Two Views of Virtue

The corporate social responsiblity movement is picking up steam. Should you worry about it?

Corporate social responsibility (CSR), the idea that companies have obligations not just to their investors but also to their stakeholders, society, and the environment, is hot. A recent Google search turned up 4,680,000 hits for the phrase, compared with 2,340,000 hits for “shareholder value.” Here and abroad, consumers, nongovernmental organizations, and socially responsible investors are prodding companies to pursue a variety of social and environmental goals.

At the same time, CSR has provoked a backlash. Critics denounce the idea as wrongheaded or worse, and some argue that companies should focus narrowly on maximizing shareholder value.

What does the sound and fury over CSR signify? Does it truly herald a sea-change in corporate priorities? Two experts who published books on the subject in 2005 offer very different answers to these questions. One is Steven D. Lydenberg, chief investment officer of Domini Social Investments, a prominent socially responsible investing (SRI) firm. His book, Corporations and the Public Interest: Guiding the Invisible Hand, proposes strategies for making CSR an essential part of corporate management.

The other expert is David Vogel, a professor of business ethics at the University of California’s Haas School of Business. Vogel is deeply skeptical of CSR, and his book, The Market for Virtue: The Potential and Limits of Corporate Social Responsibility, is a thoroughgoing critique of CSR’s assumptions and influence. CFO recently interviewed Lydenberg and Vogel about the future of CSR, and here is some of what they had to say.

Creating Long-Term Wealth

For Lydenberg, CSR is “a major secular development, driven by a long-term reevaluation of the role of corporations in society.” This reevaluation, he says, is clearer in Europe, where it is commonly assumed that companies have duties to stakeholders as well as shareholders. U.S. managers may be wary of this assumption, “but I think that [the European] influence will be very hard to resist over the long run,” says Lydenberg.

European institutional investors are leading the way. National pension funds in Sweden and Denmark “now have what I would call social and environmental screens,” says Lydenberg. Two large pension funds in the Netherlands have pilot investment programs with environmental screens, while France’s state pension reserve fund is incorporating social and environmental issues in some investments.

Socially responsible investing in the United States has been driven primarily by the retail sector, notes Lydenberg, but institutions are getting involved. Last year, for example, the California Public Employees Retirement System agreed to invest up to $500 million in environmentally screened stock funds. And in July, financial-services giant Wells Fargo & Co. announced it would provide at least $1 billion over the next five years to environmentally beneficial business opportunities. These are relatively small sums, but Lydenberg believes that institutional SRI may snowball.

An “immensely influential” development on the horizon, says Lydenberg, is guidance from the International Organization for Standardization (ISO) for implementing CSR programs. Similar to the ISO 9000 standard for quality, the ISO 26000 standard for social responsibility is due out in 2008. There is a general expectation, says Lydenberg, that companies concerned with sustainability issues will adopt the standard and ask their suppliers and vendors to follow suit.

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