“Is it naïve to expect corporations to assist in addressing the social, economic and environmental challenges of the day?”(1)
Eduardo Porter posed this question in a column he wrote for the New York Times recently. The column lays out a chronology of corporate attitudes about the obligation to produce positive social impact as part of ordinary business operations, starting at the turn of the 20th century. What might surprise most of us is that among some of the largest corporations at the time (e.g., Eastman Kodak, Ford) concern for the well-being of employees and, more generally, the American citizenry was not considered to be at odds with corporate success. After World War II, the ethos of a successful corporate America and the good of the country became even more entwined. What was good for General Motors was good for America and vice versa.
Porter identifies the ascendancy of Milton Friedman’s economic theories as the signal development that transformed prevailing notions of the purpose of the organization. “The social responsibility of business is to increase profits….For executives to devote resources to anything else would amount to doing charity with other people’s money.” This new theory of the corporation arose at a time when globalization had begun to squeeze profits. Since then, destabilizing factors – macroeconomic, geopolitical, demographic – combined with the pressures of quarterly reporting have only reinforced this singular corporate focus on profitability.
Porter does acknowledge the rise of corporate social responsibility, noting the 7,000 plus companies that have signed on to the United Nations’ Global Compact on Human Rights, Labour, Environment and Anti-Corruption. He highlights big businesses that “appear to take a serious stand on broader social and environmental issues” such as Unilever, Costco and Novo Nordisk. But, he closes his column on a gloomy note, quoting Margaret Blair of Vanderbilt Law School: “’I don’t think we would get very far in addressing large social concerns if we left them to corporations,’ …The ethic of shareholder value is just too strong, and our social problems are just too big.’” Porter agrees. He believes that only elected governments, however imperfect, can address these issues. In my opinion, this either-or view of problem-solving is part of the problem itself. Workable solutions are unlikely to come from one place or the other. The solutions are more likely to have greater staying power if they are the result of joint initiatives. The drumbeat of change is growing louder and corporations are finding it increasingly hard to avoid the call to act in socially responsible ways.
Following are what I consider to be cases in point representing the many different pressures that are forcing corporations to take a more expansive view of what constitutes success. Delivering positive social impact through their core business operations is clearly a critical element in this new value equation.
Case in Point: Starbucks
Starbucks is a hipster company known for its progressive employee practices (healthcare, 401(k) matching, stock and tuition reimbursement for online degrees). Nevertheless, it gets to be the poster child for a New York Times cover story about how commonly used scheduling software subverts its workers attempts to construct stable lives. The story describes how the company uses “software that choreographs workers in precise, intricate ballets, using sales patterns and other data to determine which of its 130,000 baristas are needed in its thousands of locations and exactly when…Scheduling is now a powerful tool to bolster profits, allowing businesses to cut labor costs with a few keystrokes.”(2) Although the article notes that other retailers use this software, Starbucks gets pride of place.
The scheduling software is good for keeping costs in check and aligning workforce levels with customer demand. But it also makes it nearly impossible for many Starbucks employees to have a life outside of work because they don’t know when or how long they will be working on any given day. This makes it hard to budget for living expenses or make childcare arrangements, for example. The article presents the story of a sympathetic and heroic single mother’s attempts to care for her child as a way of anchoring the impact of these corporate practices in reality. Her plight conveys how the true costs of enjoying Starbucks products and environment are shifted onto its employees so that prices are kept in check for those who can afford a frappuccino. Society pays these extra costs – one way or another. But they are not priced into the cost of a frappuccino.
Starbucks would seem to be the polar opposite of Walmart – everyone else’s favorite corporate villain – but with great size comes great scrutiny and great social impact. There is no escaping it. Even if your company serves up coffee beverages that have been harvested in an eco- and socio-conscious way. Even if your company does many good things for its employees. If at the end of the day, your business lacks cohesive integrity – your company will be called to task.
[The day after this article appeared, Starbucks announced significant changes to its scheduling practices designed to “improve “stability and consistency” in work hours week to week.”(3)]
Case in Point: Nestle
“Nestle, one of the world’s largest food companies, is adopting animal welfare standards that will affect 7,300 of its suppliers across the globe,and their suppliers.” [Emphasis mine.] (4) On LinkedIn, my 500 plus direct contacts ostensibly link me to a network of more than 12.5 million, leveraging my direct contacts by a factor of 25,000. Even if Nestle’s suppliers are only leveraged by a factor of 100, this means that Nestle’s action could affect 7 million companies. What reason was given for this change and who made the announcement? The Chief Procurement Officer made the announcement and this is what he said, “In the digital world, everyone has a smartphone and they want to know where things come from and share that information…Is it good for me? Is the quality good? Has it been responsibly sourced.” The standards are wide-ranging. The company “…will not buy products derived from pigs raised in gestation stalls, chickens in barren battery cages, cattle that have been dehorned or had their tails docked without anesthesia and animals whose health has been damaged by drugs that promote growth.”
This matters more than you might think. My daughter is 17 and “Fast Food Nation” was one of her required summer reading books. Each day for the past month, over dinner, she has lamented what she has learned about how what she eats gets to our table. She is already a different kind of consumer. I quote from one her college essay responses: “Fast Food Nation changed the way I think about every piece of “food” I put into my mouth: from wondering about the way it was grown and processed, to the distance it traveled to the store, and whether its price means anything about how good it really is for me.”
Case in Point: Walgreens
Inversions – the clever tax strategy of acquiring a company based in a country with a more favorable corporate tax structure and then claiming that location as your headquarters. Good for shareholders, certainly. And in the not so distant past, it would have stopped there, perhaps even been lauded as a sharp move. But, oh what a stink it has caused. The President of the United States has publicly called companies that pursue this strategy “unpatriotic,” suggesting that they are renouncing their “citizenship” and skipping out on what they owe (their fair share) (5).
Walgreens was pilloried in the press for pursuing this strategy. After having secured corporate income tax credits and other incentives totaling close to $50 million from Illinois over a ten-year period and publicly declaring Walgreens’ pride in its Illinois heritage, after receiving close to $17 billion in revenue from Medicare and Medicaid at its Duane Reade chain in 2013, after benefiting from legislation in the Dodd-Frank Act that limited the fees banks can charge merchants for debit card transactions, the company was an easy target for groups that represent unions, tax fairness, consumers and American citizens.
Interestingly, part of the push for the company to undertake an inversion came from large investors, several of which were cited in a New York Times article that reported the story (6). The one with the most name-recognition, Goldman Sachs, tried to back away from its association with this strategy “…saying that it did not take a position at [a meeting of investors with the company to discuss this move].” What’s going on? Do corporate executives fail to grasp the complex environment in which their strategic moves will be evaluated? Even if 50% of them say that integrating sustainability into their core business processes is one of their top 3 priorities (7), they will need to use a far different kind of framework for translating this concept into practice than they are accustomed to.
Case in Point: The Financial Services Industry
Splashed on the front page of the Sunday New York Times during a particularly troubled time (Ukraine, Gaza/Israel, Syria, ISL, etc.) was a warning about a new wave of subprime lending – this time for autos. “Auto loans to people with tarnished credit have risen more than 130 percent in the five years since the immediate aftermath of the financial crisis, with roughly one in four new auto loans last year going to borrowers considered subprime….[Many of these loans] are bundled into complex bonds and sold as securities by banks to insurance companies, mutual funds and public pension funds…”(8) (Yes, you too could be holding some of this junk in your retirement savings account.) This time, the arcane investment structure was not buried in the business section or only being reported in the financial journals. It was front page investigative reporting in the Sunday paper. Why? The human cost, the social impact, is devastating. Loans with interest rates that can exceed 23 percent. Loans made on defective cars. Loans that can be twice the value of the car. Auto loans made to the most economically vulnerable people for whom missed payments can lead to bankruptcy.
Financial services companies mentioned in the article – Wells Fargo, Capital One, Santander Consumer USA, M&T Bank, BlackRock – all disavow any bad practices. But they are named alongside heartrending stories of people who have been forced into homelessness to keep up with car payments. The punch line? Rating agencies have assessed the quality of bonds backed by auto loans made to people who have been forced into bankruptcy as triple-A. “A large slice of …[this type of] bond is held in mutual funds managed by BlackRock, one of the world’s largest money managers.” Somehow the argument that these financial wizards make – that they are providing credit to those who could otherwise not get it falls flat. The convoluted chain that connects BlackRock’s mutual fund with a struggling schoolteacher who has been bankrupted by an auto loan is no longer too inconsequential or obscure to be considered newsworthy. The consequences of financial engineering reverberate in the real economy, doing real damage. There is less room to hide than ever before.
I recognize that these are a series of anecdotes and, as such, can only illustrate my point. However, I believe it is far from naïve to expect corporations to assume a more active role in addressing contemporary social, economic and environmental challenges. It’s plain to me that demonstrating how the business contributes to positive social impact is fast becoming a cost of doing business. For innovative corporations it will also become a source of value creation.
(1) “Motivating Corporations to Do Good,” Eduardo Porter, The New York Times, July 16, 2014
(2) “As Shifts Vary, Family’s Only Constant is Chaos,” Jodi Kantor, The New York Times, August 14, 2014
(3) “Starbucks to Revise Policies to End Irregular Schedules for Its 130,000 Baristas,” Jodi Kantor, sourced on 9/22/14 at: http://www.nytimes.com/2014/08/15/us/starbucks-to-revise-work-scheduling-policies.html?_r=0
(4) “Nestle Moves Toward Human Treatment of Animals at Its Suppliers,” Stephanie Strom, The New York Times, August 21, 2014
(5) “Overseas Tax Inversions are Unpatriotic,” Associated Press, July 26, 2014, sourced on 9/8/14 at: http://nypost.com/2014/07/26/overseas-tax-inversions-are-unpatriotic-obama/
(6) “Renouncing Corporate Citizenship,” Andrew Ross Sorkin, The New York Times, July 1, 2014
(7) “Sustainability’s strategic worth,” McKinsey Global Survey, Shelia Bonini and Anne-Titia Bové, McKinsey & Company, 2014.
(8) “Easy Credit, Hard to Repay, Exorbitant Rates in a Subprime Boom for Used Cars,” Jessica Silver-Greenberg and Michael Corkery, The New York Times, July 20, 2014