Accountable Strategies blog

A blog about accountability issues in the public, private, and nonprofit sectors

Archive for March, 2008

Do companies do well by doing good?

Posted by David Kassel on March 25, 2008

Three academic researchers have produced the most comprehensive review to date of 35 years of studies on a question that seems to have become more timely and pressing than ever—do efforts by corporations to benefit society also benefit their bottom lines?

A draft version of their paper, “Does it Pay to be Good?”, by Joshua Margolis, Hillary Anger Elfenbein, and James Walsh, can be found on The Economist website and has been discussed in The New York Times.  Margolis said the authors are continuing to revise the paper.  Last year, Margolis asked me to hold off in posting a blog entry about the paper, but yesterday he extended permission to cite the paper and post this blog entry.  He said he hopes to have an updated version of the paper by May.

The authors have so far produced an analysis of 167 studies, and concluded that, in general, these studies found there was a mildly positive relationship between corporate social and financial performance.

So, what does that really mean?  The attention to that question is the real strength of this analysis.

First of all, the authors note the stakes involved in the three decades of research they reviewed:

If only doing good could be connected to doing well, then companies might be persuaded to act more conscientiously, whether in cleaning up their own questionable conduct or in redressing societal ills….A positive link between social and financial performance…would license companies to pursue the good…

In 1970, they note that Milton Friedman laid down the gauntlet by criticizing any firm that made so-called socially responsible investments, arguing that such activities amounted to theft from the shareholders.  As a result, at least 167 studies have been conducted since 1972 to study the effect of corporate social performance on corporate financial performance, and there have been 16 reviews of this research.   Margolis et al. are the first to offer a comprehensive appraisal of all these studies, and to suggest an entirely new path for future research.

They found that most of the 167 studies did not find statistically significant relationships between corporate social and financial performance.  Yet, certain conclusions can be drawn from the studies, among them that companies do not appear to suffer financial harm due to socially responsible investments.  Only 2 percent of the studies reported a significant negative effect on financial performance in undertaking socially responsible activities.   This appears to negate Friedman’s warnings that companies that undertake these activities will destroy shareholder value in the process.

As the authors put it:

Companies can do good and do well, even if companies do not always do well by doing good.

And, on the negative side, companies that act irresponsibly and are caught, often suffer costly consequences.

Yet, the authors also note that the studies have shown that the next marginal dollar spent on a socially responsible investment is not necessarily going to provide as great a financial return as other types of investments.  Therefore, there should be reasons other than just the potential financial benefits for pursuing corporate social performance.  Those conclusions would seem to jibe with those of David Vogel, author of “The Market for Virtue,” who has argued that Corporate Social Responsibility initiatives are an “insurance premium” for businesses rather than a consideration at the core of a business’s processes.

In fact, Margolis et al. suggest that the studies they reviewed show corporate social performance is a legitmate activity that may not produce hugh financial returns; and yet, companies ignore it at their own peril.  The authors cite the case of Wal-Mart, which found its investment plans disrupted because its corporate and marketing policies generated so much opposition.

The authors further conclude that one of the most under-explored effects of corporate social performance is whether those policies actually result in measurable benefits to society as a whole.  And they suggest that it may now be time for researchers to stop trying to find a causal link between corporate social performance and corporate financial performance, and turn their attention to three possible questions for future research:  1) why do firms pursue corporate social performance?  2) how do they go about it? and 3) how can they pursue both corporate social performance and corporate financial performance at the same time?

In other words, the question shouldn’t be: do firms do well by doing good, but rather, how can firms do good and do well at the same time?

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Iraq and the Bay of Pigs

Posted by David Kassel on March 17, 2008

Looking back on this five-year anniversary of our occupation of Iraq and its catastrophic cost in American and Iraqi blood and treasure, one can only hope that our future leaders draw some lessons from it.

But will they?

Whoever among the three remaining candidates is elected president in November, he or she might start by reading a book that I’m pretty sure George W. Bush never read.

That book, Thinking in Time: The Uses of History for Decision Makers, by Richard E. Neustadt and Ernest R. May, was published in 1986.  Its recommendations remain timely and common sensical, particularly the central recommendation that presidents should carefully examine the historical and political presumptions on which they base their decisions. 

Had Bush, Cheney, and Rumsfeld read Thinking in Time after 9/11 and taken its recommendations about presumptions seriously, it seems to me we wouldn’t be in the mess we’re in today in Iraq.  They might, first of all, have come to realize that some of their presumptions about Iraq resembled presumptions in the Kennedy administration that led to the disastrous Bay of Pigs invasion in Cuba in 1961.

Neustadt and May conclude that the Bay of Pigs was perhaps the classic case of unexamined presumptions by American presidents.  One of those presumptions that Kennedy and his advisers held was that there would be prompt uprisings against Castro throughout Cuba once the Cuban exiles who were recruited for the invasion landed on the beach there and proclaimed a rebel government.

There were high-level officials within the CIA who would have scoffed at the notion that the Cuban population would have welcomed the American-sponsored invasion.  But Neustadt and May note that Kennedy wasn’t even aware that the organizers of the invasion had walled themselves off from colleagues who might have challenged their presumptions.  They add that most of those whose comment or advice Kennedy asked were too inhibited to question his underlying presumptions or to spell out theirs.

The Kennedy administration’s presumption that the Cuban people were waiting for deliverance from Castro in the form of American-style democracy may have been more far-fetched than the the presumption of the Bush administration 40 years later that the Iraqi people were waiting for the Americans to deliver them from Saddam Hussein.  Hussein was a far more despotic ruler than Castro.  But the Bush administration was equally wrong in assuming that American-style democracy would be welcomed with open arms in Iraq.

As Rajiv Chandrasekaran notes in his own 2006 book, Imperial Life in the Emerald City: Inside Iraq’s Green Zone, Bush and his advisors, and some top officials in the Pentagon, also wrongly presumed that the Iraqis would “quickly undertake responsibility for running their country and rebuilding their infrastructure.”

Chandrasekaran further points out that there was little coordination in pre-war planning between the State Department and the CIA or even with post reconstruction experts within the Pentagon, and there was “an aversion to dwelling on worst-case scenarios that might diminish support for the invasion.”

Neustadt and May contend that presidents facing difficult decisions should:

…pause to define their concerns.  They should take precautions to avoid being misled by analogies of one stripe or another.  Then to the extent possible, they should try to see their concerns in historical context…

The invasion at the Bay of Pigs was clearly not directly analogous to the invasion of Iraq.  There were many significant differences between the two events.  But it seems that had Bush, Cheney et al. stopped to “see their concerns in historical context” before acting, they might have realized they were basing their projections about the aftermath of the Iraq invasion on some very faulty presumptions.

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Vogel: The business case for corporate responsibility will always be about to be proven

Posted by David Kassel on March 10, 2008

In 2005, David Vogel, a professor at the University of California, Berkeley, wrote a book called The Market for Virtue, which concluded that the corporate social responsibility movement had only a limited potential to bring about significant change in the way companies do business.

In a seminar last week at the Kennedy School of Government, Vogel didn’t change his message much.

Corporate social responsibility (CSR) is alive and well by every possible dimension, he conceded.  There has been an expansion in private codes of ethics; and private, voluntary regulation—so-called soft regulation—has expanded significantly.  It’s all very encouraging, but what does it mean?  Are companies behaving more responsibly?  It’s very difficult to say because the boundaries of what constitutes CSR keep shifting and companies are multifaceted, Vogel maintained.

British Petroleum, for example, has been applauded for addressing climate change issues in its business policies, but has been criticized for oil spills in Alaska, he noted.  Merck has been praised for providing drugs to cure river blindness disease in Africa, yet criticized for marketing Vioxx.  Exxon has an exemplary health and safety compliance record regarding its own employees, but hasn’t been good on global climate issues.

In the financial sector, the subprime loan mess has eclipsed much of the progress made along corporate responsibility indexes.  The fact is that while the risks and opportunities of CSR have become more important to managers in recent years, their importance relative to other business processes have not increased, Vogel argued.  CSR is an “insurance premium” for businesses, rather than a consideration at the core of a business’s processes. 

Yet, Vogel acknowledges, there remains an irresistable attractiveness in the concept of CSR and the belief “that you can make money and make the world a better place.”  The problem, he maintained, is that “the business case for CSR will always be about to be proven, but will never be proven.”

One thing that has changed about CSR is the relative importance advocates place on public policy and government regulation.  In the recent past, there was a view that government had become irrelevant as an actor in the sphere of social responsibility, but that view is now seen as naive and there is an awareness that there are limits to CSR.  Global climate change is an example.  Without government regulation and support, companies are not going to make the investments needed to begin to address that problem, he maintained.

Vogel disagreed with a comment from a member of the audience that CSR initiatives continue to be hampered by the “command and control” nature of government regulation.  “I like command and control,” he said, pointing out that advances since the 1960s in clean air, civil rights, and consumer product safety in this country have been the result of command-and-control government intervention and regulation.

Yet, Vogel was sanguine about the potential for government to resume its former pre-eminent role as a regulator of the corporate sector, arguing that government’s role in that regard constantly fluctuates.   I’m not sure I agree with him there.  It seems that since the Reagan years, there has been a long and steady slide in the political willingness in this country to use government in that command-and-control function.  The trends seem largely to have been downwards, and I’m not sure there’s a clear consensus for a reversal in the foreseeable future.

Posted in Corporate responsibility, Governance, Nonprofit, Private, Public | Tagged: , , , | 2 Comments »

Private militias and their accountability

Posted by David Kassel on March 4, 2008

Michael Walzer, a contributing editor to The New Republic, writes in the current issue of the magazine about the use of private militias and mercenaries in Iraq and elsewhere, and concludes it’s “mostly a bad idea.”

Walzer points to Max Weber’s definition of a state as holding a monopoly on the legitimate use of physical force within a society or territory.  And he adds that:

It is a very dangerous business to loosen the state’s grip on the use of violence, to allow war to become anything other than a public responsibility.

But that is exactly what has happened in Iraq.  To be fair, the current Bush administration didn’t pioneer the use of privately run militias for security and other jobs that the administration wasn’t willing or able to order its own troops to do.  Walzer notes that during the wars over the former Yugoslavia, then President Clinton permitted a private U.S. firm to train Croat soldiers in fighting the Serbs.  But might it have been better, he asked, if Clinton had gone to Congress and laid out the argument to use American troops to help the Croats?  Using private soldiers “makes policy invisible,” he notes.

Well, maybe not so invisible when those private soldiers start killing civilians, as Blackwater USA guards did when they fired into a crowd last September in Baghdad.

As Walzer points out, soldiers get out of hand at times as well, sometimes for similar reasons, including a lack of adequate training, equipment, and support.  But that, he says, “is the result of political decisions, not market processes.  And, for such decisions, we know whom to hold accountable.”

And it’s not just politicians who are held accountable when soldiers get out of hand, it’s the soldiers themselves.  As Walzer notes, solders are trained to fight in accordance with a code of conduct enforced by military courts, which in turn are overseen by civilian courts.  By contrast, security companies in Iraq operate under a voluntary, and unenforceable code of conduct.  Moreover, in an administrative law imposed by Paul Bremmer in 2004, guards are immune from prosectuion in Iraqi courts.

It remains, unclear, Walzer says, whether contractors can be tried by military courts.  They can theoretically be brought back to the U.S. for trial in federal courts.  But while there are some 100,000 American contractors in Iraq, not one has been prosecuted for an act of violence.

Violence by private militias is only one of the accountability issues raised by the government’s increasing use of private contractors in Iraq.  The government is simply unable or unwilling to adequately monitor a wide range of activities of private contractors, from reconstruction efforts to interrogations of suspected insurgents.   The result is not only unplanned violence, but general mismanagement, shoddy construction, and poor delivery of services. 

But there’s no doubt as why the use of private contractors holds such appeal to so many administrators in government.  As Gilmour and Jensen have pointed out:

…if private actors are not subject to the rules set for government action, delegating authority to private parties may allow the government to do through them what it cannot do itself.

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