The Ethics of Corporate Social ResponsibilityBy
The Business Roundtable took an ethical stand by redefining companies’ purpose from short-termism to long-term value for all stakeholders and society.
Establishing an ethical culture requires setting the tone at the top, which typically means those in the C-suite must set a good example by making ethical decisions. Some leaders talk a good game but are “do as I say, not as I do” types, whereas genuinely ethical leaders practice what they preach. In August 2019, the Business Roundtable, a lobbying group of top U.S. CEOs, including JPMorgan Chase’s Jamie Dimon, Apple’s Tim Cook, and Amazon’s Jeff Bezos, argued for changing the definition of the purpose of a corporation from short-term profitability—that is, making money for its shareholders above all else—to striving to benefit all stakeholders, including customers, employees, suppliers, communities, and the environment. Their statement advocating for corporate social responsibility (CSR) appears to be a positive step toward reinforcing ethical conduct in the business world, but given that the declaration isn’t legally binding, is it meaningful or merely a public-relations ploy—lip service designed to deflect criticism? It all depends on their follow-through.
While it’s fair to be skeptical, there’s no doubt that the Business Roundtable should be commended for encouraging companies to establish an ethical purpose for their continued existence. The Economist opined that the CEOs’ shift is a reaction to “an upheaval in attitudes towards business” in an era of high inequality, sluggish wage growth, and alarming climate change, noting that “younger staff want to work for firms that take a stand on the moral and political questions of the day.” Forward-thinking companies hoping to attract and retain top talent have taken note and begun to prioritize environmental, social, and governance (ESG) factors in rethinking their purpose and formulating a new strategic plan for their organization.
“There’s this wider movement of corporations looking at topics like purpose, ethics, societal impact, and CSR or ESG as critical to their business and part of their foundation—companies doing the right thing not just because it’s the right thing to do but because it’s good business. It makes sense for the bottom line,” says Jessica Long, a managing director at Accenture Strategy.
PURPOSE IMPROVES COMPETITIVENESS
Consumers buy from companies whose purpose aligns with their beliefs. Accenture Strategy’s December 2018 global survey found that 62% of respondents want companies to demonstrate sustainability, transparency, and fair employment practices and to take a stand on social, cultural, environmental, and political issues. The same percentage base their purchasing decisions on whether “the brand has ethical values and demonstrates authenticity in everything it does.”
Further, the 2018 Accenture Strategy Competitive Agility Index, which evaluates companies’ growth, profitability, sustainability, trust, and impact on the bottom line, revealed that more than half (54%) of the organizations examined experienced a material drop in trust due to an ethical breach or scandal at some point during the previous 30 months. A drop in trust among customers, employees, suppliers, the media, analysts, and investors caused declines in companies’ Competitive Agility Index score, revenues, and earnings before interest, taxes, depreciation, and amortization (EBITDA).
“ESG and CSR are becoming central to a company’s purpose, whereas previously it was a side effort or an appendix to their annual report,” Long said. “From a broader ethical perspective, companies are looking at how they actually operate—‘what are the ethical or moral principles that guide my decisions, where and how I work, and the basic ethos of my company?’”
Companies must evaluate the products and services they offer, factoring in both profitability and ethicality. In addition, companies are now examining their impact on the larger ecosystem: Are we doing business in the right way and making a positive impact with ethical sourcing of sustainable products?
Establishing an ethical purpose and culture, as well as shifting from short-termism to a sustainability mind-set, will pay long-term dividends for companies.
“If you focus purely on the financials, quarterly returns, and immediate profits, then you’re overlooking the fact that it takes more than a quarter to build trust, but it takes just a moment to lose that trust,” Long says. “A drop in trust has direct financial implications and ties directly back to the financial value of the company and its competitiveness—it’s a real hard measurable thing.
“If I’m just focusing on the quarterly financial returns, then I’m not looking at ESG and trust factors that contribute to long-term value,” Long explains. “Leading companies recognize that building in ESG, sustainability, and responsible business practices are critical to their success. CSR is not a trade-off.”
DEFINING THE PURPOSE
Some have argued that ESG and CSR are inconsistent with management’s fiduciary duties to the company’s shareholders, who are concerned with short-term profitability. Others assert that a responsible, ethical approach is better for the company’s stakeholders over the long term and thus is consistent with their fiduciary duties. Changing the company’s business model to be more sustainable can be justified by saying it’s necessary for the long-term health of the organization.
“As I’ve heard several CEOs say over the years, ‘being a good corporate citizen is our license to operate,’” says Troy Keller, an attorney at the law firm Dorsey & Whitney. “If you look closely at the Business Roundtable’s statement, they aren’t trying to turn themselves into full-on social benefit corporations, which would require re-chartering under Delaware law. They still owe fiduciary duties to shareholders, but they are taking a broader and longer-term view of that duty than perhaps they did in the past.”
Management accounting and finance professionals are at the heart of both strategic business planning and financial reporting to shareholders. It’s their financial analysis that will support a CEO’s assertion that investing more in employees and communities is the right thing to do.
“They need to show that the organization will remain healthy and can responsibly serve all the purposes they’re pursuing,” Keller says.
IMA ETHICS HELPLINE
For clarification of how the IMA Statement of Ethical Professional Practice applies to your ethical dilemma, contact the IMA Ethics Helpline.
In the U.S. or Canada, dial (800) 245-1383. In other countries, dial the AT&T USA Direct Access Number from www.usa.att.com/traveler/index.jsp, then the above number.
The IMA Helpline is designed to provide clarification of provisions in the IMA Statement of Ethical Professional Practice, which contains suggestions on how to resolve ethical conflicts. The helpline cannot be considered a hotline to report specific suspected ethical violations.