AS I joined more than 1000 people at the Royal Albert Hall last week to mark 25 years of the Prince of Wales’s presidency of Business in the Community, I reflected on how the battles over corporate social responsibility have changed.
For decades, some rejected the very idea of corporate responsibility. Milton Friedman called it a “fundamentally subversive doctrine” in a free society, saying: “There is one and only one social responsibility of business: to use its resources and engage in activities designed to increase its profits.”
If managers wished to support other causes they should do so in their own time and with their own money. Many supported this view. The shareholder value movement, which argued that a company’s sole responsibility was to produce a decent return for its owners, was based on it.
The champions of corporate responsibility never denied the importance of either profit or shareholder return. But they insisted responsible companies would produce more of both.
One of the first features I wrote for the Financial Times, in 1986, was about Prince Charles’s support for the Per Cent Club, a group of UK companies that promised to donate half a percent of pretax profits to community causes. Stephen O’Brien, then CE of Business in the Community, which administered the club, said the companies were not promoting healthier local communities out of philanthropy, but as a way to expand their consumer markets.
The idea that companies would do better financially if the people around them were wealthier was not new. In 1914, Henry Ford introduced a daily wage of 5 so that his workers could afford to buy the cars they built. Many later supporters of corporate responsibility extended the argument to the community as a whole: the better off people were, the more of the companies’ products they could buy.
There were other business arguments in favour of corporate responsibility. Employees who helped local schools or supported art projects would feel happier about their companies. Staff loyalty would increase. Productivity would rise.
Most important, the wider community would regard companies as contributors to society, not exploiters. Customers would stick by them in times of trouble. Winning this social acceptance, often called “a licence to operate”, was sensible risk management, and therefore a legitimate business objective.
The Friedman view still has its proponents but the financial crisis has quietened many of them. The blind pursuit of shareholder value was blamed for bringing down the banking system . By that stage, however, corporate responsibility had changed. Globalisation and competition from lower-cost countries had placed the old idea of nurturing local communities under great stress. To survive, western companies moved manufacturing abroad. Many of those loyal employees were thrown out of work and those once-nurtured neighbourhoods abandoned.
Some companies adopted a new approach: sustainability. They said reducing packaging, lowering petrol consumption and using less electricity and water both helped to preserve the planet and cut costs.
Will sustainability produce the happy marriage between profitability and a clearer conscience that champions of corporate responsibility have so long sought?
Yes, subject to two provisos. First, those old forms of community engagement will not disappear. They fulfil deep human needs — to be respected and to feel that one is doing something worthwhile. It is very well saying people should do this in their own time; much of their time is spent at work.
Second, companies committed both to traditional corporate responsibility and sustainability can still fail. Enron was a benefactor to its home city of Houston, and Lehman Brothers’ programme of support for an inner-city London school was one of the most impressive I have seen. But Enron was brought down by fraud and Lehman by unsustainable financial engineering .
True corporate responsibility, sustainability and that treasured “licence to operate” come, above all, from identifying the fundamental dangers to the business and ensuring they don’t come to pass. © 2010 The Financial Times Limited