When CSR’s Not the Answer

Originally published July 31, 2012 in The Mark.

In the 1970s, the social responsibility of business amounted to little more than – as Milton Friedman famously asserted – increasing profits. Today, corporations are expected to do more, and governments and businesses alike are increasingly embracing corporate social responsibility (CSR). CSR can take many forms, but it is essentially a self-regulatory measure in which businesses give back to the community and adhere to some ethical standard.

In some cases, CSR has been remarkably successful in respecting workers, the environment, and economic growth. Adidas, for instance, is significantly cutting its water use by switching to “Better Cotton,” and has partnered with the Grameen Bank in Bangladesh to make low-cost shoes for the poor.

In other instances, however, CSR has failed to benefit society as a whole, acting instead as mere lip service in a regulatory vacuum.

CSR should not be seen as a panacea for global development. It can have success, but it can also be irrelevant, and even harmful, for communities. Understanding the limitations of CSR is critical if corporations are to actually contribute positively to society, and not just to their shareholders.

The ideal of the corporate-consumer relationship is that it gives ultimate power to consumers, who choose – based partly on CSR initiatives – the companies that get their financial support and tacit approval. Nike, for instance, relies extensively on its brand name, which is why consumers have been somewhat successful in altering its corporate behaviour. Nike has improved (though it certainly hasn’t eliminated) its use of child labour and sweatshops in the face of mounting consumer criticism. The company also has a strong environmental record, due in part to consumer pressure.

One reason this does not always work is that many companies simply do not rely on their brand name and consumer behaviour. Nike is a globally recognized brand, which contributes to its significant profits. Other companies, however, including ones involved in the mining industry, are unknown by the average consumer, and thus do not rely on their brand power to make a profit. One example is Canadian company Goldcorp, whose mining practices in Latin America have been said to contribute to the degradation of local environments, economies, and human rights. While people protest the company’s actions regularly in Latin America, Goldcorp’s profits are not negatively impacted by those demonstrations. In western countries – where Goldcorp’s gold is sold – consumers are unable to link the products they buy with the mining company that extracted the resources, even if they happen to be aware of Goldcorp’s atrocious business practices. It is next to impossible to know where Goldcorp’s resources end up, since Goldcorp and other mining companies are not selling watches and rings in the local department store. Goldcorp can get away with not fulfilling its stated CSR objectives, or with having harmful CSR objectives, because negative associations with the Goldcorp name do not affect the company’s profits.

A related problem is that consumers never have all the information about a corporation. No matter how much research a person may do before buying a phone, a sweatshirt, or ground beef, there is always more to the product’s story than is found on the company’s website, internet message boards, and in local media. This is compounded by the fact that the unregulated regions where human-rights and environmental abuses are more likely to occur are also the regions that the media is either unwilling or unable to report from. It is relatively straightforward to learn about American Eagle’s business practices in Canada, but to know if its CSR initiatives in Cambodia are of net benefit to the local population is nearly impossible for any consumer.

A second reason CSR is not always effective is that a lot of companies are focused only on the immediate future. For companies with short-term objectives – like some mining companies – environmental sustainability and the ethical treatment of workers are not priorities. Companies thinking many years into the future, on the other hand, recognize that their profit ultimately depends on their treating the environment and their workers with respect and dignity. Shell, though not a perfect company, is typically regarded as a leader in sustainable development policies. It understands that long-term profit is dependent on social well-being, so it has adopted a fairly successful CSR model.

A third explanation for CSR’s limited success is that there is only so much one company can do. Honda’s CSR agenda might include impressive environmental initiatives, but as long as consumers continue to demand internal-combustion automobiles, other companies will continue to produce them. While CSR can help, a single company’s practices can rarely alter the demands of the market.

CSR certainly has its place, and can be effective at times, but it must be understood that there are contexts in which it will fail. Mining companies, in particular, are unfortunately subject to three conditions that make them impervious to CSR: they do not rely on their brand; they’re often focused on the short-term; and, while their business is inherently damaging to the environment, it is in great demand. In Africa and Latin America, where mining companies are doing most of their extraction, there is a distinct lack of government regulation, as power has either been coerced from legitimate governments or given away cheaply by corrupt ones. CSR, though idolized as a replacement for government regulation, will simply not work in these situations. In such contexts, other solutions must be sought if communities and the environment are to be treated with dignity.