Getting Smart at Being Good...Are Companies Better Off for It?

By Unmesh Kher

T.J. Rodgers may be many things--tough taskmaster, Green Bay Packers fan--but reticent he is not. And if anything gets the pugnacious founder and CEO of Cypress Semiconductor talking, it's the notion that corporations ought to exist for more than the pursuit of profit. In the simplest terms, that idea--called corporate social responsibility, or CSR--invites companies to consider their impact on people and the planet on a par with their traditional quest for profit. Rodgers considers that bunk. Not that he opposes conscientious corporate conduct or occasional acts of charity. He's quick to point out that he and his company do quite a bit of both. "What I do criticize," he grumbles, "is the preachy and somewhat arrogant framework of philosophy that says, In order to be a good company, thou shalt do the following."

Rodgers isn't just being curmudgeonly. He and other critics believe that shareholders entrust managers with their investment solely to maximize long-term returns, not so those managers can use the proceeds to underwrite their urge to better the world. It is unclear how many of America's CEOs silently sympathize with Rodgers' views. But a large and rapidly growing number are neck deep in CSR initiatives, spending billions, tackling everything from AIDS in Africa to deforestation in Brazil. If anyone doubted that CSR has finally come of age in the U.S., they were probably set straight in October when Wal-Mart, the world's leading corporate bad guy in the eyes of a staggering range of social activists, claimed it had caught the bug. The $288 billion behemoth announced it would slash solid waste and greenhouse-gas emissions, invest $500 million a year in energy efficiency and offer better medical benefits to its 1.2 million U.S. employees. "We are going to do well by doing good," said CEO Lee Scott.

The jury may be out on Wal-Mart's motives, but the apparent conversion of such a bare-knuckled competitor raises a question: Could CSR be smart business? Are critics like Rodgers missing something? Rodgers has contributed significantly to the debate over the past decade, most recently when he was invited, with Nobel laureate Milton Friedman, to debate CSR with Whole Foods Market CEO John Mackey in the October issue of Reason magazine. Rodgers assailed the CSR-imbued philosophy that guides Whole Foods, calling it similar to those of Karl Marx and Ralph Nader. Mackey, an avowed libertarian, replied that his approach has brought a lot more wealth for Whole Foods' investors than the one embraced at Cypress, which, he noted, has struggled to be profitable. Indeed, though Cypress made a small profit in 2004, it booked losses in the three previous years.

It's hard to dismiss Mackey. He opened a shop in 1978 with a former girlfriend and $45,000 in capital and nurtured it into a FORTUNE 500 business that boasts 180 stores in North America and Britain. Its stock has soared from $4 to $145 in little more than a decade, and its sales of often pricey organic and ethically produced groceries pulled in $4.7 billion in its last fiscal year. All those profits, yet the company measures its performance by the value it creates for six stakeholders: its customers, its employees, its investors, its vendors, communities where it operates and the environments those operations affect. "The art of leadership," says Mackey, "is to balance different constituencies and try to create value for all."

That's why Whole Foods refuses to sell overfished marine life like Chilean sea bass. If the lobster industry doesn't start treating its catch more humanely by June, Whole Foods will stop stocking lobsters as well. The company contributes 5% of its profits to charity--a long-standing policy that has continued despite its 1992 debut on Wall Street. Last month it announced it would donate more than $570,000 to a foundation it helped establish to battle poverty in developing countries. The foundation will offer small loans to aspiring but poor entrepreneurs to set up such things as vegetable stands and small dairies in countries like Costa Rica and Peru, where Whole Foods buys some of its goods.

It doesn't sound like a profitable strategy. Yet more and more companies, pressured by activists and shareholders, are jumping on the do-gooder bandwagon. Some are finding that, done smartly, doing good can be good for business.

THINKING STRATEGICALLY

Many advocates of CSR argue that to make it work financially, a do-good plan needs to have some connection to the mission of the business. "Don't do it as a reputation-management tool," says Hannah Jones, vice president for corporate responsibility at Nike. "Do it because it genuinely contributes to your business strategy."

That approach doesn't endorse, for example, the generic philanthropy embraced by many corporations--well intentioned though it may be. Advocates of strategic responsibility argue that Ford Motor Co.'s support for the Susan G. Komen breast-cancer fund, for which it has raised $84 million over 11 years, doesn't make much business sense. "There isn't a real clear link, at least in my mind," says Kellie McElhaney, a business professor at the University of California, Berkeley, "between breast cancer and automobiles." After missing out on the early hybrid-car opportunity, which was seized by Toyota and Honda, McElhaney says Ford is now reallocating a growing portion of its CSR resources to alternative energy--something that makes good business sense.

Risk management is the clearest benefit of doing good. Nike knows something about that. The Oregon-based sneaker giant spent the 1990s batting away criticism for its dependence on foreign sweatshop labor. It became clear that the company was in trouble when Amnesty International postcards protesting the practice began arriving at Nike headquarters in the early 1990s. The campaign evolved into boycotts. Colleges dropped the brand from their athletic wear, and Nike spokesman Michael Jordan was put in the awkward position of calling on his sponsor to "do the right thing."

In an effort to get ahead of the protests, Nike in 1998 appointed its first CSR director. Last April it revealed how far it had traveled along the path to CSR redemption when it released a report in which chairman Philip Knight apologized for his laggardly response to the crisis in the 1990s. In an unprecedented move, Nike also laid bare not only the audits of its suppliers but also its entire supply chain. Nike has found that some of its suppliers still permit physical and verbal abuse of laborers, but its brand is once again glistening.

SECURING YOUR FUTURE

Doing the right thing doesn't only help protect the brand. It also can help secure future resources and markets. Consider the corporate response to the HIV pandemic. "AIDS is like a laser-guided missile targeting the most productive segments of economies and societies," says Trevor Neilsen, executive director of the Global Business Coalition Against HIV/ AIDS (gbc). The epidemic in emerging economies such as India and China, he notes, threatens the future health of global commerce. As many as 30% of the employees at certain mines in Africa are infected. The severity of the crisis has prompted mining giants like Anglo American and De Beers to get deeply involved in battling the disease, providing HIV medication to employees and their families and even surrounding communities. Neilsen says executives at firms that depend on raw materials coming from those mines need to be worried as well. "Even if you remove any moral consideration and look at it in pure business terms," he says, "spending a tiny sum to protect your supply chain will be good for your investors." Roughly 150 firms have joined GBC in the past 2 1/2 years to better coordinate the business response.

WINNING HEARTS AND MINDS

Proponents say CSR programs present opportunities to develop new markets. After Crest, a Procter & Gamble brand, started a national dental-health program for underserved kids in 2000, it gained 15% more of the Hispanic market it had targeted. Customers may pay extra for brands that speak to their conscience. Whole Foods' meteoric rise, despite the high cost of its specialty goods, is testament to that claim. "The relationship with the consumer has to be framed in an eloquent way," says Timberland CEO Jeffrey Swartz. "Whole Foods is the best company in the world at framing that conversation."

Surveys conducted by Neilsen's organization have found that nearly half of consumers earning more than $50,000 a year would pay 10% more for products to help fund corporate anti-AIDS initiatives. Estee Lauder subsidiary Aveda found its customers responsive to its experiments in the use of recycled materials in bottles and other containers. Although the measures upped packaging costs 56% from 2000 to 2004, Aveda's operating profits grew 26%. "Instead of treating social responsibility as a constraint," Aveda president Dominique Conseil says, "make it work for you as a stimulus. The bottom line responds nicely."

RAISING STANDARDS

The challenges posed by the drive to do good can spark innovation. A champion of corporate social activism, Swartz became concerned five years ago about toxic organic compounds in the cements used to bind different materials in shoes. The volatile chemicals are poisonous to laborers and bad for the environment. So he asked Timberland researchers to find a less toxic alternative to those adhesives. As it turned out, Nike, far along on its own journey to environmental responsibility (one that has made it the largest retail consumer of organic cotton), was way ahead in developing viable water-based cements and was willing to share its technology, as were some other firms.

Trouble was, the new glues cost three times as much. So Timberland's engineers cut the volume of the adhesive required to manufacture the boots enough to break even. "I can now make the fact-based case to the hardest-nosed engineer in the world that we've eliminated the volume of volatile organic compounds" without increasing costs, says Swartz. "That's not limousine liberal, not self-indulgent. It is hard-nosed business. That is the innovation we seek." When foreign vendors complain that water-based adhesives are too expensive, Swartz says, Timberland invites their engineers to its plant in the Dominican Republic and shows them how to cut costs.

INSPIRING THE WORKFORCE

Swartz would have pressed on even if he had failed to bring costs down. Why? Because the green glues added value to a brand worn by environmentally conscious outdoor enthusiasts. But there's another reason: the effect Swartz believes such socially responsible initiatives have on the rank and file of his company. That also accounts, in part, for why he has installed stringent fair-labor policies at Timberland's factories and those of its vendors in Asia, Eastern Europe and North Africa. Timberland does not allow workers to put in more than 60 hours a week--a rule that has provoked much grumbling abroad, where laborers often want to work more. (Swartz says that the policy is nonnegotiable and that he is not yet satisfied with the results.) In China the company has started funding skills training for women at its suppliers' plants. In Bangladesh it's working with CARE in Chittagong to provide microloans, health education and training to some 20,000 workers at one of its vendors, the YoungOne Co.

Those practices--arguably a drag on productivity--could all be construed as detrimental to shareholder interests. But Swartz sees in them a huge return on investment. That return is employee satisfaction--assuming that people like to work for companies that do good, a belief notoriously difficult to prove. (Citing internal surveys, Swartz says his employees identify strongly with the company's human-rights positions.) That reasoning also supports Timberland's current drive with actor Don Cheadle to raise awareness about the genocide raging in Darfur, Sudan. Although it doesn't cost the company much, the campaign could be dismissed as the sort of self-indulgent do-gooding or splashy p.r. drive that irritates some CSR activists as much as it does the movement's detractors. But Swartz sees a direct link between his policies and the productivity and creativity of his employees. "What we do is our jobs," he says. "But what we be is engaged citizens who happen to work for Timberland. And engaged citizens always come up with better business solutions, with better products."

Whole Foods' Mackey believes that people are far more inspired by their work when they feel it connects them to ideals that reach far beyond the bottom line. "We need to tap deeper into the purpose of business," he argues. "Teachers go to school with a deeper purpose--to educate young minds. Lawyers ... are not taught in law school that their job as a lawyer is to maximize billing for their firm. Law school preaches the ideas of fairness and justice. Every other profession has a deeper purpose to it. So does business, only it's been taught that it doesn't, that its only purpose is to maximize profits." Critics say, however, that when profit is the sole measure of performance, managers can be held eminently responsible. "In a nutshell, the problem with CSR," says Stephen Bainbridge, a corporate-law professor at the University of California, Los Angeles, "is that managers who are responsible to all of their constituencies are accountable to none."

To Cypress's Rodgers, all this talk about purpose higher than profit also seems like a Trojan horse for the eventual piling on of top-down government controls on commerce. The virtues touted by CSR, in his opinion, come just as easily if markets are left to run freely. Rodgers points to the initial public offering last month of Cypress's solar-power subsidiary, SunPower, and asserts that investors chipped in not to make an environmental statement but because they believe clean solar power is a potentially profitable enterprise. He is running a business, he notes, whose motivation is profit alone. In his mind, the long-term pursuit of profit necessitates socially responsible practices. "We practice and have always practiced good environmental standards because it's good business," says Rodgers. "The idea that you can pollute and get away with it is wrong. It doesn't work. It's bad business."

Funny enough, his position turns out to be not that far from that of many of his intellectual adversaries. Indeed, once you get past the ideology--Rodgers argues that advocates of corporate social responsibility are "negating capitalism and espousing socialism"--it isn't clear how much the standards CSR advocates seek to impose differ from those ostensibly supported by their opponents.

Liberals may argue that all that strategic thinking about social responsibility means companies' motives aren't sincere. But who cares? It is, after all, business's job to do business. At the same time, in a globalized economy, the problems faced by societies and corporations are undeniably converging. Investing in the former is often equivalent to securing the future of the latter. As GBC's Neilsen puts it, "Global issues have become the business of business." The question for companies and activists alike is how best to mine the opportunity.

With reporting by Laura A. Locke/ San Francisco, Kristin Kloberdanz/Chicago, Hillary Hylton/ Austin, Eli Sanders/Seattle