Doing Well by Doing Good: A Look at the Academic Research

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Doing Well by Doing GoodA Look at the Academic
Research

• Joshua D. Margolis James P. Walsh
• Harvard University University of Michigan

Council on Foundations Corporate Grantmakers
Summit June 11, 2003
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Outline

• Characters
• Tension
• Resolution
• Preview
• Critics Corner
• Sequel

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Exercise

• What is the most surprising project you fund
• the project that you would least expect to find
• among your foundations portfolio of projects?

• How did you get involved in funding that project?

• Share with two people at your table.

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1. The Characters

• Calls for Help
• v.s.
• Economic Theory of the Business Corporation

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Protagonists Calls for Help

• Mary Robinson, UN High Commissioner for Human
  Rights
• November 4, 1999
• Address to Business for Social Responsibility
• The Problem
• 3 billion people today live on less than 2.00
  per day.
• 1.3 billion people today live without access to
  clean water.
• This year 12 million children under age 5 will
  die from preventable disease.
• In far too many parts of the world today, girls
  have no access to primary education.
• The growth in real income for the people of
  Sub-Saharan Africa was 28.00 between 1960 and
  1995.
• The gap between rich and poor countries doubled
  between 1940 and 1990. . . and it has increased
  within countries as well

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Protagonists Calls for Help

• Mary Robinson, UN High Commissioner for Human
  Rights
• November 4, 1999
• Address to Business for Social Responsibility
• The Solution
• Government has the primary responsibility to
  solve these problems.
• Business should not take over the role of
  government.
• Nonetheless, companies must develop policies and
  practices that affect human rights directly
• Attend to triple bottom line economics,
  environment, social impact
• Adhere at least to minimum labor standards
• Use distribution channels for food, medicine,
  building materials
• Use information technology to improve access to
  information
• Offer products to the developing world

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Protagonists Calls for Help

• Kofi Annan, UN Secretary General
• June 1, 2001
• Address to United States Chamber of Commerce
• By joining the global fight against HIV/AIDS,
  your business will see benefits on its bottom
  line. You will see direct benefits, such as
  protecting investment and reducing risk. And you
  will make less tangible, but no less important
  gains in assets such as reputation and customer
  loyalty.
• But even though HIV/AIDS poses a huge economic
  threat, it is, first and foremost, a humanitarian
  imperative. In fact, there is a happy
  convergence between what your shareholders pay
  you for, and what is best for millions of people
  the world over.

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Protagonists Calls for Help

• Presidents Bush and Clinton
• Legislatures Courts
• NGOs (47 sets of standards)
• Charitable Foundations (Ford, Sloan)
• Academic Superstars

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Antagonists Economic Theory

• 3 Versions
• Companies already maximize social welfare
• Redressing social ills is theft and usurpation
• Foolish and irrelevant. . .but okay (as long as
  disclosed)
• 3 Concerns
• Misappropriation
• Misallocation
• Defalcation/Malfeasance

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• Problem Does Not Exist
• 200 years worth of work in economics and
  finance indicate that social welfare is maximized
  when all firms in an economy maximize total firm
  value.
• --M. Jensen. 2002. Value maximization,
  stakeholder theory, and the corporate objective
  function. Business Ethics Quarterly, 12 239.
• Theft and Subversion
• What it amounts to is an assertion that those
  who favor the taxes and expenditures in question
  have failed to persuade a majority of their
  fellow citizens to be of like mind and that they
  are seeking to attain by undemocratic procedures
  what they cannot attain by democratic
  procedures.
• --M. Friedman. 1970. The social responsibility
  of business is to increase its profits. New York
  Times Magazine, September 13 124.
• Caveat Emptor
• What is the goal of the corporation? Is it
  profit, and for whom? Is there anything wrong
  with company charity? Should corporations try to
  maximize profit over the long run or the short
  run? Our response to such questions is who
  cares? If the New York Times is formed to
  publish a newspaper first and make a profit
  second, no one should be allowed to object.
  Those who came in at the beginning consented, and
  those who came later bought stock the price of
  which reflected the corporations tempered
  commitment to a profit objective. . . . One
  thing that cannot survive is systematic efforts
  to fool participants.
• --F. Easterbrook D. Fischel. 1991. The
  Economic Structure of Corporate Law. Cambridge,
  MA Harvard University Press 35-37.

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2. The Tension

• How to enact humanitarian concerns where
  economic rationale and unforgiving competitive
  forces reign?

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3. The Resolution

• Can Kofi Annans happy convergence be
  substantiated?

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The Costs of Bad Behavior

• Irresponsible and illegal behavior destroys
  shareholder value
• Jeff Frooman, 1997
• Meta-analysis of 27 event-studies (1981-1994)

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The Return on Virtuous Behavior

• Corporate virtue is likely to pay off
• Marc Orlitzky, Frank Schmidt, Sara Rynes, 2003
• Meta-analysis of 52 studies (1972-1997)
• Correlations with Financial Performance
• Social Environmental Performance .0776 to
  .3648
• Environmental Performance .0562 to .1246
• Social Performance .2301 to .4671
• Philanthropic Donations .1463 to .2907

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A Virtuous Cycle

• CSP and CFP mutually affect each other through
  a virtuous cycle financially successful
  companies spend more because they can afford it,
  but CSP also helps them become a bit more
  successful.
• -- Orlitzky, Schmidt, Rynes, 2003 424

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CSP-CFP (1972-2000)Observation Publication
Years
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CSP-CFP (1972-2002)An Overview of Results
Revealed in 122 Studies
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Summary

• Resolution corporate social performance does
  not systematically destroy value. . .and it may
  even create value for shareholders.

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Some Cautions Concerns

• Shortcomings of prior studies
• Methodological
• Sampling
• Controls
• Timing
• Measures of CFP CSP
• Theoretical Defining CSP
• there are no definitions that provide a
  framework or model for the systematic collection,
  organization, and analysis of corporate data
• --M. Clarkson, Academy of Management Review,
  1995

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4. Preview What Explains the Link between CSP
and CFP?

• Reputation
• Attraction, Retention, and Morale
• Short-term Cost, Long-term Investment

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5. Critics Corner Challenges

• Challenge 1 Is this the motivation and return
  we want?
• Challenge 2 Could the resources be put to
  even more lucrative uses?
• Does 1 spent on philanthropy or other forms of
  CSP provide a greater return than 1 spent on
  something else?

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Irreconcilable Differences

• Is this a conflict over values masquerading as a
  research dispute?
• Disagreements rooted in values should be
  profoundly resistant to change. . . .
  Libertarian conservatives might oppose the
  (confiscatory) stakeholder model even when
  confronted by evidence that concessions in this
  direction have no adverse effects on
  profitability to shareholders. Expropriation is
  expropriation, no matter how prettified. And
  some egalitarians might well endorse the
  stakeholder model, even if shown compelling
  evidence that it reduces profits. Academics who
  rely on evidence-based appeals to change minds
  when the disagreements are rooted in values may
  be wasting everyones time.
• -- P. Tetlock. 2000. Administrative Science
  Quarterly, 45(2) 323.

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5. Critics Corner Open Questions

• Problem 1 What if it does not pay?
• Divestment from South Africa (Meznar, Nigh,
  Kwok, 1994)
• Diversifying boards of directors (Carleton,
  Nelson, Weisbach, 1998)
• Problem 2 If you are going to devote resources
  to philanthropy and CSP, what guides your
  action in practice?
• Whether to respond to this particular situation?
• What to do what the content of the response
  should be?
• How to act how to respond appropriately and
  effectively?

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6. Sequel Dawning of a New Era?

• Companies are designed to advance economic
  purposes
• Creating wealth
• Producing delivering goods and services in a
  manner that conserves resources
• Serving material welfare
• Companies reside in a world where
• Human welfare, human rights, human development,
  and the natural environment are threatened
• Companies are sometimes best positioned to
  redress these problems, and sometimes they are
  the last resort

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Dawning of a New Era?

• Were trained as businessmen. . .but were
  being asked to pass judgment on the moral and
  ethical value of these projects.
• --David Komansky, Chairman,Merrill Lynch,
• commenting on Three Gorges Dam
• 2002 World Economic Forum
• Bobby Danchin, head of exploration and
  acquisitions at Anglo American, says he spends
  10-15 of his time worrying about environmental
  and humanitarian rights issues, up from 1 a
  decade ago. He reckons that such concerns add
  about 5 to operating costs.
• --Business in Difficult Places,
• The Economist, May 20, 2000 85-88

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Guiding Questions of the New Era

• Are companies committed to contributing to the
  health of society?
• Are companies wisely using the resources with
  which they are entrusted?

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Thank You.

• Feedback, criticism, comments are welcomed
• jmargolis_at_hbs.edu