Corporate Social Responsibility Is Good Business Strategy

Lou Miller has owned and operated Big Apple Bagels in Apple Valley, Minnesota for the past eleven years. At the end of each day, she donates whatever bagels she has left over to a variety of non-profits, such as food shelves, veterans groups, and schools. While Lou can't say for sure whether the donations have significantly improved her bottom line, she does know that this small gesture of giving away excess food on a daily basis has generated good will for her business. Most importantly, to Lou, it just feels like the right thing to do.

Some business leaders believe that their only obligation is to their shareholders. The sole objective in business, these managers assert, is to improve profitability for the benefit of the owners of the firm. Increasingly, however, American consumers are rewarding businesses that see their mission more broadly. Many companies, big and small, are becoming aware of and acting upon an important economic reality: corporate social responsibility is good business strategy.

Corporate social responsibility (CSR) involves the array of steps that a company can take to contribute back to the community: philanthropy, product donations, volunteerism, cause-marketing (for example, providing business expertise to non-profit groups), and citizenship, especially around environmental sustainability. While it is no doubt more difficult to precisely measure return on investment for these types of activities, abundant data demonstrates the economic benefits of CSR. DePaul University conducted a study in 2002 that compared the performance of the 100 Best Corporate Citizens from Business Ethics magazine against the remainder of the S & P 500. In measurements such as sales growth, profit, and return on equity, the socially responsible companies exceeded the competition by ten percent.

A Time magazine article from September 2009, entitled "The Responsibility Revolution," cites a 2007 Goldman Sachs report that concluded that companies with a focus on sustainability outperformed the overall market, frequently by a significant margin. PricewaterhouseCoopers recently completed a study that showed a better return on assets for companies that reported sustainability information over those firms that did not share such data.

Time conducted a poll which showed that more than 60 percent of Americans have purchased organic products since January 2009. Almost 40 percent say that they bought products this year because of the social or political values of the company that sold the merchandise. Time says, "What we are discovering now, in the most uncertain economy since [the Great Depression], is that enlightened self-interest- call it a shared sense of responsibility- is good economics… We are starting to put our money where our ideals are."

Many organizations have long understood the importance of CSR. More than 30 years ago, 23 Minnesota companies formed the Keystone Program. Participating firms each contribute at least 2 percent of annual pre-tax earnings back into their communities. Today, there are more than 200 members of Keystone.

Target Corporation- a charter Keystone member as Dayton Hudson- contributes 5 percent of pre-tax earnings, in good times and in bad. I recently spoke with my friend and former colleague Gail Dorn, who was for many years the Vice President of Communications and Community Relations at Target.

Gail talked about the enduring culture and tradition of giving back at Target, and indicated there were many times when it would have been easy to cut the program. She recalled, "Analysts would challenge us, asking Why are you giving away 5 percent? [Target leadership] ignored their pleas. Even though a return on investment was difficult to measure, Target's community programs generated incredible good will. Our customers loved that we always took the extra step to become integrated in the community. This was particularly helpful in 1987 when Dayton Hudson sought public support to fend off a hostile takeover attempt."

Another mighty Minnesota corporation that appreciates the importance of CSR is the Best Buy Company. An article in the December 7, 2009 issue of Fortune magazine describes Best Buy's free recycling program. Since March, when Best Buy began offering free recycling of TVs, computers, and any other electronic gadgets, more than 25 million pounds of old devices have been turned in at Best Buy's 1004 U.S. store locations. Fortune says, "The company's massive recycling program seems expensive to run, until you look at all the benefits: a green reputation, a focus on service, and a fresh way to get customers into the stores. No wonder Best Buy has learned to love old TVs and eight-track tape players."

Best Buy's leadership understands that the take-back program will probably be, at best, a break-even proposition. Nevertheless, P & L consequences aside, Best Buy CEO Brian Dunn described how he feels when a customer drops off an old TV set: "I'm happy because it helps make the connection between Best Buy and the customer and the community."

Sometimes, financial outcomes are not the most important consideration in business.

Small and medium-sized companies should take heed of the responsibility revolution as well. Time points out that shoppers consider not only the nature of the product they buy, but where it came from. More than 80 percent of consumers say they have deliberately supported local and neighborhood businesses (like Big Apple Bagels) that demonstrate a corporate conscience and concern for the environment. Also, there are more than 250 socially responsible investment mutual funds (consisting generally of companies that do not profit from tobacco, oil, or child labor), that today manage approximately $2.7 trillion in wealth.

Time concludes, "… Americans are recalibrating our sense of what it means to be a citizen, not just through voting or volunteering, but also through commerce: by what we buy… That's evidence of a changing mind-set, a new kind of social contract among consumers, business, and government. We are seeing the rise of the citizen consumer- and the beginning of a responsibility revolution." Indeed, smart companies today have seen the future and are taking action. These companies know that corporate social responsibility is good business strategy.

Be Aware of Cognitive Roadblocks to Good Decision Making

Perhaps the most important skill of an effective business leader is the ability to make good decisions. Yet as leaders we are susceptible to cognitive biases that can hinder the decision making process. Cognitive biases are simply distortions in our perception of reality that can occur when we use traditional shortcuts to help us make choices. Most of the time, shortcuts allow us to arrive efficiently at a good decision. Sometimes, however, making choices in the most economical manner based on familiar rules of thumb is not the right thing to do. Even competent, knowledgeable, and experienced business leaders can get caught up in this trap. Because we are human, we will never completely overcome our natural biases, but we can learn to make better choices by simply being aware of cognitive roadblocks to good decision making.

Cognitive biases can take many forms, but in the case of the Mount Everest tragedy of 1996, three types of bias contributed significantly to a disaster in which two expeditions were trapped in a storm near the top of the mountain and five people died. Those cognitive biases are:
• The overconfidence bias
• The sunk-cost or escalation of commitment bias
• The recency effect

In May 1996, two commercial expeditions consisting of customers who paid up to $65,000 each to be professionally guided to the summit of Everest (the world's tallest peak) became trapped in a blizzard high on the mountain. This tragic event was immortalized in Jon Krakauer's famous best-seller, Into Thin Air (Krakauer, a journalist, accompanied one of the expeditions). Two of the world's best-known and most experienced mountaineers, Scott Fischer and Rob Hall, served as expedition leaders. In addition to the financial outlay, the effort to reach the summit of Everest requires a huge time commitment; climbers must spend six weeks acclimatizing their bodies to the high altitude. The two teams established a series of base camps at ever-increasing heights, and then embarked on an arduous 18-hour round-trip to reach the summit. An unexpected and violent storm moved in, killing both Fischer and Hall, and three other climbers.

In a pamphlet entitled, The Art of Critical Decision Making, Professor Michael Roberto of Bryant University identifies the three primary cognitive biases that reared their ugly heads to contribute to the Everest disaster.

First, both Fischer and Hall demonstrated the overconfidence bias. Research shows that human beings have a consistent tendency to be overly optimistic. For example, even experienced physicians tend to be unrealistically positive in their diagnoses. In talking about Everest, Scott Fischer said, "We've got the Big E completely figured out, we've got it totally wired. These days, I'm telling you, we've built a yellow brick road to the summit." Other members of the team became cocky as well. Jon Krakauer described several of the highly inexperienced amateur climbers as so overconfident in their own abilities as to be "clinically delusional."

The second cognitive bias is the sunk-cost effect. A rational actor makes choices based on the marginal cost of pursuing one choice over another. In contrast, the sunk-cost effect causes people to continue in a sometimes disastrous course of action in which they have invested significant time, money, and/or effort. On Everest, expedition members refused to allow their huge financial expenditure and many weeks of herculean effort to be for nothing. With the blessing of their leaders, they pushed ahead to the summit, even in violation of well-established turnaround times. A number of climbers reached the top too late in the afternoon, and were forced to descend the mountain while negotiating a furious storm in the dark.

Another common term for this same basic phenomenon is the escalation of commitment bias. Consider America's experience in Vietnam, or the current debate about Afghanistan. We have spent eight hard years fighting in that troubled country at great cost in blood and treasure. To be sure, all of our choices there are tough ones. Yet the argument still centers not on whether we should withdraw, pursue a different strategy, or otherwise cut our losses, but rather at what level we will continue the effort.

The final cognitive bias is the recency effect, which simply refers to the tendency to place a disproportionate value on information obtained recently. This data is most salient to us, but can cause us to overlook other relevant information. On Everest, team leaders were fooled by a string of years in which good weather had prevailed on the mountain. One commentator said, "Season after season, Rob [Hall] had brilliant weather on summit day. He'd never been caught in a storm high on the mountain." No one prepared for the worst case scenario. Disaster resulted because of this failure on the part of leadership to consider ample data that demonstrated that in past years, deadly storms had been a common occurrence on Everest.

Think about your own decision making as a business leader. Have you ever allowed overconfidence, sunk-costs, or recency to sway your mind one way or the other? Don't be too hard on yourself if the answer is yes. Despite what economists would have us believe, none of us are perfectly rational actors. We all occasionally yield to a lifetime of biases. Nevertheless, we can improve our decision making if we develop the self-knowledge to be aware of these tendencies and, wherever possible, to overcome them.