Asking a company to do more than align its social and environmental activities with its business purpose and values is taking things a step too far.
Most companies have long practised some form of corporate social and environmental responsibility (CSR)with the broad goal of contributing to the wellbeing of communities and society. But pressure is increasing to dress up CSR as a business discipline and demand that every initiative should deliver business results.
That asks too much of CSR and distracts from its main goal: to align a company’s social and environmental activities with its business purpose and values. If CSR activities mitigate risks, enhance reputation, and contribute to business results, that is all to the good. But those outcomes should be a spillover, not their reason for being.
Over the past decade we have conducted in-depth interviews with managers, directors, and chief executives who are directly or indirectly responsible for CSR strategies and developed more than a dozen case studies. Our findings are remarkably consistent.
Despite the widely accepted ideal of pursuing “shared value” – that is, creating economic value in ways that also create value for society – our research suggests this is not the norm. Most companies practise a multifaceted version of CSR, from pure philanthropy to environmental sustainability to pursuit of shared value. Moreover, well-managed companies seem less interested in integrating CSR with business strategy and goals than in devising a CSR program aligned with the company’s purpose and values.
Many companies are hampered by poor coordination and a lack of logic connecting their programs. Although numerous surveys tout the increased involvement of CEOs in CSR, we have found that programs are often initiated and run by a variety of managers, frequently without engagement of the CEO.
Audit existing programs
Our research shows that CSR activities are typically in three theatres of practice. Assigning programs accordingly is a crucial first step.
Theatre one: philanthropy
Examples include donations of money or equipment to civic organisations, engagement with community initiatives and support for employee volunteering.
Theatre two: operational effectiveness
Programs in this theatre support operations across the value chain, often improving efficiency and effectiveness. They may increase revenue, decrease costs, or both.
Examples include reducing resource use, waste or emissions, which may reduce costs; and investment in employee working conditions, healthcare or education, which may enhance productivity, retention, and reputation.
Theatre three: the business model
These programs create new forms of business to address social or environmental challenges. Improved business performance is predicated on achieving social or environmental results.
Hindustan Unilever’s Project Shakti (“empowerment”) is a good example. To reach remote Indian villages, it recruits village women, provides them with access to microfinance loans, and trains them in selling soaps, detergents, and other products door-to-door. More than 65,000 entrepreneurs now participate, nearly doubling their household incomes, on average, while increasing rural access to hygiene products and thus contributing to public health. These social gains have been met by business gains: as of 2012, Project Shakti had achieved more than $US100 million in sales. Unilever has rolled out similar programs in other parts of the world.
Theatre three programs need not be comprehensive. Most are narrow initiatives that have a focused market segment or product line in mind, but with potential to alter the company’s social or environmental impact and financial performance. They almost always call for a new business model rather than incremental extensions.
Programs in one theatre can influence and complement those in another or even migrate. The valuable reputations of Tata in India, Grupo Bimbo in Mexico, and Target in the US are built in part on those companies’ philanthropic and community engagement.
Similarly, IKEA: its People & Planet initiative calls for its entire supply chain to be 100 per cent sustainable by 2020, even as it aims to double sales. IKEA will have to radically alter how it designs furniture and devise new models for collecting and recycling furniture.
Once managers have inventoried their firms’ CSR activities, they can bring discipline and coherence to the portfolio. Drawing on the experience of participants in Harvard Business School’s CSR education program and research, we have developed a four-step process.
Companies seeking to coordinate established portfolios should begin with step one, which emphasises rationalising the programs. Companies building their first portfolios should start with step four, which focuses on interdisciplinary strategy.
Step 1. Prune and align programs
The initial step for many firms is to bring coherence to existing programs. They must reduce or eliminate initiatives that do not address an important social or environmental problem in keeping with the company’s purpose, identity, and values.
Large Midwestern bank PNC unified a multitude of theatre one philanthropic and community service projects, spread across business units, behind a single cause. With $US100 million in funding for 2010-15, Grow Up Great provides school-readiness resources to communities where the bank operates. Before this initiative, each PNC market had a CSR budget which regional managers allocated as they thought best. Roughly 5 per cent of the funds went to education, and 3 per cent to health.
Then CEO James Rohr unified PNC behind Grow Up Great because of his long-standing commitment to early childhood education, employee eagerness to engage with a local cause and the program’s alignment with the bank’s orientation to community development. By easing out CSR programs without an early education focus and encouraging managers to redirect budgets, PNC has built a well-funded initiative that correlates with employee motivation and is likely to significantly benefit communities.
Family-owned Mexican baking company Grupo Bimbo demonstrates alignment in theatre two. Bimbo is Mexico’s largest bakery, with a workforce of nearly 100,000 and a similar number of small retailers. Its comprehensive CSR programs focus on social welfare: it provides free educational services to help employees complete high school and offers supplementary medical care and financial assistance for dependants’ care. It also has a strong microfinance program to help mum-and-dad retailers. The programs are intended to increase efficiency and effectiveness and, indeed, they have improved employee performance and retention and strengthened Bimbo’s distribution chain.
Step 2. Metrics to gauge performance
Gauging the success of a theatre one program requires measuring nonfinancial outputs. For Grow Up Great, PNC tracks the volunteer hours its employees spend reading to children and the increases in the children’s comprehension, along with the grant funding it provides to develop educational materials, the number of children receiving those materials and the improvement in school performance. It also measures funding for early childhood education programs from other entities resulting from its advocacy.
Because theatre two programs may generate revenue or reduce costs, measuring performance requires more familiar, tangible approaches. These might be the effect of energy- and waste-reduction initiatives on top or bottom lines and air or water quality.
UPS enlists an independent auditing firm to evaluate its progress on energy use and carbon emissions reductions and reports both the cost savings and the resource savings.
Not all theatre two financial benefits are realised quickly, so companies need a system to track net present value. Regardless of business performance, a company must measure and report initiatives’ social and environmental benefits.
Theatre three initiatives have particular measurement challenges. Consider Jain Irrigation, a global drip-irrigation equipment supplier based in India. Jain’s shared-value business model was designed to benefit India’s small, chiefly low-income, farming landholders. The company offers farmers microfinance loans to help them purchase its equipment, provides technical advice and buys their output at guaranteed prices.
Since creating societal value is essential, firms must develop measures both of the value produced and of the financial results, and show how the two are connected. In Jain’s case, the improvement in some crop yields was dramatic. Jain boosted its top line while retaining operating profit percentage.
Step 3. Coordinating programs
Together, CSR activities need to form a coherent portfolio, consistent with the firm’s business purpose and values.
The founders of Ambuja Cements, an Indian subsidiary of Swiss conglomerate Holcim, expressed a deep commitment to the communities where it sourced limestone and operated kilns. Its CSR programs were largely in theatre one. When Holcim acquired a controlling stake in 2008, it brought a more comprehensive focus on environmental and social sustainability. By 2010 Ambuja had several plant-level programs, mainly in theatre two, to complement its foundation’s programs. They included plant water management and increasing the use of alternative fuels.
In 2010, Ambuja began to coordinate its portfolio of CSR activities. Its alternative fuels program led to the expansion of a theatre one program to educate farmers about productivity practice, which now includes instruction on recovering farm waste materials the company buys to use as biofuel.
A “water neutral” program in theatre two, involving mining operations, led to a highly successful program for “water recharge” (the replenishment of aquifers and other groundwater) in theatre one, which gained significant financial support from the local government. The adjoining farmland has become much more productive and the company’s tracts of mined land – otherwise fallow – are arable.
So Ambuja has pushed for a business-model transformation in theatre three, where it can offer reclaimed land with good water (plus cash compensation) in exchange for new land to mine.
Step 4. An interdisciplinary strategy
Ideally companies should establish a position for someone whose primary responsibility is to integrate initiatives across all three theatres. Yet in large companies the head of the corporate foundation may handle philanthropy; theatre two initiatives are typically run by operations managers; CEOs are more likely to be directly involved with shared-value programs. With responsibilities spread, it’s no surprise firms often struggle to mould a coherent CSR vision.
Two effective approaches
We’ve seen two effective approaches to CSR strategy development, one top down and the other largely bottom up. Ambuja took the latter approach. In 2010 Ambuja established committees with oversight of all social and environmental activities, at both the plant and the corporate levels. Both groups include Ambuja Foundation representatives. At corporate-level meetings, members discuss issues flagged by the plant-level committee and their own concerns. The CSR goals of the company are to give back more than it takes and to clean more than it pollutes – a vision made possible by input from across Ambuja and coordination across the three theatres.
In contrast, IKEA has developed its blueprints top-down. When it hired Steve Howard as chief sustainability officer in 2011, it appointed him to its seven-person executive management group, which sets the company’s vision and develops strategy. Its work has facilitated the simultaneous pursuit of aggressive growth and bold sustainability plans, along with a social welfare initiative related to preventing child labour and maintaining other labour standards in the supply chain. Its sustainability agenda is crafted at the top.
Best-practices companies operate coordinated and interdependent CSR programs. Some initiatives create shared value; some, as intended, create more value for society than for the firm; and some are intended to create value primarily for society. Yet each are aligned with the company’s business purpose, its important stakeholders’ values and community needs where it operates. Such companies stand in stark contrast to those focused solely on creating value for shareholders.
Kasturi Rangan is a principal at Booz & Co; Lisa Chase is a Harvard Business School research associate and freelance consultant; Sohel Karim is an HBS research associate.