The concept of corporate social responsibility [CSR] is gaining increasing attention from the public and corporate executives. The worldwide financial crisis – punctuated by events such as the Madoff scandal — is intensifying that interest. But is CSR just the latest trend in a long line of soon-to-be-discarded business acronyms? Or, is it instead a new management paradigm destined for a long shelf life? Joaquín Garralda, professor of strategy at Spain’s IE Business School and director of the PwC-IE Center for Corporate Responsibility, is the author of the book Toward the Reasonable Corporation, in which he offers an overall perspective on and an analytic model for CSR. In an interview with Universia Knowledge at Wharton, Garralda shares his views on how companies can achieve the sort of CSR that goes beyond business as usual.
Universia-Knowledge at Wharton: One of the leading debates in business today is whether corporate social responsibility is merely a fashionable trend or, instead, is becoming a core guiding principle for management. What are the basic arguments behind the two views? What is your view in that regard?
Joaquín Garralda: The main point made by opponents of CSR is that it is just a fashionable trend that will disappear — and because of the current economic crisis, it will disappear sooner rather than later. That view rests on the notion that the marketplace is the appropriate mechanism for efficiently allocating the resources of any country. If everything is going to work well, companies must adopt an approach based on maximizing profitability. This [focus on profitability] is the proposition on which the company has been established, and if a company provides a high-quality product that is in demand, fulfills it commitments to laws and regulations and it pays its taxes, then that company is already fulfilling its social mission. When it comes to improving social welfare, either the government or non-profit organizations should take care of that [according to this view]. On the other hand, those who argue that CSR is becoming a management principle for all companies argue as follows: First, companies must respond to the expectations of society in order to “win their license to operate.” Second, whenever CSR is well focused, it can improve financial results.
My view is that in the short and medium term, CSR is going to be a managerial principle in some sectors because of certain structural characteristics. Long term, I realize it is hard to guarantee just when this is going to start — we can be as dramatic as Keynes, who affirmed “over the long term, we are all going to be dead.” Yet I believe that CSR will become a managerial principle for every company in developed markets, regardless of sector or company size. In poor countries, and in those with social systems that are influenced a great deal by religion or autocratic ideology, this ‘long-term’ future may never arrive, so long as current conditions remain the same.
UKnowledge at Wharton: When you devote a part of your budget to CSR, is it an expense or an investment?
Garralda: Following up on my previous argument, in some sectors it can be an expense because it is very hard to evaluate the positive impact on a company’s profitability. But in some sectors, it is an investment and to the degree that CSR is executed in a pioneering way, it will have a more positive impact on profitability.
UKnowledge at Wharton: What differences exist between big companies and smaller ones [when it comes to CSR]? For example, should codes of good governance only involve publicly traded companies? Are other kinds of companies exempt from questions of responsibility?
Garralda: Clearly, big companies have more media exposure and they have a greater responsibility because of the impact that their activities can have. Nevertheless, in some market sectors, including small and midsize companies, other companies must enact CSR initiatives. Good governance codes are mandatory for companies whose shares are traded on the stock market, so strict fulfillment of these codes is not really CSR, which has the intrinsic characteristic of being voluntary. As for smaller companies, if they decide to be more transparent in their governance and they communicate that point voluntarily, that is a CSR measure and it can have a very positive effect, depending on the circumstances.
UKnowledge at Wharton: What is the biggest challenge facing CSR during this full-blown global economic recession?
Garralda: Pessimists believe that CSR is going to disappear because they view it as an arbitrary expense that has no impact on business results. Optimists believe that the recession is going to strengthen CSR because society feels more strongly that companies need to manage their operations under this paradigm if they don’t want to disappear. My view is that, generally speaking, budgets for corporate sponsorship and patronage are going to be reduced a great deal. But from the viewpoint of companies that had already taken steps to integrate CSR into their daily practices, I don’t believe that they will take many steps backward. Although companies might refine [these techniques] more, they are not going to forget the positive effects that CSR has had in many situations. Of course, for those companies that had not already begun to enact CSR practices before the crisis, or who only viewed them as an altruistic social activity, they are now going to find arguments that are strong enough to delay any decision to introduce CSR principles into their management practices.
UKnowledge at Wharton: Who decides within a company how to devote resources to CSR? Must it be the managers, the shareholders, the customers?
Garralda: Naturally, without the support of management, CSR remains something is sporadic and is known for being [simply] “generous.” It is carried out in an anecdotal [rather than systematic] way. So, it is understood that it takes senior executives to decide to enact CSR [systematically], which is a logical within a hierarchical structure. But we should ask ourselves: Who provides the impetus for CSR? In some cases, it is customers who have promoted the process within the company. In other cases, although this happens less often, employees begin [CSR] by taking small initiatives that catch on deep within the organization, and then win the support of managers – weakly at first, and then decisively – because of their measurable impact bottom-line results at the company. Nowadays, shareholders are not [typically] the group that suddenly initiate these kinds of measures. The may ultimately support them or view them with curiosity, but the decisions don’t often come from them. There are some [investment] funds that carry out shareholder activism but they have only limited influence. Nowadays, if a business leader — owner or corporate manager — has values that strongly support CSR, it is very likely that from the birth of the company – or from the point when the manager took control of a company he inherited – he will carry out CSR — even though at the time he introduced the concepts he didn’t know about the term “CSR.” Just like [the title character in] Moliere’s “The Bourgeois Gentleman,” he has now discovered that he was “talking in prose” [practicing CSR without knowing that it was called “CSR”].
UKnowledge at Wharton: Does a company need to be making money with CSR?
Garralda: Experts recommend that CSR initiatives be “sustainable.” The question is whether you need to find a way to derive the maximum benefit from CSR. In that regard, it is very hard to determine a fixed time period for getting a [financial] return, and to evaluate its profitability. There is still uncertainty about this sort of measure when it comes to obtaining results. The ultimate impact can wind up being “nebulous” in the sense that it combines aspects of intangibles – reputation and improved relationships with interest groups [some of which are critical for regulators].
UKnowledge at Wharton: What is the current condition of CSR in Spain, compared with its European neighbors and with Latin America?
Garralda: We [in Spain] began later than other advanced European countries such as the United Kingdom and France but we did so with great enthusiasm. At least when it comes to communications, we can draw conclusion drawn from the fact that we are the leaders in sustainability reports that reflect the principles of the Global Reporting Initiative. As for Latin America, generally speaking it is still focused on the philanthropic view of social action, although it must be emphasized that Brazil plays an important leadership role in this area.
UKnowledge at Wharton: What might be the repercussions on CSR of the most recent American financial scandals, such as the Madoff case? Could there be a trend toward greater regulatory imposition of CSR? In the U.S., companies must comply with SEC [the Securities and Exchange Commission] regulations, and those norms are not voluntary in Europe either. However, that didn’t prevent this new case of fraud.
Garralda: Logically, after the way things happened in earlier cases [such as Enron and Parmalat], controls will be strengthened and regulations will become more demanding. However, these regulations cannot cover all of the existing options for CSR, and CSR measures are going to be established in innovative ways. So, while [mandatory] regulations will expand, there will always be some room for CSR measures. The catch is that these [CSR initiatives] don’t wind up “substituting” for the government. And from the viewpoint of public opinion, social expectations about CSR will become even more sensitive [in part because of the economic crisis].
UKnowledge at Wharton: How much time do companies need for their CSR practices to mature? Who needs more time?
Garralda: Several factors facilitate the integration of CSR into management practices, including the system of corporate governance, the leadership of managers, and the business culture. In some cases, the integration process can be very quick — between two and three years. But in other cases, it is very hard to complete the process, especially when the managerial leadership remains the same.