When Principles Pay

When Principles Pay: Corporate Social Responsibility and the Bottom Line

Geoffrey Heal
Copyright Date: 2008
Pages: 288
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  • Book Info
    When Principles Pay
    Book Description:

    Stories of predatory lending practices and the reckless destruction of the environment by greedy corporations dominate the news, suggesting that, in business, ethics and profit are incompatible pursuits. Yet some of the worst lenders are now bankrupt, and Toyota has enjoyed phenomenal success by positioning itself as the green car company par excellence. These trends suggest that antisocial corporate behavior has its costs, especially in terms of the stock market, which penalizes companies that have poor environmental track records and rewards more socially conscious brands.

    The political context of our economy is rapidly changing, particularly in regard to incentives that operate outside the marketplace in a strict and narrow sense and involve interactions between corporations and nongovernmental organizations (NGOs), activist groups, regulatory bodies, consumers, and civil society. These interactions can significantly color a corporation's alternatives, making socially or environmentally harmful behavior much less attractive. British Petroleum, for example, has voluntarily reduced its greenhouse gas emissions over the past ten years, Starbucks, has changed the environmental impact of its coffee production, and Nike and other footwear and textile makers now monitor the labor conditions of their subcontractors.

    When Principles Pay jumps headfirst into this engaging and vital issue, asking whether profit maximization and the generation of value for shareholders is compatible with policies that support social and environmental goals. Geoffrey Heal presents a comprehensive examination of how social and environmental performance affects a corporation's profitability and how the stock market reacts to a firm's social and environmental behavior. He looks at socially responsible investment (SRI), reviewing the evolution of the SRI industry and the quality of its returns. He also draws on studies conducted in a wide range of industries, from financials and pharmaceuticals to Wal-Mart and Monsanto, and focuses on the actions of corporations in poor countries. In conclusion, Heal analyzes how social and environmental performance fits into accounting and corporate strategy, presenting an executive perspective on the best way to develop and implement these aspects of a corporation's behavior.

    eISBN: 978-0-231-51293-0
    Subjects: Business

Table of Contents

  1. Front Matter
    (pp. i-vi)
  2. Table of Contents
    (pp. vii-x)
    (pp. xi-xvi)
  4. 1 Introduction
    (pp. 1-18)

    Companies face choices on environmental and social issues. They can worry about pollution or greenhouse gas emissions, or ignore them. Likewise, they can be concerned about employment conditions in third-world subcontractors, or neglect them. This book is about the incentives that they face in making these choices. Are there incentives that lead a corporation to minimize its environmental impact, or to take a stance that is supportive of minorities and of the less privileged members of society? Or are the forces that they face neutral on these issues or even oriented in the opposite directions? These questions matter. Corporations have...

  5. 2 Social, Environmental, and Financial Performance
    (pp. 19-46)

    A firm’s social and environmental performance can certainly affect its financial outcomes: the question is how. What is the mechanism at work here? Do social and environmental concerns reduce profits by diverting cash and attention from other more strategic issues, or do they help profits through other mechanisms? Responsible behavior can certainly be profitable. At the opposite extreme, seriously unethical behavior can decimate profits, or even lead to bankruptcy, as evidenced by Enron, Worldcom, Arthur Anderson, and many others. A more interesting and less obvious observation is that, within limits, more ethical behavior can add to profits, and that a...

  6. 3 Socially Responsible Investment
    (pp. 47-66)

    According to the Socially Responsible Investment forum, “socially responsible investing (SRI) is an investment process that considers the social and environmental consequences of investments, both positive and negative, within the context of rigorous financial analysis.” Mutual funds in their present form go back to 1924 when three Boston securities executives pooled their money to form the Massachusetts Investors Trust. As I noted before, the first SRI fund followed only four years later, when in 1928 evangelical Protestants founded the Pioneer Fund, which avoided investments in companies that made liquors, cigars, or cigarettes, with the idea of using investments as a...

  7. 4 Financial Institutions and Social and Environmental Performance
    (pp. 67-95)

    For financial institutions, external costs are typically not important and not a source of conflict with society. But for the clients of these institutions, this is not the case. Banks may finance companies involved in deforestation or polluting energy production and thus indirectly cause external costs. If aggrieved groups “follow the money,” they find a trail leading to banks and often point a finger at them, a process that has lead to the development of the Equator Principles (EP), one of the most interesting developments in the area of managing environmental impacts. Much of this chapter is about the Equator...

  8. 5 Pharmaceuticals and Corporate Responsibility
    (pp. 96-112)

    “We try never to forget that medicine is for the people. It is not for profits. The profits follow, and if we have remembered that they never fail to appear. The better we have remembered, the larger they have been.” These are the heartwarming words of George W. Merck, founder and past president of the eponymous pharmaceutical company. Heartwarming—but are they true? They imply that pharmaceutical companies do well (financially) by doing good (medically). There does seem to be truth in this.

    Certainly, they have done well: pharmaceutical companies are always among the most profitable, with rates of return...

  9. 6 Wal-Mart and Starbucks
    (pp. 113-136)

    Wal-Mart presents us with a paradox. It is one of the most admired companies in America, indeed in the world. It has been on Fortune Magazine’s list of the most admired for many years, and in 2003 and 2004 was top of that list, the most admired company in America two years running. Still regarded as one of the best companies in America to work for, it has morphed into one of the most hated even while continuing as one of the most admired. Wal-Mart even has its own NGOs devoted to harassing it and exposing its alleged failure. (See...

  10. 7 Interface and Monsanto
    (pp. 137-151)

    Interface is a carpet company. In fact, it is the largest such company in the world, selling 40 percent of all the carpet tiles used in commercial buildings in 110 countries around the world, with sales of about $900 million in 2004.¹ For a company founded only in 1974, this is an impressive achievement. The current CEO, Ray Anderson, was the founder: he established Interface as a joint venture between Carpets International Plc, a British company, and a group of American investors. Carpet tiles, Interface’s main product, are attractive to commercial users because they allow selective replacement: you can replace...

  11. 8 Outsourcing
    (pp. 152-175)

    Outsourcing is one of the most controversial and divisive topics on the contemporary political scene. American and European manufacturing companies commonly carry out much of their production in low-wage countries, through local subsidiaries or through independent companies specializing in products to be sold under Western brand names. In the press this practice is often referred to disparagingly as “exporting jobs.”

    Most garment and footwear manufacturers use overseas subcontractors to produce their goods, as do many makers of electronic devices. Indeed, in industries where labor costs are important, outsourcing is now virtually ubiquitous: for example, in the low- and medium-price categories,...

  12. 9 Getting Rich by Selling to the Poor
    (pp. 176-196)

    Those of us lucky enough to live in rich countries probably do not often consider the role of capital markets in our lives. Indeed, we may even be unaware that they play any role at all. Yet they do and it is a central one. Most of us have mortgages—large loans secured against our houses and paid back from future income over periods as long as thirty years. Allowing us to borrow against future income is a major role of capital markets. When we take out a mortgage is not the only time we do this: most consumer credit,...

  13. 10 Cell Phones and Development
    (pp. 197-207)

    We are so used to using the telephone that it requires a feat of imagination to think of life without phones and the services based on them, services that include faxes, e-mail, and Internet access. Without phones you would depend for communication on the vagaries of the postal system, or on personally visiting the people to whom you want to talk. The time and effort required to communicate would be many times greater than we are used to and would surely consume much of the day. Productivity would be less, because of the time spent in communicating and the impossibility...

  14. 11 Measuring Corporate Responsibility
    (pp. 208-224)

    There are people who measure corporate social and environmental performance for a living. I emphasize this because it might seem a rather intangible concept, interesting and intellectually important but nonetheless unquantifiable. This is not so: we encountered measures in Chapter 2, in reviewing empirical studies of the effect of corporate responsibility on corporate financial performance. Each of the studies reviewed there used a quantitative measure, more often than not of the environmental dimension. We also encountered there the work of companies like KLD Research and Analytics of Boston and Innovest Strategic Value Advisors of New York. Both sell comprehensive social...

  15. 12 Social and Environmental Policies and Corporate Strategy
    (pp. 225-235)

    How a company behaves on social and environmental issues can affect its financial performance. Senior executives responsible for financial performance therefore need to concern themselves with these matters. In this chapter, I present a framework for thinking about corporate responsibility from the executive’s perspective, tying together material from the earlier chapters to focus it on executive decisions, and ultimately on the place of social and environmental policies in a corporation’s overall business strategy.

    I want to start by emphasizing what social and environmental policies are not. They are not philanthropy, not public relations, and not marketing. All of these have...

  16. 13 Conclusions
    (pp. 236-246)

    We saw in Chapter 1 that divergences between corporate and social interests can occur naturally when external costs are associated with a firm’s activities, as in the case of pollution or greenhouse gas emission, or when the outcome of the activity is controversial because of its distributional implications, the classic example here being the use of low-wage labor in poor countries. In these cases, what is most profitable is not always most desirable from a social perspective. Companies will want to use polluting activities more than can be justified from a social perspective, or to pay wages that in spite...

  17. NOTES
    (pp. 247-262)
  18. INDEX
    (pp. 263-272)