Source: Ethical Corporation
Mallen Baker , 7 Jan 09
Let's lose the sloppy thinking about CSR and bottom line benefits to start with, argues Mallen Baker
I don't know about you, but I have had my fill of articles and blog entries which aim to review the year 2008, or make predictions for the year 2009.All the reviews start the same - what a year it was, and whoever would have thought it - and all the predictions are statements of the obvious - it's going to be a tough old year to come.So I thought instead it would be interesting to reflect on what we actually learned from the events of last year - and particularly on whether those learnings would be of any use as we face the next year and ponder where next for corporate social responsibility.
First - most people, including the declared supporters of CSR, have not really bought the business case arguments that have been put out there by a range of organisations, research groups and others.
Early in the year the IBM study said that it proved that CSR helped companies to be more competitive. It was the latest in a long line.
But as recession bites, we see lots of people on the defensive. It's not that companies have come out to declare they no longer believe in CSR, but CSR budgets are being cut, plenty of CEOs are talking about focusing on core business, and other things are on hold.
This is not unique. The marketing budgets have been cut. The HR development programme is on hold. Hatches are battened down all over the place.
But if decision makers had really bought the argument that CSR made them more competitive, they would be talking about that as part of their way out of the crisis. If CSR budgets were being cut, they would be demonstrating how they aimed to do more with less - like they are with the marketing budget.
The fact is that the research reports didn't prove anything, and many of the key decision makers didn't believe for a moment that they did. No-one was going to call this except for the critics - because actually there are plenty of good reasons to do this stuff. The benefits may be unproven - like every marketing campaign is before it's actually been run - but that doesn't mean they don't exist.
There has been a whole industry based on this line in recent years. Trying to prove cause and effect - successful business = responsible business. It's time to move the argument on, because all of those attempts bought into one central assumption - that it is the primary role of business to maximise shareholder returns and therefore any CSR commitment needs to show that it delivers cash to the bottom line in a direct and predictable way. That is the biggest assumption whose future is questioned by recent events.
Second thing we learned (or re-learned) - the basics still matter. Even in this crazy faster-than-the-speed-of-thought internet universe. The banks got very innovative in creating financial instruments that buried the visibility of risk. The shining edifices of the investment banks' headquarters attested to the permanence and solidity of those institutions. But when some of them fell, they fell so rapidly it gave the lie to those perceptions.
If the rock-solid institutions of yesterday could blow away into the dust because they had no solid foundations - which other apparently rock solid pillars of our society do we suspect may have similar problems? What about the global food chain? What about the entire tourism industry? Or the insurance sector? Or the entire natural ecosystem? If we think any of those are 'too big to fail' then what is our strategy other than the blind faith that didn't work too well last year?
Third - the other side of the maximising shareholder value is that CEOs are attracted and retained by large financial rewards. And if those rewards can be aligned with the interests of shareholders, then businesses do well. If they become disconnected, then the CEOs may 'go native' and do things against the shareholders interests.
This way of thinking has led to the view that huge pay for CEOs is necessary to attract and retain great talent. There is some truth to this, in that if you pay peanuts you get monkeys. But likewise, if you make vast financial reward the key motivator for CEO success, then you attract the kind of people who value above all else vast financial reward.
What is wrong with aiming to motivate people to want to do a great job because it creates value, it provides a service, it gives people fulfilling and meaningful jobs, and it can help to solve some of society's problems. What sort of leaders would we attract if we could do that? We need Mandela-like leadership, not Attila the Hun style leadership for this next bit.
Because last year we saw again how important is leadership. Barack Obama captured the imagination of the world - all because people saw the possibilities now that they felt real leadership was in evidence again in one of the most powerful nations in the world. Forget the politics of the parties - this is just about vision and focus.
Did we see any leadership in the financial sector? Some, not much. Some companies refused to take part in the parlour games of the sector overall and kept their feet on the ground. They did not criticise their peers, and they have enjoyed not being part of the story of crisis.
Most, however, embraced the logic and did what they were asked to do. Some of the people that asked this of them are now the ones condemning them. But that's stakeholder expectations for you.
Finally - at the start of the year, everybody was talking about the rise of private equity. A number of the CEOs and other business leaders I dealt with at the time talked about their ambition to get into private equity, where the rewards were seen as huge and the irksome barriers seen as few. A brutal world, where stellar performance was expected, but stellar rewards were duly delivered as a result.
But it was all based on the leverage provided by cheap credit. A private equity firm could buy a poorly managed company having borrowed eighty percent of the cost, and putting in only twenty percent of the stake from its own funds. If it could then turn the company around and float it back onto the markets - say at 120 percent of the price paid, then the debt is repaid, and the company has doubled its money. The mathematics of this simple process made a number of individuals super-rich.
But what happens to the ethics of the portfolio companies that are in the process of being turned around? It's not that they are always thrown overboard - they aren't - but where was the hard-edged business case that would have played with the hardball players who just wanted a turnaround and a big return?
Now, of course, it has all changed. The credit flow has dried up. Don't expect to see any cheap credit again any time soon. And the stock values of companies have plummeted. Maybe it'll be awhile before the stellar returns are realised as well. Oh, and since companies are doing badly then some of the struggling badly managed companies are ... at best, struggling well managed companies.
Maybe that is all to the good. Suddenly, the owners of companies are going to have to behave like they might just own them for a bit longer than they expected, and wonder what they have to do to build long term value.
So - learnings at the end of all that?
1. We need a more robust discussion about the benefits to society and business of a different way of doing business. This needs to be quite radical - none of yesterday's assumptions are exempt from scrutiny. Why? Because the rules just changed. Even if you don't think that changes anything major, it would be as well to check.
2. Let's lose the sloppy thinking about CSR and bottom line benefits. Nobody believes that the equation is this simplistic. Any more than they would someone who 'proved' that companies that sell the most are the ones that spend the most on marketing.
3. The basics matter. But we, as a society, are prone to wishful thinking. The dot-com bubble. The credit crunch. How can we avoid this effect in the future - particularly over things that are genuinely too big to fail, and are now subject to a government bail-out if they do?
4. Is there a concept of a 'fair return' for shareholders to replace the 'maximum return' concept? Can we get more people to buy in to a sustainable future if it means that the smart or lucky ways to get unfeasibly large returns are no longer possible? Guess what - you have to work hard to get rich, not just get lucky?
5. Since pay for CEOs is one of the easiest targets for discontent when poor CEO performance is one of the big issues, we should expect to see this reined in. There's an opportunity there for some visionary CEOs to show leadership. And an opportunity for society to build a vision of what the job of a CEO is, and how they should be motivated. Pay peanuts, get monkeys. Pay obscene salaries, get obscenely greedy monkeys.
Learn from the best of the voluntary sector, and blend it with the best of the private sector.
6. Take the challenge to the private equity guys. The party's over. What are the real strengths of the private equity model we could learn from? What are the real downsides?
That's quite an agenda for the next twelve months!
Taken from Mallen's Business Respect e-newsletter with kind permission. For more, go to www.mallenbaker.net
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