Originally published October 2008
In this essay, Amy Domini discusses how investor demand for ethical practices has shifted the idea of corporate social responsibility from solely focusing on profit to considering environmental and social factors. Amy emphasizes the importance of accountability and proactive engagement from CEOs in addressing these concerns.
In 1970, The New York Times Magazine published an article by economist, Milton Friedman, the title of which elegantly summarized its most salient point: “The Social Responsibility of Business Is to Increase Its Profits.” In the years since, he and many others have continued to assert that there’s no need for investors to consider social and environmental factors, adding that the misguided pursuit of “corporate social responsibility” completely missed the point of free-market capitalism.
Though “free market” ideologues continue to make this argument, the business world has changed markedly. It’s widely accepted these days that corporate social responsibility (a concept so institutionalized it’s known by its acronym: CSR) involves far more than maximizing earnings. This change has come about mainly because investors have begun to consider social and environmental factors seriously when they make their investment decisions.
Like so many people, I prefer to invest in companies whose business practices promote human dignity and environmental protection. We do this because companies that respect the environment and their employees tend to be well-managed, and over the long term this can translate into strong financial performance.
Every business has an impact far beyond the CEO’s office and faces a multitude of decisions relating to social and environmental issues. When investors incorporate that impact, we build an infrastructure for understanding and evaluating corporate behavior.
But this isn’t a passive process of evaluation. By asking the hard questions and communicating with companies about the ways we expect them to behave, we help redefine the role they play in our society.
When communities were devastated because of decisions made by executives in the past, protests and fines often prompted action. But did those executives hear from their shareholders—their bosses? No. Shareholders only asked how much money they made that quarter.
Social investors are now setting the standard for social and environmental reporting and performance, much as an earlier generation of analysts set expectations and created standards for corporate financial reporting. Today, thousands of companies around the world respond to our questions about their business decisions. They publish CSR reports, maintain websites touting their ethics, and provide data to back up their claims.
Many would say this is simply public relations, or “greenwashing.” And some of it is. But these reports are also something far more important. They’re conversation- starters. They’re accountability tools.
When a CEO signs off on a financial report, she asks questions. “Why did our numbers improve here, but not here? What will next year’s report look like? Can we do better next time?” If she doesn’t ask, there’s sure to be a member of the board, or an angry shareholder, who will.
Every time a CEO signs off on a sustainability report, you can be sure the same kinds of questions are being asked. “What can I tell the press about this child labor violation on page 23? How do I explain this decrease in toxic emissions to analysts? Can we double that next year?”
Milton Friedman, who died in 1996 at the age of 94, lived long enough to observe, if not appreciate, a sea of change in corporate culture. After all these years, smart companies came to understand that the social responsibility of business means so much more than increasing profits. Shareholders are asking the companies the way they treat people and the planet. And if CEOs don’t they’ll hear about it.
By asking the hard questions and communicating with companies about the ways we expect them to behave, we help redefine the role they play in our society.