While the principles and practices of corporate social responsibility date back more than a century, the current wave of public, business and academic interest in the subject is unprecedented.

Its contemporary importance is reflected in the number and size of social and ethical investment funds, the increase of voluntary codes of corporate conduct, and the number of companies that now report on their social and environmental practices. It is also evidenced by the mobilisation of non-governmental organisations to challenge corporate environmental and human rights practices, the frequency of consumer boycotts and protests, the number of third-party organisations that now monitor and report on corporate social and environmental performance and the emergence of various “ethical” brands and labels.

Equally important, corporate social responsibility has for the first time become a global phenomenon: its principles and practices have been embraced by business leaders in the US, Europe, Japan, and a number of developing countries.

For many observers, the growth of corporate social responsibility over the past decade signifies a major change in the conduct of global firms. According to this perspective, in order to maximise shareholder value in an increasingly transparent global marketplace, corporations must now behave more responsibly. Sophisticated managers increasingly recognise that corporate social responsibility makes business sense: it gives firms access to the capital of socially concerned investors, it prevents consumer boycotts and promotes brand loyalty, and it can help attract more motivated employees. In short, there is a market for virtue.

Belief in the business case

The belief that companies will behave more responsibly because corporate social responsibility pays has become very influential.

It underlies the business logic of social mutual funds and many corporate social responsibility consultancy services; it is the conclusion of numerous academic studies that correlate corporate profits and social performance; it is the theme of countless books on corporate social responsibility; it is espoused by numerous NGOs; it has been repeatedly endorsed by the EU and a number of European governments; and, perhaps most importantly, it is widely believed by executives.

The idea is attractive to many business students because it reassures them that they need not sacrifice their social goals when they enter the private sector. On the contrary, the firms for which they work can become more profitable if they behave more responsibly. It also appeals to many politicians, especially in Europe, since it provides a way for them to promote more responsible corporate conduct without having to impose additional regulations.

Unfortunately, the evidence in support of the business case for corporate social responsibility is weak. Certainly many relatively responsible firms have prospered. Such a list would include Starbucks, Nike, BP, Gap, Ikea, Seventh Generation and Johnson & Johnson. But there are at least an equally large number of relatively responsible firms that have recently found themselves in financial difficulty, including Marks & Spencer, Shell, Interface, Levi Strauss, Ben & Jerry’s, Merck, Hewlett Packard, and the Body Shop. Corporate social responsibility is neither a necessary nor a sufficient strategy for business success: there are numerous responsible firms that perform poorly and irresponsible firms that prosper.

For most firms most of the time, corporate social responsibility is irrelevant to their financial performance. On occasion, it may “count” – either positively or negatively – but its impact on corporate earnings is typically overshadowed by other business risks, opportunities and developments.

This explains why socially responsible funds have performed no better than any other kind of fund. It also helps account for the reluctance of mainstream financial analysts to take greater account of corporate social responsibility in making investment decisions. The fact that the typical analyst report on the financial prospects or performance of a firm rarely mentions anything to do with corporate social responsibility is a revealing indication of its continued unimportance to the financial markets.

Barring the way

An important factor that prevents the market for virtue from “clearing” is the limited demand for corporate social responsibility.

While most consumers and many investors and employees may claim that they prefer to buy from, invest in, and work for more responsible firms, few are prepared act on these beliefs. Very few consumers are willing to pay more for more-responsibly-produced products and the market share of ethical brands such as Fair Trade coffee, Rugmark or FSC wood products remains modest. And few companies have experienced sales losses because of consumer disapproval or their social or environmental policies.

While ethical funds have grown, they still constitute a very small percentage of total mutual fund assets in the US and Europe. Nor is there any systematic evidence that more responsible firms attract more motivated employees. Tellingly, for all the media attention devoted to CSR, few consumers, investors or employees can even identify the names of more than a handful of relatively responsible or irresponsible firms.

Unmeasurable bottom lines

Another important obstacle to civic pressures to improve corporate social conduct is the continuing difficulty of measuring, and thus assessing, responsible or irresponsible behaviour.

There are as many definitions of corporate social responsibility as there are ethical mutual funds, ranking services and NGOs. Notwithstanding all that has been written about the triple bottom line, no one has ever proposed a way of measuring the second and third bottom lines – environmental and social performance –with anywhere near the precision of the first – financial – bottom line.

Compounding this problem is that corporations, like individuals, do not typically exhibit morally consistent behaviours. Virtually all firms perform better, or worse, on some social and environmental dimensions than on others. This makes it difficult to assess or measure a corporation’s overall “virtue,” let alone improve it.

Does this mean that environmental and social should not be taken seriously? Not at all.

Corporate social responsibility is not just about more sophisticated corporate public relations. Those critics of business who claim that corporations cannot behave more responsibly in the absence of additional rules and regulations are misinformed.

The past decade has witnessed substantial improvements in the social and environmental behaviour of a number of global corporations. Many highly visible firms in the US and have assumed greater responsibility for improving working conditions in the factories in Asia and Central America that produce goods for them. The programmes of firms such as Starbucks, Sainsbury and Nestle have improved conditions for many agricultural workers. Many US and European global energy companies have made substantial efforts to avoid human rights abuses and improve their environmental practices in developing countries. In the US and Europe, more than 100 corporations have undertaken verifiable commitments to reduce their emissions of greenhouse gases.

These changes in corporate policies are important and the environmental and social movement can claim much of the credit for them. The practice of “naming and shaming”, along with the extensive scrutiny of corporate policies by NGOs, non-profit monitoring firms, ethical investment funds and socially oriented institutional investors have made a difference.

Sophisticated NGOs have taken advantage of the interests of many global firms in protecting their reputations to force them to broaden the scope of their responsibilities, especially with respect to human rights and environmental conditions in developing countries. Western activists have creatively stood the global economy on its head: they have used the emergence of global brands as a vehicle to embed global market forces in a complex network of private, market-based regulation, often accompanied by monitoring and reporting requirements.

Beyond capacity

Yet these voluntary initiatives, however commendable, do not herald a new era of responsible business practices. The fact that the business benefits of corporate social responsibility are largely intangible constrains the willingness of firms to devote resources to corporate social responsibility. The most important limitation to the market for virtue is the market itself: the supply of corporate virtue is constrained by the unwillingness of western consumers and investors to pay the additional costs of more virtuous corporate behaviour.

Since the market is largely incapable of identifying, let alone rewarding, relatively responsible firms and punishing less responsible ones, corporations do not have sufficient incentive to devote the resources needed to ameliorate the problems corporate social responsibility is intended to address.

In other cases, these problems are simply beyond the capacity of firms, acting either alone or collectively, to solve. Not surprisingly, substantial gaps remain between the promises of virtually all corporate and industry codes and actual business behaviour. And while some of these gaps may diminish over time, the long-term ability of voluntary standards to improve corporate performance is not promising.

To date, corporate codes have affected a relatively small number of factory workers in developing countries who produce goods for export. Even fewer agricultural workers have benefited from the commitments of some western companies to improve the conditions in which they work. The impact of corporate human rights policies has been limited by widespread corruption and civil strife in many developing countries with substantial natural resources. Corporate commitments to reduce emissions of greenhouse gases are far too modest to make measurable progress with the problem of global climate change.

The best should not be allowed to be the enemy of the better. Corporate social responsibility has made the world a better place. But little is to be gained by exaggerating its actual or potential impact. Pressures from civil society are only capable of forcing firms to internalise some of their externalities.

The most effective strategy for reconciling private business goals and public social purposes remains what it has always been, namely effective government regulation.

Regulation not only creates a level playing field for relatively responsible firms that cannot recoup the costs of their virtuous behaviour in the marketplace, but it represents the most effective way of forcing their less virtuous competitors to improve their social and environmental practices.

Too much writing on corporate social responsibility ignores the critical role of government in forcing companies to improve their behaviour. An important reason why the business case for corporate social responsibility is so popular among executives is that it fosters the illusion that corporate behaviour can be expected to steadily improve without also expanding the scope of government controls over business.

Partnerships the way forward

The definition of corporate social responsibility needs to be expanded to incorporate not only what corporations do voluntarily, but the position companies take with respect to public policy. A corporation should not be considered responsible if it voluntarily improves its own practices but opposes expansions of public authority that would require all firms to act more responsibly.

This is certainly a more realistic expectation in developed countries where governments are capable of effectively regulating firm behaviour – even in the face of business opposition.

It clearly poses a greater challenge in many developing countries where the rule of law is ineffective or non-existent. Indeed, much of the pressure on global firms to adopt corporate social responsibility policies emerged precisely as a response to the inability or unwillingness of many developing country governments to make and enforce laws that adequately protect their citizens and environment. Yet unless these governments become more effective, private initiatives, however well intended, will continue to have limited impact. This means that corporations must work with international institutions, western governments and both international and local NGOs to find ways of improving the effectiveness of developing country governments.

Corporate social responsibility illustrates many of the market’s virtues. It provides a vehicle for socially committed consumers, investors and employees to “vote” for their values in the marketplace and, on occasion, to change corporate behaviour. It can also encourage firms to develop creative and sometimes cost-effective ways of addressing various social problems. And it can reward responsible business practices and penalise irresponsible ones. For relatively profitable firms, corporate social responsibility can represent a commendable allocation of discretionary corporate resources.

Private or soft regulation does have a useful role to play in improving some aspects of the behaviour of some companies. In the short run, corporate social responsibility can be a useful supplement to government regulation, particularly in countries in which the latter is still ineffective. But it should not be regarded as a long-term substitute for the rule of law. Our challenge is to identify the ways in which both private and public regulation can complement each other to improve corporate performance. We need to recognise the potential of the market for virtue, as well as its limits.

David Vogel is professor at the Haas School of Business at the University of California, Berkeley. He is the author of “The Market For Virtue: The Potential and Limits of Corporate Social Responsibility” (Brookings, 2005). vogel@haas.berkeley.edu

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Ethical Corporation will host a conference on the subject of communicating values and CSR issues to consumers in London on November 22-23. For more details see: www.ethicalcorp.com/consumer