Three Laws of CSR

In most fields of inquiry or practice there are certain observable understandings that develop over time to become “laws.

There are many “laws” in business and just like those in physics you can pretty much rely on them to be true, and one can observe them or not at their own peril.

One of the most well-known is Murphy’s Law: If it can go wrong, it will go wrong.”

Another is the Peter Principle which states “in a hierarchy every employee tends to rise to his or her level of incompetence”

CSR is no exception, and after twenty years of working in this field, I have observed the following laws:

First Law of CSR – Profitability and CSR are Positively Correlated
Many of us have known for a long time that profitability and CSR are positively correlated.

In the early 1990s, social investment rating services often found companies with the best CSR performance literally had no idea that they were even practicing CSR! These firms were simply well run and a part of that meant treating labor well, avoiding environmental fines, having sound supply chains etc.

Today of course, much more is known about good CSR performance, and the proof can be found in long term performance measures including the outperformance of sustainability stock market indices. These indices bundle together the highest performing CSR firms on a stock exchange to form a stock index. Found in many countries including South Africa, Brazil, the US, England and recently Mexico, they have over the years consistently met or beat relevant comparator indices.

Second Law of CSR – Know Your Stakeholders
A company can’t even begin to maximize returns on CSR if they do not understand the needs and priorities of their stakeholders – internal and external.

Opportunities abound and dialoguing with stakeholders (not just clients) can generate numerous and substantial ideas for CSR improvements throughout a company and its product portfolio.

Likewise CSR related threats and risks are myriad, and those companies that engage stakeholders in a meaningful dialogue will either avoid potential problems altogether and/or will develop a certain amount of “social insurance” in the event something does go wrong. And in the age of the internet, you can bet that if something does go wrong, someone will be filming it and putting it on line.  Remember United Airlines about how friendly the internet can be. http://www.youtube.com/watch?v=5YGc4zOqozo.

Clear, authentic communications and feedback based on a solid understanding of stakeholder interests and needs is imperative if a company is to uncover millions of hidden value or avoid millions in risk.  A sustainability report, preferably in Global Reporting Initiative format, involving substantial stakeholder input is a vital part of any CSR communications.

Third Law of CSR – Crisis Leads to Regulation
If you do not follow Law Two, at some point there will be a CSR crisis resulting in legislation that will always be less favorable that proactive voluntary CSR. Do you want to be “Enroned” or BPed” or do you want to pursue the business advantages afforded by CSR?  Just ask financial sector leaders how much they like the proposed financial legislation winding its way through the US government.

Spending millions on litigation or lobbying may seem proactive and less expensive in the short run, but if companies took the time to measure the full value of CSR they may think of investing with different priorities (and imagine all the good and profitable activities using lobby funding for CSR initiatives; and imagine all the silly and bad things it would avoid).

Companies that focus energy and resources on building CSR value will always see that value grow over time.  The extractive industry, for example, has seen their voluntary code of conduct help companies avoid millions, even billions of stakeholder risk related costs while improving their positive contribution to the communities they are working in and of course to the environment. A new code and guide for doing business by the Global Compact in conflict countries, for example, will support the advance of human rights and better development of oil and mineral rich countries like Sudan and the Democratic Republic of Congo. Following guidelines voluntarily supports better strategy and can provide important license to operate insurance.  Even better, like the US trucking industry, get stakeholders to write great regulations themselves.

It is the Spirit of the Law and How You Measure it that Counts
I have spoken with executives and top business school professors the world round and, believe it or not, many still do not believe CSR is relevant past the doors of a company’s donation’s program.  Lack of vision invariably grows from the fact few companies have yet to provide shareholders compelling evidence that CSR can increase value and earnings and that it should be more seriously integrated into business strategy.

Poor strategic vision reminds me of another business law:  “if you can’t measure it, it doesn’t exist.” Now I have spent my entire career measuring things that were once thought un-measurable – business impact on poor people and communities, stakeholder risk and opportunity quotients, CSR contribution to brand value — and I know that it is possible to measure pretty much anything you want and, more importantly, I have learned “if you don’t measure it, you can’t manage it.”  CSR performance expectations are real and the pressure for good performance increases daily, so both measuring and managing appears not to be an option, but a necessity.

Unfortunately very few companies choose to measure to manage CSR value and returns in a systemic way and as a result fewer still have developed a strategic sustainability culture.

Observing the laws of CSR is simply not enough. Following the spirit of the laws by creating a sustainability culture is what truly generates powerful CSR gains and allows firms like Nike to replace expensive and harmful gas with actual air in their air cushions shoes; allows Starbucks to support coffee farmers and communities the world round; and Pfizer to make a business case for helping poor African get the medicines they need.

Go Straight to Jail – Or Not
Any company executive can take these laws as seriously as they like but they treat them as unimportant at their own risk.  Taking CSR seriously, as seriously as the physics the three laws suggest, will not only keep a company safe in the Sustainability Century it will maximize profitability and value enhancement too.