This third blog on the theme of corporate values and sustainability will examine the links between profits and responsible corporate behaviour: the practical realities of ethical challenges.
For every study claiming that ethical behaviour pays there will be another claiming it does not. The reality is nuanced: there are companies that have made money through moral indifference (Exxon), and companies concerned with social responsibility that have not made much money at all. Other firms have lost billions as a result of ethical miscalculations (BP), just as some can attribute a proportion of profits to their moral character, or exist solely for it (Café Direct).
A study in 2002 investigated entrepreneurs’ responsible or socially minded actions to determine whether social responsibility could lead to financial returns. Although finding direct and indirect links between values, ethics, CSR activity and financial performance, it was ‘impossible to state that these linkages caused the changes in financial performance noted’ and it was clear that there is likely to be a time lag between any activity and a resulting financial gain (further complicating efforts to link socially positive behaviour and profits). There is a long list of potential intangible benefits available to firms that act ethically – including, better commitment (from employees and customers); ease of business improvements resulting from increased levels of trust between businesses and stakeholders; avoidance of opportunistic behaviour between owners and managers; employees’ moral satisfaction leading them to reduce their salary demands; and strong moral identity attracting higher quality recruits.
All very encouraging, but when it comes to the application of CSR within the framework of markets and market-based incentives, the reality is that ‘business can do well and do good… up to a point. Business, in the end, must be profitable, and the aims of social and environmental objectives do not always coincide with the hard-nosed realities of the competitive marketplace.’
What happens when the rights and interests of third party groups (that a company relies upon) compete with each other, let alone with the economic well-being of the company? Deborah Doane’s 2004 paper critically explores this question. Unless the need to act ethically is placed at the heart of an organisation, a business can promote peripheral efforts that generate positive social impacts as well as concomitant positive financial benefits, whilst ignoring the far more detrimental effects of its core operations (e.g. a supermarket offering school equipment in return for purchases whilst simultaneously breaking up local communities). Truly resolving moral situations, rather than CSR sleights of hand, requires creativity. Under the right circumstances this creativity can also deliver profits. Business however, is prone to innovating only where profits are clearly available, which if nothing else, hugely limits innovation.
CSR has too often been little more than a PR strategy to divert attention from the real work of maintaining business-as-usual: as Ray Anderson said, ‘The status quo is an opiate’. Many efforts made in CSR’s name have not resulted in the intended benefits. For instance, increasing legislative and governmental pressure on business to report on non-financial risks was aimed at improving companies’ ability to manage and thus reduce their negative environmental and social impacts, benefitting society as well as the company bottom lines. However, even a wider understanding of ‘material’ risks leaves a large gap between risks that are relevant to a business and risks to society resulting from business activity. Other barriers that CSR has comes up against include the failure of ‘notoriously passive’ consumers to demand that companies resolve important social or environmental concerns (such as, why do we need this product?), and the indifference of SRI funds to malign corporate activism in their ‘responsible’ investments.
Market forces make it incredibly hard for any company to succeed in changing the way business is done: acting as responsibly as it can, respecting its entire corporate ecosystem, internalising environmental and social costs and providing products that serve rather than drive human need. Companies that do try tend to be small and idealistic: Doane refers to them as ethical Minnows, pitting them against multinational Mammoths that try to scale down their negative impacts, more often than not ‘doing what they can, within the confines of the market,’ (protecting profits), ‘rather than what they should’.
So we can’t guarantee profits from responsible business?
Ethical business strategies cannot, on their own, fix a general market failure whereby markets compete against the broader public good. I cannot address the conflict between markets and sustainability in this blog. For now, let’s just examine how we can promote sustainability by questioning the activities of companies from a perspective other than financial returns. Financial returns are fairly easy to predict at the early stages of sustainability initiatives – efficiency measures, better risk management, more educated employees – all deliver relatively predictable returns in relatively short time frames. But to think that there is always a win-win combination between sustainability and profits is naïve. What do we do when there is no obvious win-win?
We need something more than money to guide us. Take the example of obsolescence. A company might decide to embrace circular economy ideas and make longer-lasting resource-protecting products in the interests of lower raw material costs over time. But doing so wouldn’t ever require the company to question whether the product is actually needed, and so the solution is still one of operating ‘less badly’ rather than ‘well’. I also suspect that considering initiatives primarily from the perspective of financial returns restricts sustainability ambitions. Most corporate sustainability efforts do remain focussed on cost-savings from efficiency improvements, rather than any real paradigm shift away from linear business and resource-use models. This efficiency focus sidesteps the moral questions (that I established we should be asking in my last blog) – for instance, what goals and whose interests does efficiency serve?
If not profits..?
So what lens could we use to look at sustainability that would circumvent some of these issues? Is there a way of encouraging greater sustainability innovation in the face of restricting financial returns-based business cases? To answer this I looked at some of the companies that are considered to be sustainability leaders: they also happen to be successful businesses. What strategies do these companies employ that allows them to be both sustainable and profitable?
The most sustainable companies seem to have a strong set of core values and an entrenched clearly defined purpose beyond profit. They understand ‘why’ they exist, which takes precedence over ‘how’ they exist and drives ‘what’ they sell to exist. They understand the importance of long-term thinking (which usually appears to be in conflict with profit motives) and the benefit of taking a broader view of what holds value to their businesses.
Once core values and purpose (not necessarily sustainability-focused) permeate a company, informing all decisions and activities, companies can be more focused on their work, which in turn is good for business. It also puts them in a position where they can consider whether having good values, rather than just values, will also be good for business.
In the next blog I’ll take a closer look at the importance of corporate values and purpose in the success of business strategies, and see how core business values can develop to become core sustainability values.