The Market for Virtue, the Potential and Limits of Corporate Social Responsibility, (2006, Washington, DC: Brookings Institution Press).
Written by: David Vogel
Reviewed by: Gaurav Parnami
On a flight to San Francisco last year, I sat next to the CEO of a major computer manufacturer and somehow our conversation turned towards Corporate Social Responsibility (CSR). I chose to argue that corporations have a social responsibility towards the community in which they sell or produce merchandise. His argument, very much like the famous 1970 Milton Friedman New York Times article, stated that corporations are only responsible for generating shareholder value and any actions of the firm should reflect that goal. He agreed that if CSR can be shown to reduce costs and increase the stock price, then it has a place, otherwise, it shouldn’t exist. We left our conversation in a disagreement about the role of corporations in society. David Vogel’s book The Market for Virtue, the Potential and Limits of Corporate Social Responsibility attempts to address that issue and explores the history of CSR.
In order to define the concept, Vogel starts with some well-known examples of CSR and defines it as “practices that improve the workplace and benefit society in ways that go above and beyond what companies are legally required to do.” However, since these companies operate in a market, they are restricted and aided by the market. The biggest force causing companies to participate in CSR actions is “Civil Regulation”. Civil Regulation is demand by consumers, employees, investors and pressure by NGOs. While CSR has been effective business practice in certain niche markets served by companies such as The Body Shop, Patagonia, and Timberland; it has failed to become a norm in the marketplace.
Vogel outlines that CSR concept started in US in 60’s and slowly spread to Europe where it now plays a greater role in the market than it does in US. In the 90’s, it gained much more prominence through globalization and Multi-National Companies became targets of CSR proponents to adapt CSR practices. Vogel shows through the example of Nike in the 90’s, that labor and human rights movements are currently the primary focus of CSR issues and practices.
Corporations also practiced CSR through philanthropic donations in their communities without regard to its relevance to the company’s business, however, that slowly changed because managers started to believe that philanthropy could be used to create additional financial or stockholder value. This also led companies to create “cause related marketing”, where firms donate a portion of the proceeds from the sale of their products to a charitable organization, and in return, anticipate an increase in sales.
The CSR movement also encompasses Socially Responsible Investing (SRI), investment options for individuals to exhibit their personal value with investment dollars. Vogel spends a great deal of time evaluating SRI as an option to test the effectiveness of CSR and states that most studies show no financial benefit of SRI and major flaws exist in the evaluations strategies used by researchers. Also, as there are no consistent criteria used for such investment, there exists a lot of ambiguity in selection of companies. Enron, one of the biggest failures in capital markets, was considered a model CSR firm and was a major holding of most SRI firms.
Evaluating the effectiveness of CSR is even more difficult to measure. An excellent example Vogel uses is “should Wal-Mart be considered a responsible company for providing consumers with low-priced goods or an irresponsible one for paying its employees low wages and driving out independent merchants?” When evaluating the cause of success or failures of a company, it is difficult to assign a single driving force behind that condition. CSR falls in the same category as other factors such as marketing and advertising. Some companies advertise a lot and are successful whereas many companies do not advertise and are equally successful and vice-versa. CSR is also a business strategy; however, Vogel claims that it is held to a higher standard in achieving results than other factors. CSR is thought as competitive advantage for companies, but companies are more than willing to share their CSR practices with competitors, minimizing any such advantages. Vogel concludes that CSR is only a single factor in the success (or failure) of company amongst many other potential options and should be treated as such.
So why should companies practice CSR? Surveys show that nearly all consumers place a high priority on CSR; however, when translated to actual sales, less than five percent of those consumers make purchasing decisions based on the CSR policy of a company. Most consumers in fact are not aware of how the products they buy are manufactured. Consumers place the highest priority on the product’s quality and the willingness of the company to stand behind that product rather than the company’s social stand. There is a small subset of consumers that takes active decisions based on their personal values but those are already served by existing companies like Patagonia or Body Shop.
Some consumers and NGOs publicly boycott products in order to force companies to adapt more CSR practices. While those practices do sometimes work, the effects are minimal in changing the fundamental strategies of the business. The boycott is almost always aimed at companies that already practice CSR (Starbucks, Nike, BP, etc.) and the companies that choose to not make CSR a component of their business practice, mainly avoid this criticism. An ExxonMobil executive described it as “The spouting whale gets harpooned.” Employees also lead the effort to change the companies as a happy workforce is critical for the well being of a company, but Vogel points out that companies that do not utilize CSR strategies have not experienced trouble finding talented employees.
Investors can also lead a company to adapt more CSR practices but most investors are focused on short-term returns whereas CSR practices are geared towards long-term return. Investors are similar to mass consumers where when surveyed, they place a high priority on CSR, but less than a percent of people actually invest in SRI vehicles. An ironic fact that Vogel shares is that the Vice-Fund has out-perfumed most SRI funds. Investors do exhibit their values in other manners of investing, but it takes a 25% change in the price of the company’s stock for a company to consider changing its strategy. Shareholder resolutions that emphasize CSR have increased in the past years but none have generated a majority to force change.
Vogel states that “If bottom line costs and benefits of CSR are difficult to measure and are rarely material to investors, many firms act as if CSR matters.” Why? These decisions seem to be driven by few people, founders that had a social mission or activists that target these companies. However, ultimate evaluations of companies are still primarily driven by financial reasons than any other.
CSR is discussed and utilized amongst companies that have overseas manufacturing operations. However, the same consumer sentiment also applies here. Consumers want companies to pay fair wages, improve working conditions, but are not willing to pay for it. Companies have it difficult because their supply chain runs many layers beyond their controls and it is difficult to monitor through each layer. In the past ten years, many monitoring agencies have sprung up but companies are not willing to pay the costs associated with monitoring and changing the practices at each layer of their contractors. Suppliers also face a challenging task; buyers want a faster turnaround time but are not willing to pay for the increased costs and yet expect them to give higher wages and provide better working conditions.
Despite all of the limitations, CSR strategies have influenced positive change and managed to improve the working conditions of individuals in developing countries, increase some wages, and have almost eliminated child labor in the manufacturing industry. However, Vogel criticizes that most child laborers work in the agricultural sector where no such change has occurred and he equates this accomplishment to companies grabbing the low-hanging fruit. Social labeling such as Rugmark and Fair Trade have also been effective as some consumers are wiling to pay a premium for products with that stamp, but they also represent a very small portion of the entire marketplace. Fair Trade coffee represents less than 1% of all coffee sold in US.
CSR has run into similar limitations when dealing with environmental issues. Consumers are unwilling to pay a premium for products and as a result, efforts made by companies like BP and Ford are minimal in terms of their overall business strategies. An area where CSR has succeeded is voluntary carbon reductions because it has a led to large savings for companies in their cost of doing business.
CSR practices have also made some progress in Human Rights issues but companies have shied from making any such practices a core part of their business. They normally prefer to avoid taking any stance especially when there are political and cultural differences between the activists and the local markets. Vogel states that companies only react if there is a danger to their brand and not from virtue.
In this book, Vogel does an excellent job of introducing CSR and its history. He has provided the reader with an in-depth evaluation of the areas where CSR has been thought to be effective and critically provided limitations of such practices. Just as consumers want companies to be more responsible, we the readers are likely to hold the same opinions. Vogel provides good insight on why only a few companies incorporate CSR in their business strategies. He attacks the widely-held notion that companies can help their business by incorporating CSR practices by showing how the many limiting factors that hold companies from doing so. The most useful thought that Vogel raises for the reader is that even though CSR proponents want such practices to be wide-spread and become a norm in doing business, CSR is not applicable in every situation. There are plenty of legitimate reasons that hold companies from placing a higher priority on CSR.
However, Vogel needs to do a better job of demonstrating the “Potential” of CSR. He shows the progress made through such efforts by talking about improvements in the quality of life for workers, reduction in child labor; but these are mentioned only as small, trivial victories. If a reader wanted to learn how to promote CSR in the market or in their workplace, they would leave dejected after reading this book. Vogel dismisses the changes as trivial because relative to the bigger problem, they are small. However, he can highlight those changes as an important start. While Vogel discusses at length about the reasons companies use CSR, he never mentions that corporations can practice CSR without any implicit business connections. There are many companies that practice such behavior and examples of such firms should be important part of discussion about CSR.
Vogel leaves the reader with a novel and concluding idea that if “companies are serious about acting more responsibly, they need to reexamine their relationship to government as well as improve their own practices.” This idea should have been explored more in depth and why/how companies can use government intervention to improve themselves and why it would make more business sense.
Using CSR seems to be a daunting task. Everyone wants to make it happen but no one wants to pay for it. If one is to think more about this topic, they should take a step back from this analysis and evaluate the role of corporations in society. Are companies merely legal entities or should they have a soul? One, we, I need to answer that question before tackling any ideas about CSR and its limits or potentials!