By Jerilyn Klein Bier
Resolved: That when companies expend resources on corporate responsibility and sustainability they destroy economic value.
Agree? Disagree? Confused?
This resolution was argued last week during an Oxford-style debate at Commit!Forum 2011, a New York City gathering of socially responsible corporate leaders presented by Corporate Responsibility magazine and NYSE Euronext. Here's a very quick look:
Affirmative (the argument against corporate responsibility)
Dr. Aneel Karnani, associate professor of strategy at the University of Michigan's Stephen M. Ross School of Business, described "doing well by doing good" as a "grand illusion," and said corporate social responsibility (CSR) can be irrelevant, ineffective and even dangerous.
Karnani posited that when private profits and public welfare are aligned, this is simply good management and CSR is irrelevant even though companies might play it up. Companies that are neither profitable not virtuous may also be motivated to do something good for society in their quest for profits. But if companies must sacrifice profits to help the public, they'll just talk about it (i.e., greenwashing) and action will only be driven by government intervention.
Gerry Sullivan, portfolio manager of the Vice Fund (VICEX)--which seeks to invest in well-performing stocks of tobacco, alcohol, gaming and weapons/defense companies because it believes these industries tend to thrive regardless of the economy of a whole--said companies must advocate for the shareholder and not just for the stakeholder. Greenwashing, he argued, ends up being part of the marketing but doesn't end up in the financials.
Hewlett-Packard might be a responsible corporate citizen, but its stock price is a disaster and it has fired three chief executives in recent years, Karnani said. In that vein, Sullivan pointed to General Electric, whose stock value plummeted between the May 2005 implementation of its ecomagination initiative and August 2011. Meanwhile, the S&P 500 and Dow Jones Industrial Average rose during this period.
Negative (the argument for corporate responsibility)
Sustainability can enhance shareholder value, argued both R. Paul Herman, founder and CEO of investment advisor and portfolio manager HIP Investor Inc., and Dr. Vinay Nair, founder and managing principal of Ada Investment Management and an adjunct associate professor at Columbia University's graduate school of business.
Sustainable business practices and decision-making can lead to higher profits and cash flows through stronger brand and greater pricing power, greater operational efficiencies, more efficient use of resources, and enhanced ability to attract, retain and motivate employees. In turn, this can boost stock prices.
Customers aren't the only ones who want to "do good" in their purchases--investors do, as well. Herman cited a 2008-2009 survey by Cone, a Boston-based public relations and marketing firm, that found 66% of investors see "doing good" as a positive indicator and 19% refuse to invest in companies not "doing good".
And Nair noted that investors are focusing on the durability of profits and the growth rates for the sustainability sector of some industries such as the organic part of the food industry, hybrids in automotive, the renewable side of energy, and the green side of the building materials industry. He added that companies going public today have a higher multiple if they have higher safety standards.
Briefs written by the debaters can be found in the September/October 2011 issue of Corporate Responsibility magazine. FA Green also followed up with Karnani and Herman after the debate.
FA: You said government, not the corporate arena, should be tackling societal challenges, and that government regulations are appealing because they're binding. If government doesn't respond in a timely or satisfactorily manner is it acceptable for corporations to step in with solutions?
AK: The only way to get companies to actually act in the public interest is to have government intervention. The government can then decide whether to provide incentives (e.g., subsidize wind energy), impose penalties (e.g., carbon tax, or cap-and- trade scheme), or mandate some actions (e.g., catalytic converters on cars). If the government does not act appropriately, then it would be great if the companies stepped in with solution, but they will not and it is naïve to expect that they will do so by sacrificing profits.
FA: Do you think collaboration between companies and NGOs can be a good thing?
AK: It can be, but just because companies do it doesn't mean it's good. NGOs need to keep their eyes open and see if collaboration is really good for society. It's bad if the NGO becomes a tool of the company.
FA: You said focusing on CSR can delay or discourage more effective measures to enhance public welfare in cases where profits and public goods are at odds. How so?
AK: Ordinary citizens who are lulled into thinking problems are being solved by corporations may not vote for supporters of tougher laws. Companies who think they're being socially responsible are also lobbying against tough laws.
FA: Beyond HP, GE and BP, can you share examples of companies who present a strong divergence between CR actions (or image) and its performance?
AK: There are many companies with a divergence between their CR actions/image and their business performance. Exxon has a poor CR image but very strong business performance. Tobacco companies are in the same situation: high profitability but poor CR image. On the opposite side, Timberland, Levi's, and Citibank have strong CR image but poor business performance.
R. Paul Herman:
FA: Your debate partner, Vinay Nair, mentioned there's convincing evidence that CR doesn't destroy returns but not enough evidence to show it creates better returns. Can you expand on this?
RPH: There are mutual funds, such as Parnassus Workplace (PARWX) and Portfolio 21 (PORTX), that have a higher alpha and there's clear evidence of outperformance over a three- to five-year period. The challenge is there aren't a lot more available funds or ETFs, though there's an increasing catalog of separate accounts.
FA: The opposing team argued that public welfare is government's responsibility. What are your thoughts on that?
RPH: Government can play a valuable role in acting for the common good where markets fail. To solve big problems, value is added from businesses, government and the social sector [NGOs]. When businesses only are looking through the lens, there may not be enough time, attention and resources.
FA: BP had 760 unreported "willful and egregious" safety violations during the three years prior to the Gulf of Mexico explosion, according to OSHA statistics you referenced. Should investment managers and financial advisors be looking at OSHA data before making investment decisions?
RPH: Yes, we think CR and sustainability are part of fundamental research. The SEC hasn't mandated disclosure of all risks on Form 10-K.