Psst…what’s the dirty word?

PROFIT! That’s the word. Not really. Despite all the hoopla that law makers across the world make – profit is the reason why an entrepreneur takes huge risks and the return that she gets is profits. You are already wondering -But, how much profit? The standard rule of higher the risk, higher the return applies.

Or, is it CSR (corporate social responsibility)? Over the years CSR has also become a mainstream business activity. Firms are investing ever more resources in public goods provision, and many companies reduce negative externalities below levels required by law. More than half of Fortune Global 250 firms now provide regular public statements exclusively discussing CSR, and approximately 10 percent of S&P 100 companies report in detail on CSR activities. More than one-third of large firms have voluntary external certifications for social and environmental standards, and nearly 11 percent of professionally managed U.S. investment was certified as socially responsible.

Economists take differing views on CSR and profits. Milton Friedman, a noted economist, said – “There is one and only one social responsibility of business — to use its resources and engage in activities designed to increase its profits.” On the other hand, Joseph Stiglitz the Nobel prize winning economist says “Whenever there are externalities–where the actions of an individual have impacts on others for which they do not pay, or for which they are not compensated–markets will not work well.”

These extreme views cause confusion. However, one could integrate both the views and show that profits and CSR are valuable in their own way.

A typology of CSR and profits has been developed in economics literature. This can be represented in a matrix depicted below.

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Friedman’s proposition is simplistic. Although costly, CSR can be part of an optimal firm strategy. Benefits accrue in form of increased reputation, greater customer interest in products etc.

1. If shareholders themselves care about social or environmental issues they would be happy to trade off monetary profits for CSR or may even incur losses by using their ownership in the firm to “do good” and channel corporate donations to needed areas. This provides for not for profit CSR.

2. Also, shareholder wealth maximisation may motivate CSR. This comes from the belief that shareholder value is maximised, if the value of all stakeholders is maximised. Hence by combining both private profit and social profit – profit maximisation (or, shareholder wealth maximisation) can occur.

3. Firms that combine profit maximisation with not-for-profit CSR can thrive in a competitive environment only if they are able to attract customers and employees that also value the other not for profit (CSR) goals. This works very well for strategic CSR.

Going back to where we started from, neither profits nor CSR is a dirty word. Both have their place in the sun and can coexist.

Article coauthored with Utkarsh Majmudar and originally published in Economic Times.

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