Kellogg experts reveal the (triple) bottom line on corporate social responsibility, and its strategic role for today's businesses

By Matt Golosinski

—Milton Friedman, New York Times Magazine, Sept. 13, 1970

Some mutual funds screen for it, while various indexes and rankings establish criteria related to CSR. The Global 100, for example, tracks performance of what it calls the "most sustainable corporations in the world. "The Kellogg School, meanwhile, has established courses to teach leaders how to excel in the hypercompetitive world of market and nonmarket forces, and offers frameworks to manage a host of issues around practices that aim to "do well and do good."

That business should care about a diverse set of community stakeholders in addition to its shareholders' profits is an appealing notion,one whose merits seem unassailable, even if the supporting details can be vague. What, after all, does it mean to be "environmentally sustainable?" How does the definition change if you're an oil company?

It's easy to get swept up by the allure of CSR, an idea that elevates business to heroic problem-solver, tackling challenges — from poverty to pollution —that formerly were the domain of government to redress. This concept isn't entirely new: A century ago business leaders were just as eager to be pillars of the community. The Protestant Christian "Social Gospel" and the political Progressive movements influenced executives and educators, including those at Northwestern University's School of Commerce, a predecessor to the Kellogg School.

Economist Earl Dean Howard was one of the scholars who took his insights into the community, successfully bringing labor and management together at Chicago clothier Hart, Schaffner & Marx, saying in 1928 that each party could "afford to make very great efforts to preserve industrial peace; on both sides there is much to lose and little to gain by warfare."

More broadly promoting the social obligations of business was Charles Cason, vice president of Chemical National Bank. "We know that real success in business is not attained at the expense of others," he said in 1927.The best executives "would not consider a policy which enriched them and their company and was at the same time against the public interest."

Scratch beneath the surface, though, and CSR becomes more complex, which is why Kellogg offers a curriculum — Social EnterprisE at Kellogg, or SEEK — to teach students how to navigate the rapids of consumer activism and regulatory pressure. Doing so includes strategically deploying philanthropy or adopting sustainable practices that signal one's standing as a good corporate citizen. Years ago, this approach seemed easier to dismiss, and some influential thinkers did just that.

By 1970, free market advocate Milton Friedman complained of the intellectual looseness of CSR. Only people could be "responsible," he contended,not companies. Business leaders who spent resources (i.e. the owners' money) to promote unclear "social" objectives in addition to advancing the firm's profits were imposing a kind of tax on shareholders and "preaching pure and unadulterated socialism," in Friedman's view. It was enough for the Nobel Laureate that business provided jobs and products that supported social and political freedom. Anything more amounted to ill-advised meddling, or worse: an attack on individual liberty.

What a difference four decades makes.

Like it or not, the competitive landscape has shifted dramatically today, requiring most leaders to harness the power of any and all tools, including CSR.

Post-materialist consumers

It's this strategic utility of CSR that Daniel Diermeier, the IBM Professor of Regulation and Competitive Practice, researches and teaches. He says nonmarket forces, including regulation and consumer boycotts, can significantly shape a firm's success, which is why he and other Kellogg colleagues like Adam Galinsky, the Morris and Alice Kaplan Professor of Ethics and Decision in Management, and Klaus Weber, assistant professor of management and organizations, are preparing students to manage effectively in this complex environment.

Diermeier says that information technology, the global supply chain and a shift in values among many "post-materialist" consumers (those affluent enough to enjoy the luxury of fulfilling needs beyond mere necessity) are forcing firms to pay more attention to how they conduct their business at all levels of their value chain — from the suppliers with whom they work to how they treat their employees to their corporate presence in the community.

Just ask Wal-Mart, Diermeier says. Its stock price fell some 27 percent as a result of recent sustained nonmarket activism, much of which was disseminated via the Internet and in response to the company's labor and management practices. Its sales growth also has slowed to an average of 3.5percent and its proposed new urban stores have run up against community resistance. The retail giant even went from being lauded as one of America's most admired companies in Fortune magazine to the subject of a scathing documentary, "Wal-Mart: The High Cost of Low Price."

It becomes much more important for businesses to do things the right way as the Internet makes companies ever more transparent to consumers who care about social responsibility and sustainability, says Diermeier, also director of the Ford Motor Company Center for Global Citizenship at Kellogg. One bad supplier, poorly managed retail store or unhappy customer on video can spell years of disaster for a company the instant the news hits the Internet.

"Once it's on YouTube, it lives forever," he adds, citing the power of communications technology to move markets. As an example, he notes the pressure that the Rainforest Action Network put on Citigroup in 2004 to adopt a comprehensive environmental policy on logging. "Twelve people exploited the flattened, integrated economy to force change," says the Kellogg professor, pointing out that these efforts, instead of going after the main company, can target critical links in that firm's value chain that may be vulnerable,ultimately producing the desired change at the top of the chain. "As a manager,you've got to deal with this, even if you think the claims behind the attack are wrong."

But under the best circumstances, customers still are demanding more from businesses. "They want more than a car, they want a Prius,something that signals, 'I care about the environment!'" says Diermeier. As a result, for these consumers a firm's environmental or labor practices can matter as much as its products. For the company, he adds, this shift in values offers an opportunity to "market to the moral self."

Whether corporate social responsibility as a competitive or a nonmarket strategy can increase the bottom line depends. The majority of recent studies indicate that CSR has a positive impact on the company's financial performance, although these studies mostly pertain to environmental issues.

Diermeier notes that the payoff will vary based on industry, company and product line, with "lifestyle" brands (think Starbucks) and well-known consumer brands enjoying the most potential benefit. Not all firms may find it worthwhile to sink resources into CSR, but clearly some cannot afford not to do so. Equating corporate social responsibility to a level of product quality, Diermeier uses an analogy to explain how for a hotel chain the investment can be essential, optional or just minimal depending on the market space. A premium brand like the Four Seasons will approach value investment rather differently than a more standard brand like Holiday Inn. But for businesses in the accounting or healthcare space, it may be impossible to skimp on superior value.

"There is no market for a low-quality auditor. There is no market for a low-quality heart pump that works some of the time," Diermeier says.

It takes a mindset

Understanding the strategic value of CSR is one thing; executing along that dimension is another. Weber says it takes resources, leadership and commitment to bring it off, and not every organization can handle the challenge. It also takes the ability to innovate, a significant prerequisite and one that Weber says is too often ignored in discussions of responsible business practice.

"If consumers are clamoring for greener products, can you come up with something that squares the circle? Can you offer something before they start clamoring and then fix consumer and competitor minds on that [option] as the way to go?" he asks.

Even if the company's senior leaders embrace CSR, "you need to put it into the firm's DNA, and that is really tough," he adds. As an example, he points to corporate "greening" efforts like carbon trading — a relatively straightforward transaction that doesn't alter the organization fundamentally — and other, more pervasive environmental efforts that demand a comprehensive approach. "Once you want everyone inside the firm to think that way and come up with innovative ideas about how to make every process, every product more sustainable, that's really difficult," Weber says. "It takes both a formal organizational commitment and an informal commitment among the workers. It's more difficult to do the informal; you need people with the right mindset."

Often, he points out, it's not that people don't want to pursue"good" outcomes. Rather, "there isn't anything 'more good' to choose from and so they keep doing things the way they are used to." The bottleneck, he believes, has more to do with a company's ability and agility than with its motivation.

When the right resources are in place, though, CSR can deliver results for the company's balance sheet, for its employees (particularly those who themselves are driven more by "post-materialistic" ideals) and for the community. Doing good can also be a potent recruiting tool, says Galinsky, whose research includes investigations into power dynamics, motivation and negotiations.

"From an evolutionary/cognitive perspective, we are 'inspirational-ready' individuals," he says. "CSR comes into play in this regard because as a company you can tap into the idea that people are making a difference and having a meaningful impact. Many people are willing to take less money to be part of an organization that they feel has more meaning and that lets them feel they are making a more significant contribution."

Curiously enough, though, sometimes even the people at the top who espouse the value of doing well and good can fall victim to their own worst impulses, Galinsky says. That's because power tends to transform people's psychological states. As people gain positions of authority, they may show characteristics that appear inconsistent or incompatible with the tenets of responsible business practice. Galinsky cites the example of Paul Wolfowitz, former World Bank president,whose public expressions against corruption didn't match his private behavior in promoting a colleague with whom he was having a romantic relationship. The recent case of Eliot Spitzer, former New York attorney general and governor who resigned after a sex scandal, offers another textbook case of how power affects values and judgment. The example of Whole Foods CEO John Mackey, a vocal advocate for corporate social responsibility, is also illustrative, Galinsky says. Mackey was revealed in 2007 to have been posting messages to a Yahoo stock market forum under an alias for several years. The messages, according to The New York Times, "championed his company's stock and occasionally blasted a rival, Wild Oats Markets," which Mackey was maneuvering to acquire — apparently hoping his anonymous postings might decrease the potential acquisition's share price, making it cheaper for Whole Foods to buy.

"Mackey was caught engaging in what a number of us would consider unethical behavior," Galinsky says. "And, in his case, very hypocritical behavior — he has long advocated an alternative view to Friedman's— a stakeholder theory of the firm that takes into account societal and employee impact of corporate policies."

More generally, he adds, the threat of hypocrisy with respect to CSR initiatives is a "huge danger."

"Hypocrisy affects people very, very deeply on a psychological level," Galinsky says. "If you're going to go down that road and present yourself as a socially responsible company, you have to commit to that road, because as soon as you get caught behaving in ways that are inconsistent to what you professed, there will be a cascade of negative reaction more extreme than if you just engaged in that behavior without sounding hypocritical."

The backlash could even occur if a firm's scales back its CSR efforts because of economic necessity in a down market, which is why Galinsky says companies need to exercise care before "jumping on the CSR bandwagon."

The temptation to jump on that wagon, though, is great, especially given the possibility of using CSR to forestall vigorous government regulation. Even better, if companies can get out in front of regulation and actually help shape it, this may result in competitive advantage, Weber says. In effect, the company "gives" the government something to regulate in the hope that other elements central to the firm's operation will remain unregulated. "From the company's viewpoint, it's a bit of an agenda-setting advantage," he says. This is especially valuable if the company can set an agenda that creates hurdles for rivals.

Galinsky sees CSR as one element in a landscape that also includes regulatory oversight. "I'm a huge proponent of free markets and competition,"he says. "Competition is one of the best ways to produce more efficient outcomes. At the same time, regulations can really make a huge difference by preventing certain practices that, without regulation, would just be economically foolish not to engage in."

The trick, he says, is creating regulation that encourages good behavior without handcuffing competition and innovation.

"I sometimes use the term 'locks for honest people' — ways that make it harder for people to do the wrong thing but easier to do the right thing," Galinsky says.