How Much Social Responsibility should Firms Assume and of

Which Kind?Guidelines for Firms’ Social

Engagement

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The tragic collapse of Bangladesh Rana Plaza factory triggered strong public pressure on global retailers to assume responsibility for labor conditions in the country garment industry, including in factories to which these retailers have neither ownership ties nor contractual relationships. Two years on, the combined costs of voluntary actions embraced by retailers such as H&M, Zara’s parent Inditex, Levi Strauss, and Primark, among others, are estimated to have exceeded $5bil. These companies have committed themselves for additional investments of far more substantial magnitude. The responsibility for the safety and wellbeing of garment labor has shifted to Western retailers.

Such public expectations, which hold firms accountable for societal issues that are not related to their own conduct, represent fundamental shift in the view of firms and their role in society. Milton Friedman much quoted claim that the only social responsibility of firms is to increase their profits, and investment in activities for which there are no immediate financial returns is a misuse of corporate resources, has been replaced by loud requests that firms act as guardians of world’s problems and societal ills.

Influential management thinkers have endorsed these public voices, and have offered theoretical underpinning for them, according to which firms have broader purpose than succeeding in their business. A new theoretical model of the firm, known as ‘stakeholder theory’, established legitimate place for interests and concerns of parties other than shareholders in orienting firms’ actions. Leading business schools and universities have introduced Corporate Social Responsibility (CSR) programs to their curricula, treating them as providing some of the most critical skills that managers today need to master1. International organizations, NGO and non-for-profit organizations have issued guidelines and voluntary codes for firms’ ethical behavior, and national governments used their legislative power to enforce firms’ social activity. There have also been enduring attempts to demonstrate that the social engagement of firms is consistent with wealth maximization, although decades of rigorous academic inquiry failed to establish significant relationships between them2. In this new world, the notion that the business of business is profit has become obsolete and unacceptable, and the traditional purpose of maximizing profits or shareholder value has come to be seen as insufficient for current times.

These views have been directed towards all firms, but Multinational Enterprises (MNEs) have been their major targets. The economic power and visibility of these firms, combined with their global scope and exposure to multiple and diverse stakeholders, have given impetus for expectations for accountability that exceed those directed to other firms. A large-scale study shows that CSR initiatives increase significantly with the growth of international activity, and the relationships are particularly pronounced for larger and more established MNEs3. (See Box 1 on challenges of the social engagement of MNEs).1 Prominent proponents of this approach are R.M. Kanter “It's time to take full responsibility.” Harvard Business Review (October 2010); M.E. Porter and M.R. Kramer “Creating shared value: Redefining capitalism and the role of the corporation in society.” Harvard Business Review (February 2011).2 For reviews of these studies see D.J. Vogel The Market for Virtue: The Potential and Limits of Corporate Social Responsibility (Brookings Institution Press, Washington, D.C. 2006); M. Orlitzky, F.L. Schmidt and S.L. Rynes “Corporate social and financial performance: A metaanalysis.” Organization Studies 24(3): 403-441, 2003; J.D. Margolis and J. P. Walsh “Misery loves companies: Rethinking social initiatives by business.” Administrative Science Quarterly, 48: 268–305. 2003.3 N. Attig, N. Boubakri, S. El Ghoul and O. Guedham “International diversification and corporate social responsibility.” Working paper 12-11/2013, American University of Sharjah, 2013.

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How are firms to reconcile the inevitable trade-off between these societal expectations and the demand of a free market and profit maximizing activities? How are they to allocate their resources between these competing considerations? From a broader societal perspective, is this state of affairs, whereby firms are treated as social institutions expected to take on responsibilities traditionally held by governments, desired? Does the creation of public goods by profit-maximizing firms generate the greatest societal paybacks? In the contemporary enthusiasm for the engagement of firms, whose long-term viability and survival are conditioned upon their profitability, in social causes, these questions are seldom asked.

And to the extent that there is recognition of the conflicting demands imposed on firms by these expectations, they typically conclude by calling firms to engage in social causes ‘strategically’, but stop short of providing operational frameworks to pursue these activities. The ambiguity surrounding the engagement of firms in social causes, which is compounded by varying expectations and conflicting needs of different societies, leaves firms in the dark as to how to identify social causes that are strategic for them. The challenge further intensifies due to the firm-specificity of these choices, and their inherent variations across firms with different competitive strengths and lines of business, as well as country of origin and global activities.

To guide firms in addressing these challenges, I present firms, governments, and NGOs as alternative providers of social services, and identify their respective strengths and weaknesses in the provision of these services. I further classify the universe of social services based on the attributes of the input used in their production as core or non-core to firms, and those of the output, whether proprietary or public goods. I allot the resulting categories to firms, governments and NGOs, and draw a normative partition among them that build on their respective strengths as social service providers.

The resulting framework is employed to specify the type of social activities in which firms should engage, the conditions necessary for their involvement, and the type of firms that should undertake them. I draw on these to offer guidelines for firms for designing an agenda for social engagement that generates proprietary benefits and serves to advance their strategic objectives. I show that there is large scope for firms’ social engagement, but a different one from the one many firms practice, and from what stakeholders expect them to do. In this framework, firms are assumed to be fully responsible for negative externalities of their own activities, and to operate in full compliance to the law and to universal ethical norms. Given that these are taken as non-negotiable obligations, they do not form part of the conceptual framework of this paper.

I also extend a call for society to use responsibly its power to shape the social agenda of firms and to recognize the opportunity costs of driving firms away from their core activities. I stress the need for appreciation of the wealth of positive externalities and public goods created by firms via the pursuit of profit-maximizing activities, and acknowledgement that this is the best way for firms to serve society.

The ideas expressed in the article have been shaped during several decades of teaching and consulting engagements with executives of global companies and government authorities around the world, and have been informed by a recent consulting report I wrote for the United Nations

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on sustainable investment by MNEs. They were further evaluated and refined through a series of interviews with CSR representatives, CFOs and CEOs of a dozen MNEs in the US and India, as well as with several experts in this area (see box 2 ‘about the research’).

Firms, Governments and NGOs as Alternative Providers of Social Services

Firms, governments and NGOs4 represent distinct institutional arrangements with varying logics and goals that play different roles in society. They also differ in their strengths and weaknesses as providers of social services5 (Table 1).

Table 1 about here

The varying strengths and weaknesses that firms, governments and NGOs have as social service providers suggest that they should engage in the provision of different services. To establish a normative division among these constituencies, I classify the universe of social services by the inputs used in their production based on their utilization of firms’ core assets, and the outputs of these activities by the extent to which they can be internalized by firms. Core assets are those that encompass the essence of firms’ competences and provide the foundations for their competitive advantages. Figure 1 presents the resulting framework that assigns the provision of social services to firms (cell 1), governments and/or NGOs (cell 2), governments and firms in collaboration, what is known as Public-Private-Partnership (PPP) (cell 3), and some combination of firms, governments and NGOs (cell 4).

Figure 1 about here

Cell 1: The Domain of Firms Social activities in this cell are those that make use of and leverage on firms’ core assets for the production and delivery of social services whose externalities can be internalized by firms. Several types of engagements form cell-1 activities. These include social and environmental innovations that open up new markets and growth opportunities or increase resource utilization and efficiency, and further long-term demand for firms’ offerings. Improvements of market deficiencies that hamper firms’ ability to pursue their activities also belong in this category, as well as investment in the wellbeing of local communities that host firms’ activities6.

UBS initiative for teaching fundamentals of finance in US high schools suggests an example of cell-1 activities. These initiatives utilize UBS financial capabilities to create societal value in the form of astute financial spending, and at the same time, foster recognition of UBS among

4 I use the term NGO broadly to encompass all forms of non-governmental, non-for-profit organizations, such as charities, foundations, as well as unincorporated and voluntary associations. This is a large and highly diverse group with varying legal and governance forms, which are typically formed voluntarily by individual citizens and lack formal institutional approval. The organizations in this group are committed to a wide scope of activities and are driven by a variety of political and philosophical motives.5 The term ‘social services’ signifies a range of services designed to strengthen societies and make them more equal and just. It encompasses a broad range of activities, which vary considerably across countries, but most typically include education, health care, job training, community management, and the likes.6 S. Ambec and P. Lanoie “Does it pay to be green? A systematic overview.” Academy of Management Perspectives 22(2), 45–62, 2008.

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potential customers that may increase UBS future customer base. Intel initiatives to promote scientific innovations in Asia suggest another example. As the Head of Intel CSR in South Asia explained to us, the proprietary gains for Intel in creating such social value lie in that these initiatives will: ‘…encourages love for science in children and these children will ultimately help grow our business.’

Another type of cell-1 activities is the development of resources that are either not available on the market or their quality does not meet firms’ needs. Wipro Mission 10X, a non-for-profits initiative to improve the skills of India engineering graduates suggests an example. Wipro Chief Sustainability Officer described to us the rationale for this project: ‘We conducted a study of engineering colleges in India and found that there is a gap between the talent that our industry is currently looking for, and what we were getting. So we invested in an engineering program for education capability improvement. There is a direct correlation between our investment and our business here.’ In a similar fashion, Coke investment in improving the livelihood of local mango growers in Africa serves to increase the quality and quantity of mango supply that is used in Coke mango-based beverages.

Firms’ investment in local communities that host their operations is yet another type of cell-1 activities. These communities are often the source of the majority of firms’ employees, suppliers, and in some cases also customers, and the strength and vitality of these communities are essential for firms. Zensar, an Indian IT company interviewed for this study, described to us its vast community development programs in Ambedkar Nagar, near its campus in Pune, and the benefits it derived from its investment in this community.

The proprietary benefits of cell-1 activities combine both financial gains and benefits in kind, such as reputation and goodwill. For instance, Starbucks’ provision of education and health insurance for its baristas improves Starbucks reputation as a desired employer, and increase retention rates and employees satisfaction. These are likely to translate into better service and affect the bottom line. In the context of the MNE, such non-financial gains may assume the form of a license to operate in a country and serve to mitigate negative feelings towards foreign companies.

The provision of cell-1 services carries considerable risk and may therefore be appropriate only for certain types of firms. Risk originates in that these activities generate public goods whose internalization by individual firms is not guaranteed. For firms to embrace such activities they must be able to capture a disproportionate share of the externalities of their investment, such that their competitive gains exceed the public benefits of their investment. Such disproportionate shares typically accrue to the dominant firms in their markets. As one of the largest and most desired employers for IT professionals in India, Wipro captures large share of the social value it creates by developing India IT skills. UBS’s dominant market position likewise affords it substantial benefits of the enhanced financial literacy generated by its investment.

Another source of risk of cell-1 services is that they often require the provision of social services for which there may not be a readily apparent revenue stream, at least in the near-term, and whose outcomes are not certain. The transformation of public goods into proprietary gains is typically a lengthy process. Long time will elapse before the potential customers UBS is

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educating via its high-school financial initiative may become actual customers, and this outcome is not certain because they may opt for one of UBS competitors instead.

Yet another concern associated with the generation of proprietary gains of cell 1 investment is related to stakeholders’ willingness to endorse firms’ social engagement, which is essential for this outcome. This, however, has so far been sporadic and minimal. Notwithstanding views to the contrary expressed by consumers in repeated surveys, green products account for less than 4% of the global market, in spite of decades of investment in marketing of such products. And to the extent that consumers’ purchasing behavior reflects any social concerns, it is driven by personal rather than societal gains. Sales of organic food in the US are ten times higher than those of Fair Trade, as consumers believe that organic food improves their health whereas Fair Trade does not have any immediate personal impact7. Nor do employees, including the vocal Millennia who express laud concerns regarding firms’ social activities, show inclination to accept lower salaries from socially engaged firms, and a minority of investors reward firms’ shares for social activities that do not improve financial performance8. In the absence of social endorsement, these engagements cannot generate the proprietary gains necessary to warrant firms’ participation in their provision. Nor can they sustain themselves and reach a magnitude large enough to make the impact they are intended to make. C.K. Prahalad influential idea of the Bottom of the Pyramid is explicit about serving the poor profitably.

These characteristics of cell 1 services entail that firms’ provision of these services is only warranted for firms with dominant market positions and with the financial prowess to allocate resources for investments for which there may not be apparent streams of revenues, and whose benefits may not materialize at least in the near-term.

Cell 2: The Domain of Governments and/or NGOsGovernments and/or NGOs are the appropriate providers of social services whose production is based on assets that are not core to firms, and whose externalities cannot be appropriated by them, for instance, clean environment. Markets for such services do not exist or are dis-functional, either because self-coordination via market- or price-mechanisms is not feasible, or due to a variety of market failures9. High-risk investments whose return are uncertain or are too small to cover the costs of the investment, such as pharmaceutical orphan drugs, also belong in this category. Firms’ investment in such causes would put them at a competitive disadvantage and harm their performance.

7 Joseph Cronin et al. "Green marketing strategies: an examination of stakeholders and the opportunities they present." Journal of the Academy of Marketing Science 39: 158-1741, 2011; Michael G. Luchs, Rebecca Walker Naylor, Julie R. Irwin, and Rajagopal Raghunathan “The Sustainability Liability: Potential Negative Effects of Ethicality on Product Preference.” Journal of Marketing September 2010, Vol. 74, No. 5, pp. 18-31; Olson, Erik L. "It’s not easy being green: the effects of attribute tradeoffs on green product preference and choice." Journal of the Academy of Marketing Science 41:2: 171-184, 2013; M. Bagnoli and S. Watts “Selling to socially responsible consumers: Competition and the private provision of public goods.” Journal of Economics & Management and Strategy 12(3): 419–445, 2003.8 M. Orlitzky. “Corporate social responsibility, noise, and stock market volatility.” Academy of Management Perspective 27: 238-254, 2013; A. Mackey, T. B. Mackey and J. B. Barney “Corporate social responsibility and firm performance: Investor preferences and corporate strategies.” Academy of Management Review 32(3): 817-835, 2007.9 R.Cornes and T. Sandler The Theory of Externalities, Public Goods, and Club Goods (Cambridge: Cambridge University Press. 1996)

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The engagement of firms in cell-2 activities is not only debilitating for them; it is also not warranted for society. Firms are not democratically elected and there are no formal institutional mechanisms that dictate the choice of the social causes they select to address, questioning their legitimacy in this role. Moreover, the dependency of firms on revenues and profits for their survival implies that business considerations influence the nature of their social engagement in ways that may not be aligned with societal benefits10. A recent McKinsey survey suggests that firms’ social agendas are shaped by the reputation capital they generate more than by any other consideration11. These concerns are aggravated when the firms in question are MNEs, whose foreignness and footlessness further question their legitimacy as providers of such services, and weaken the impact of local communities on their social investment agenda. MNEs’ lesser familiarity, compared to local firms, with local markets is further likely to hinder their ability to understand local needs and respond to them effectively.

Furthermore, addressing societal causes requires resources and consumes time and attention, diverting resources away from firms’ core business, causing societal loss of the value created by these activities. Nor do firms possess skills to address social causes that bear no relation to their core competencies, further increasing the opportunity costs of channeling resources away from their areas of specialization. More than a third of the CEOs interviewed for the 2013 UN Global Compact/Accenture sustainability study were skeptical of their ability to align their social initiatives with value creation. Similar concerns were expressed in other surveys, in which executives felt that CSR activities are beyond their capabilities12.

Moreover, the magnitude of the tasks involved in the provision of solutions for societal causes often exceeds that capacity of firms, including the largest and most powerful of them. The firms surveyed by McKinsey admitted that their efforts are dwarfed by the scale and complexity of the issues they try to resolve, and this recognition leads them to focus on marginal issues whose societal value might be minimal. An estimate by EPG, a consulting firm, suggests that the largest firms in the US and the UK spend more than $15 billion a year on CSR, but it is not clear that this investment delivers returns with measurable results. It is probably due to these limitations that, although firms continuously increase the resources they devote for social services, the actual impact of their activities has been minimal13.

Under certain circumstances, there is some room for the involvement of NGOs in cell-2 services. These constituencies are established in order to fill gaps in the provision of public services by governments. However, the voluntary and sporadic nature of NGOs, and the absence of regulatory framework that monitors their activities, may question their legitimacy as social service providers14. NGOs are not elected and there is no institutional mechanism for society to express its approval or otherwise of the choices they make in targeting social causes. Nor are 10 T.M. Devinney “Is the socially responsible corporation a myth? The good, bad and ugly of corporate social responsibility.” Academy of Management Perspectives 23(2): 44-56, 2009; D. Henderson The Role of Business in the Modern World (Institute of Economic Affairs, London, 2004).11 McKinsey. Sustainability’s Strategic Worth: McKinsey Global Survey Results. McKinsey 2014.12 UN Global Compact-Accenture. CEO Study on Sustainability. United Nations Global Compact and Accenture. 2013; J.L. Bower, L.B. Herman and L.S. Paine “Global capitalism at risk. What are you doing about it?” Harvard Business Review 89(9): 104-112, 201113 GreenBiz and Trucost. State of Green Business (Trucost, London, 2014); McKinsey 2014, op. cite.14 J.P. Doh and T.R. Guay “Corporate social responsibility, public policy and NGO activism in Europe and the United States: an institutional-stakeholder perspective.” Journal of Management Studies 43(1): 47–73, 2006.

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they subject to market mechanisms that provide venue for stakeholders to express their voices, further constraining the normative case for their participation.

It thus appear that the engagement of firms in social services for which there are no proprietary gains, and where the compass of market forces cannot be employed as a guide, is harmful for firms and societies. The opportunity cost of firms investing in areas that are not related to their core competencies is high and causes inefficiencies that increase societal costs rather than address social needs.

Cell 3: Governments, NGOs and Firms Together (PPPs)Public Private Partnerships (PPPs) are various forms of collaboration between public and private entities that blend attributes and practices of for-profit and nonprofit in the production and delivery of social services. The appeal of these arrangements for firms lies in that governments’ participation awards them proprietary gains for the creation of public goods whose externalities cannot be appropriated via market mechanisms. They thus offer a unique venue for the utilization of core assets in ways that would not be economic otherwise15.

Notwithstanding these worthy attributes, PPPs are costly for firms. Costs originate in the imperatives of bridging organizational cultures of for-profit and not-for-profit institutions, with different goals, and sources of power and legitimacy. Costs may also occur as a result of changes of governments and shifts in their priorities, including attitudes towards PPPs. These are particularly concerning in relation to PPPs, due to the long time-span and high sunk cost typical of these projects. Wal-Mart collaboration with a number of public agencies in Porto-Rico, created to improve production methods of local farmers in order to increase the quality of fresh produce, is a case in point. The party that negotiated and signed the agreement was defeated in the subsequent election and the new government decided to change the terms of the agreement to an extent that required re-signing a revised version that was less favorable for Wal-Mart. Almost a decade after the initiation of the project, Wal-Mart still experiences considerable challenges in the management and implementation of the project16. The case for firms’ participation in PPP arrangements is tempered by such costs, and is only warranted when the proprietary gains accrued from the engagements outweigh these costs.

The balance between these costs and gains varies across firms. Some firms are better able to extract value from collaboration with non-for-profit public authorities than others. Their organizational capabilities and organizational cultures are more in tune with the demands of such collaborations and better enable bridging the gap between private and public organizations. Firms vary also in their experience in collaboration with public entities accrue to them by their histories and the experience of their leadership. There is also considerable variation across firms of different countries in this regard, originating in varying levels of government involvements in their economies and attitudes towards their authority and power17.

15 I. Kivleniece and B. V. Quelin “Creating and capturing value in public-private ties: A private actor's perspective.” Academy of Management Review 37: 272-299, 2012.16 M. Comas and J. Sagebien “Wal-Mart Puerto Rico: Promoting Development through a Public-Private Partnership.” Harvard Business School case 910M24-PDF-ENG, 201017 For further articulation of firms’ variations see the papers in Henisz Witold (ed.) “Governance Issues in Public Private Partnerships.” Special issue, International Journal of Project Management Volume 24, Issue 7, October 2006

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The attraction of PPP arrangements for firms varies also across markets. A notable market attribute that affects this variation is the nature of the market failures that inhibit the internalization of externalities. In some cases, the absence of market could be remedied, often with firms as the agents of change, enabling firms to capture proprietary gains of their investment without government participation. The co-existence of public, private and PPP options side by side in the provision of social services such as public health, infrastructure, and education, is indicative of the possibility to deliver these social services via market mechanisms. The size of the investing firm in relation to the size of the market for the social services created also affects the net gain of PPPs for firms. When the investing firms are large in relation to the market, they are likely to be the default beneficiary of the public goods they create, even when internalization of these goods is intrinsically not feasible. Wal-Mart was the buyer of about 70% of the fresh produce generated via its investment in training of local farmers in Porto-Rico. Such cases may render government participation unnecessary and firm might be better off going on their own.

NGOs might also be candidates for collaborative arrangements, although engagement with them may prove less beneficial for firms. Limited resources often constrain NGOs’ ability to offer firms proprietary gains, and in the absence of formal social legitimacy, also the reputational effects accrue from collaboration with governments may not materialize. Nonetheless, some firms collaborate with NGOs, often for defensive reasons, in an attempt to preempt NGO campaigns against their corporate practices18.

Cell 4: Firms or Governments and NGOs Firms’ delivery of cell 4 services requires the development of skills in non-core areas. In agreement with the general logic for diversification, such moves are warranted when the overlap between the new skills and firms’ core assets creates synergies and opportunities to leverage resources across related areas. Another condition for such moves is that the ensuing economies of scale and scope are in excess of costs incurred as a result of loss of focus and the additional demand on managerial capacity, as well as the cost of the investment in developing non-core assets19.

When these conditions hold, the case for firms participation is similar to the one discussed above in relation to cell-1 services, that is, firms involvement is warranted when they can internalize gains of the services they create that is in excess of public gains. However, the realization of these conditions in non-core activities is likely to be more costly, because they are based on non-core assets.

Cell-4 activities are appealing in relation to social services that make extensive use of generic assets that can be utilized across different services. Examples include shared facilities to serve additional market segments, certain managerial capabilities and organizational routines that are of value across different services, and the likes. Research on diversification of non-for-profit organizations shows that many of the services offered by these organizations are based on such 18 Michael Yaziji, Jonathan Doh NGOs and Corporations: Conflict and Collaboration (Cambridge University Press, New York, 2009).19 L.E. Palich, L.B. Cardinal and C.C. Miller “Curvilinearity in the diversification-performance linkage: An examination of over three decades of research.” Strategic Management Journal 21: 155-174 2000.

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assets, and their diversification moves evolve gradual expansion of these services into related activities20.

Firms’ diversification into cell-4 activities is particularly appealing when it offers opportunities to exploit assets created for the provision of core-based services (see 1 activities) towards related ones, for instance, relationships with stakeholders that are of value across non-core activities as well. A necessary condition for such diversification moves is the possession of managerial capabilities to create synergies among the core/non-core areas.

When these conditions do not hold, governments should deliver the services in question, as the institution that holds the ultimate responsibility for social services. In some cases, outlined above in relation to cell-2 services, NGOs may assume this role as well.

Managerial Implications

The framework outlined above is explicit in confining firms’ social engagement to activities that generate proprietary benefits and improve long-term competitive position. It also suggests that within these domains, the scope for firms’ participation is constrained by several factors and is suitable for firms with certain characteristics. These are summarized in Figure 2.

Figure 2 about here

Taken together, the boundaries for firms’ social engagement outlined in Figure 2 are broad and here offer considerable scope for firms’ social engagement, albeit a different one than what many firms practice, and what stakeholders expect them to do. As discussed above, cell-1 encompasses large areas that utilize firms’ core strengths towards the creation of social services, although these are appropriate only for firms that are able to internalize the externalities of the public goods they create. In most cases, this requirement narrows the scope to firms with dominant market position and with the financial means to undertake activities whose benefits may not materialize in the near terms, and to weather the risk associated with such engagements. As noted, cell-2 services are not the domain of firms.

The engagement of firms in cell-3 activities (PPP arrangements) further broadens the scope for firms’ participation and opens up additional venue for them to exploit their core assets towards the provision of social services. However, firms’ actual participation might be conditioned upon the possession of skills required to manage collaboration with public entities, and create net gain from these engagements. The case for firms’ engagement in cell-4 activities is similar to the one outlined in relation to cell 1, albeit somewhat more restricted on the ground of the challenges associated with diversification into non-core areas and exploitation of potential synergies of such moves. The framework introduced here offers tools for firms to design an agenda for social engagement and to identify the social services whose provision is right for them. These are activities that serve as a source of differentiation and competitive advantage, and whose provision is

20 G.M. Kistruck, I. Qureshi and P.W. Beamish “Geographic and product diversification in charitable organizations.” Journal of Management 39(2): 496-530, 2013.

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intertwined with firms’ long-term strategic goals. Only then is a firm’s engagement warranted and will generate value for firms and society. Intel was among the few of our interviewees that is treating its social engagement in such a way. It stood out in the systematic and explicit process via which it selects its social activities such that they are fully aligned with its business goals and form an integral part of its strategy. The Head of the company’s CSR South Asia described the process: ‘Intel has core values defined at global level and we work under this purview. …We select issues based on how they impact our business. We also consider how our stakeholders will be impacted by the initiatives. In addition to these we also have activities that are purely philanthropic.’

To ensure that the actual social engagement agenda and the specific social services selected indeed generate proprietary gains for firms, the idea that underlain the thinking behind this paper, the selection process must be subject to the scrutiny of rigor cost/benefit analyses, and be embraced only when the return on the investment outweighs the cost.

This, however, is not what most companies do. The majority of the firms we interviewed for the study told us that they do not measure the financial or otherwise effectiveness of their investments. The prevalence of this approach among both private and publicly-traded companies suggest that it endures even the scrutiny of the capital market. Addressing social causes is probably the only activity undertaken by firms that is not subject to cost/benefit analysis. As the Senior Manager of Wipro’s sustainability initiatives put it: ‘…There is not much role of CFO in the approval of the [CSR] projects.’ In their enthusiasm for social engagement firms do not appear to have even a clear idea as to the side of the balance sheet in which investment in these causes should be, that is, whether treated as a cost or investment. The Chief Manager of CSR & Sustainability of Indian Oil Corporation referred to these activities as: ‘… something that is ‘give and forget’. It is not related to the business. …. We do CSR for people who cannot even buy petrol and diesel (that we sell). … We do not and cannot expect any financial benefits from them in money terms.’ The sustainability representative of Tata Capital expressed disregard not only for financial returns but for reputational ones as well: ‘…We do not want our money back, and we are not doing it [invest in CSR] to earn goodwill. Tata already has a name for goodwill, and we do not need to invest in CSR to earn goodwill.’

This unique status delegated to social investment, which liberates them from scrutiny of any value creation considerations, should be replaced by critical evaluation, on par with any other investment. This will require the development of criteria that are in tune with the nature of the investment and its goals, including the adoption of measures and time spans that are appropriate for these activities.

Firms must also resist public pressure to engage in initiatives that are inconsistent with the conditions specified here. The interviewees for this study provided ample examples of such engagements, including UBS tree planting and recycling programs, on which the person responsible for UBS CSR initiatives in the US proudly told us. Herein belongs also Wipro program in schools and colleges in India to foster excellence in sustainability thinking and doing, as well as Indian Oil investment in the provision of drinking water and rainwater harvesting. Coca-Cola investment in cleaning China’s Yangtze River is yet another example of companies investing in social causes not appropriate for them. When explaining the rationale for these

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activities interviewees typically dwelled on their broader societal value, with complete disregard to the relevance of these engagements for their strategic goals and competencies. The Executive President of Corporate Communications & CSR of Aditya Birla Group described how the company selected its social activities: ‘…we went to villages to find out the key problems. …That is how we came up with our focus areas.’

Many of our interviewees admitted that these engagements are driven by concerns regarding reputational risks. The manager of CSR strategy of Hindustan Coca Cola described the rationale for the firm’s social engagement as: ‘… a fire-control situation and need of the hour. … Even investors today are asking for it. .. A key indicator for me [in selecting CSR activities] is that CSR helps me avoiding adverse impact on my business.’ The CSR representative of UBS US echoed these views: ‘…Of course we compete on our CSR with every other banks.’ And Wipro representative concurred: ‘…we do scan the horizon and see what other players are doing [in the area of CSR activities].’ Similar concerns were repeatedly reported in surveys across countries and industries21.

Rather than submit to public pressure, firms should be unapologetic about profit maximization as the criterion that shapes their social investment agenda, and as the only way for them to serve society. More than half a century ago Theodore Levitt expressed the view that the appropriate response of firms to societal pressure for engagement in activities that depart from their profit maximization goals should be ‘…to perform its main task so well that critics cannot make their charges stick, and then assert forthrightly its function and accomplishments with the same aroused spirit that made nineteenth-century capitalism as great as it was extreme. …It seems clear that today’s practices fall far short of this prescription. …American capitalism [is]… pouring millions into campaigns against things which people have a right to expect from their government…’22. This advice is as valid today as it was then. Role for Society

Society plays critical role in shaping firms’ social agenda. Equipped with the power of social media and digital technology, stakeholders express their preferences lauder and stronger than ever before, pushing firms into a ‘global race to the top’ in social behavior as an imperative for protecting their reputation and brand name. Cynics have recently suggested that CSR in fact stands for Corporate Social Risks.

To a large extent, these public attitudes originate in a disregard to the societal value and positive externalities that firms generate via their profit-maximizing activities, in the form of innovations and their commercialization, job creation, tax payment, and returns to shareholders. The societal gains generated via these activities often exceed the proprietary gains that firms could possibly appropriate from these activities. Mobile phone, Internet search and the likes are notable examples. Societal pressure must be informed by the opportunity cost of treating firms as a social institution and enticing them to engage in activities that bear no relations to their core assets and their mandate as profit maximizing institutions.

21 For recent examples see knowledge@wharton. “Does the Good Outweigh the Bad? Sizing up ‘Selective’ Corporate Social Responsibility.” 2013; UN/Accenture 2013, op. cite; McKinsey 2014 Global Survey op. cite.22 T. Levitt “The dangers of social responsibility.” Harvard Business Review 36(5): 41–50, 1958.

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The widely repeated and highly influential claim that firms should create ‘shared value’23 as a condition of legitimacy and credibility is similarly driven by misconception of the relationships between firms and society. This claim is being met by default because firms’ interests and gains are aligned with those of the societies of which they are a part. Firms are dependent on their stakeholders for their ability to create value and survive, and the strength and sustainability of their stakeholders is a business priority for them. This entails that firms create shared value by pursuing their profit-maximization goals and their objectives must be aligned with those of society.

Having the power to shape firms’ social agenda, society should use it responsibly, in a manner that does not undermine the very cause it seeks to advance. The responses of firms to the Bangladesh Rana Plaza tragedy illustrate this point. Some foreign firms pulled out of the country for fear that their continued presence will have appalling consequences for their reputation and public image. They invested elsewhere instead, taking away the benefits they brought to Bangladesh in the form of job creation, capital and technology. Other firms opted to work with fewer suppliers in order to minimize their responsibility for working conditions in suppliers’ factories, and bear the costs of reduced economic efficiency. And smaller firms, who lack the resources to assume responsibility for the sustainability standards in their supply chain, have refrained from investing in Bangladesh altogether24.

There is also a need to change the view of firms as the constituency for making up for governments’ shortcomings. Enthusiasts of firms’ engagement in social causes often cite deficits left by incapable governments as the justification for their positions. The Secretary of Bangladesh Garment-Workers Union explicitly expressed the view that Western retailers are the only ones capable of prompting change in the industry, because the government is ineffective in controlling the wealthy and politically connected factory owners. What is needed instead is pressure on governments to perform their duties effectively. Responses to the tragedy in Bangladesh demonstrate that governments have the means and power to assume responsibility for such issues. The US government suspended Bangladesh preferential tariffs until workers’ rights are improved, and the World Bank’s IFC offered low-interest loans to improve safety conditions in factories in Bangladesh. NGOs may also be called upon to fill gaps left by government initiatives.

Firm, governments and NGOs have shared role in the provision of societal needs, but are suitable for different ones. Under certain conditions, investment by firms can bring about more efficient utilization of resources and generate societal value. Absent these conditions, social engagement by firms has debilitating consequences.

23 Porter M.E. and Kramer M.R. 2011. Op. cite. 24 B. Powell Out of Poverty: Sweatshops in the Global Economy (Cambridge University Press, Cambridge UK, 2014).

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Box 1. The Multinational Enterprise (MNE) as a Provider of Social Services

MNEs represent a special case in the debate regarding the provision of social services by profit maximizing firms. They are the subject of the most amplified societal pressure and assume most of the social activities undertaken by firms, but their participation is mired with challenges.

The general ambiguity surrounding the type of social activities that should legitimately be assumed by firms is particularly assailable in relation to MNEs. The activity of these firms in multiple institutional and cultural environments subject them to different views of the ultimate goals of firms and to conflicting expectations regarding the nature of firms’ dialogue with stakeholders. The very definitions of what firms stand for and what is their role in society varies broadly across societies. Doing the right thing, or even knowing what the right thing might be, is hindered in uncertainty, challenging the ability to introduce a global agenda for social engagement.

The ambiguity further intensifies by the lack of consensus as to which country’s expectations should prevail in the case of conflicting pressures. There are no formal institutions with the power and authority to guide MNEs on these issues, and although many bodies have assumed themselves the role of ethics-enforcing institutions (i.e., NGOs, activists, industry associations, and the likes), they lack formal legitimacy in this role. There is an agreement that the social engagement of firms should respond to the needs and desires of stakeholders, but these needs differ across countries and are often in conflict with each other.

Nor is it clear what the relevant benchmarks against which MNE behavioral standards should be judged are, whether local norms in the communities that host them or the norms of their home country constituencies. The difficulty is further exacerbated because MNEs are often held to higher standards than local firms. They are also subject to pressure by home country stakeholders to conform to the standards of their home country, even when these bear no relevance to host countries and are not operational in this context.

These conflicting expectations and the ambiguity they create are magnified by internal MNE encounters as to the organizational units that should design social actions, whether local affiliates or global HQs. Whereas these conflicts feature in many aspects of MNE activities, they are particularly challenging in relation to social engagement due to the absence of market mechanisms to direct the choices and the ambiguity surrounding the concept and its application.

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Box 2. About the Research

This paper is informed in part by insights generated through a series of face-to-face interviews conducted in 2013/14 with nine firms in India and the US in a variety of industries, all of whom MNEs with substantial international activity. The interviewees held major responsibility for their companies’ CSR initiatives, representing in most companies the Corporate Social Officer (CSO), or the equivalent title. In some firms we also approached CFOs and CEOs. In addition to firms, we interviewed a Trustee of an NGO based in India that is involved in the development of CSR guidelines for companies in the pharmaceutical industry, and a senior World Bank economist with expertise in CSR.

The interviews were guided by a series of open-ended questions that inquired about the nature of the social activities in which the firm engages, the criteria employed in selecting them, and the selection processes. A series of questions focused on the return to this investment and asked about expectations and measurement, if any. We also inquired about organizational policy regarding investment in non-core, none profit generating activities. The conversations were taped and subsequently summarized in written transcripts. Interviews lasted about an hour on average.

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Table 1. Firms and Governments as Alternative Providers of Social Services

Firms Governments NGOsSocietal role Job creation;

commercialization of innovation; tax payment; shareholders’ return/dividends

Provision of public services; regulation and enforcement of the law; income distribution

Supplement to government services; fill gaps in government services

Condition for survival

Possession of exclusive, proprietary assets that generate revenues in excess of production costs

In democratic societies: approval of the electoral vote;In authoritarian regimes: power and control

Persuasiveness of cause to an audience of supporters; funds to cover operating costs

Legitimating force

Financial gains Welfare creation Societal approval

Strengths as providers of social services

Speed and efficiency of production/delivery; market knowledge; channels for feedback from the market

Ability to finance the provision of public goods; control of the terms of use of social services; in democratic societies transparency

Free of political pressure and profit maximization considerations in setting up social agenda

Weaknesses as providers of social services

Legitimacy as social service providers; self-selected agenda; competitive/financial considerations may outweigh social concerns

Slow decision-making processes; decisions subject to political pressures; inadequate monitoring; inefficiency

Accountability to a narrow range of stakeholders; limited social checks and minimal transparency; self-selected agenda with minimal societal voice

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Figure 1. The Provision of Social Services

InputUtilizes Firms Core

AssetsDoes Not Utilize

Firms Core Assets

Output

Can be internalized by firms(creates proprietary gains)

1:Firms

4:Firms or

Governments/NGOs

Cannot be internalized by firms (generates public goods)

3:Governments,

NGOs and Firms in Collaboration

(PPPs)

2:Governments and/or NGOs

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Figure 2. Conditions for Firms’ Engagement in the Provision of Social Services

InputUtilizes Firms Core Assets Does Not Utilize Firms Core

Assets

Output

Can be internalized by firms(creates proprietary gains)

1:Firms

*Dominant market position that enables to capture disproportional share of value created by the investment in social services *Financial prowess to finance investment whose return may not materialize in the near-term *Ability to weather risk of investment in public goods whose proprietary returns are not guaranteed

4:Firms or

Governments/NGOsAs for cell 1 + * Managerial skills to identify diversification opportunities* Managerial and organizational capabilities to create synergies across different activities*Possession of generic skills with potential for synergies *Financial resources to develop non-core assets

Cannot be internalized by firms (generates public goods)

3:Governments, NGOs and

Firms in Collaboration (PPPs)*Skills in collaboration with non-for-profit institutions; ability to extract value from the relationships *Absence of market inherent in the nature of the service and cannot be remedied by firms*Ability to weather risk of creating a market for services previously provided by governments, often for no or limited charge

2:Governments and/or NGOs

Not the domain of firms

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