990s. Pressures from investors relegated founder Anita Roddick to an advisory nonexecutive role at the Body Shop, and in 2000, Ben and Jerry’s, faced with a highly undervalued share price and declining profits due to a series of management failures, was taken over by Unilever. The carpet manufacturer Interface, whose chief executive, Ray Anderson, was called “the green CEO” and whose environmental practices have been described as “leading the way to the next frontier of industrial ecology,” has been unprofitable since 2000. In 2001 it consolidated its services operations, exited the broadloom market in Europe, and cut about 10 percent of its workforce, making further cuts the following two years. Notwithstanding Hewlett-Packard’s widely applauded CSR initiatives under CEO Carly Fiorina, the firm’s disappointing financial performance forced her resignation in 2004.

The more responsible firms, no less than the less responsible ones, must survive in highly competitive markets. Consumers can choose to purchase pharmaceutical products, household products, ice cream, herbal tea, clothes, jeans, computers, or body care products from many companies. Socially responsible firms, like all other firms, are subject to the vagaries of shifting consumer preferences and poor management. And when such firms find themselves in financial difficulty, many of their distinctive CSR practices can become more difficult to sustain.

The less-than-strong financial performance of many firms with strong CSR reputations hardly suggests that such firms represent the wave of the future. Rather it says that while the business system has a place for socially responsible firms, this place is at least as precarious and unstable as for any other kind of firm. The market for social responsibility is dynamic. Some companies with strong CSR reputations are prospering (for example, Patagonia, Seventh Generation, Starbucks, Stonyfield Farm, Ikea, BP), while others are not (Levi Strauss, Merck, M&S, HP, Interface, Shell); still others perform well financially but have become less socially distinctive (Cummins Engine). At the same time, new relatively responsible firms continue to emerge, some of which will be financially successful and some of which will not.

Proponents of CSR tend to view the dynamics of responsible business in evolutionary terms. Since they assume that only the most responsible firms can or will survive in the long run, they believe that over time there will be more responsible firms and fewer irresponsible ones—a kind of survival of the virtuous. However the dynamics of corporate responsibility are better understood in ecological terms. There is a market or ecological niche for the relatively responsible firms. But there is also a market or ecological niche for less virtuous ones. And the size of the former does not appear to be increasing relative to the latter.

Reprinted with permission of the Brookings Institution Press.

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David Vogel David Vogel
Solomon P. Lee Distinguished Professor in Business Ethics
At Haas since 1973