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The Reasons—and Risks—Behind Corporate Social Responsibility

Editor’s note: To analyze the value of so-called corporate social responsibility, Ethical Chic –from which the following is excerpted–takes an in-depth look at six companies known for CSR qualities—deservedly or not: American Apparel, Apple, Starbucks, Timberland, Tom’s of Maine, and Trader Joe’s.

Arguably, the first time that American consumer power was deployed to make a political point was the Boston Tea Party – the original one — in 1773. The consumer movement grew, alongside political populism, union organizing, and the campaign for women’s suffrage, in the late nineteenth and early twentieth centuries. That was the era when the Interstate Commerce Act, the Sherman Antitrust Act, the American Federation of Labor, and the Food and Drug Act came into being, while muckrakers at Collier’s Weekly and the Ladies’ Home Journal investigated phony patent medicines.

Corporate management, for its part, recognized a sense of responsibility. The new Harvard Business School’s mission statement vowed, “We educate leaders who make a difference in the world”—that is, a nonbusiness difference.

The Depression, World War II, and postwar rebuilding temporarily pushed aside the public’s interest in social causes as people made basic survival a priority. Then the second great era of political-consumer activism was ignited by the civil rights movement in the 1960s, antiwar protests in the 1960s and 1970s, and the growing revulsion against South Africa’s apartheid in the 1970s and 1980s. Shoppers and investors discovered that their dollars could buy political pressure as well as stuff. Socially responsible investing, for one, is now a $2.7 trillion business. People wanted to feel that they were making a difference for good, and it was so much easier to do it as part of their daily routine, while buying something they needed to buy anyway, rather than seeking out a special activity.

The targets continued to spread. Student groups demanded investigations into the foreign sweatshops that manufactured their official college gear. Advocates for farm workers boycotted California grapes. Gay rights advocates boycotted orange juice and, now, the Chick-fil-A restaurant chain.

And increasingly, since the 1990s, business has been responding to this demand. Frito-Lay plans to make half of its junk food with natural ingredients. International Paper is burning biomass debris to save fuel. Trader Joe’s stopped selling orange roughy and other endangered fish in 2010, after pressure from Greenpeace. Starbucks – hounded for more than two years by socially responsible mutual funds, activists like Oxfam America, and the Ethiopian government – in 2007 finally signed a licensing deal that grants trademark status to newly chic brands of that impoverished nation’s coffee. Nike has transformed itself from the evil sweatshop contractor of the 1990s, to being the greenest shoemaking protector of the Amazon rain forest.Overall, the average score for companies rated by the environmental website ClimateCounts has risen nearly 20 points since the site was launched in 2007.

The burgeoning of social-responsibility themes in marketing makes a particularly good yardstick, since ads are the means by which businesses project the image they think will appeal to shoppers. “Companies are trying to move in that direction because it does give them some cachet with the press and customers,” said Michael Myers, president of Palio Communications, an ad agency based in upstate New York. “In a few more years, it’s going to be expected.”

As a typical example, Donald Schepers, director of the City University of New York’s Robert Zicklin Center for Corporate Integrity, described a recent television commercial for a Honda Civic, a car known for good gas mileage: “It starts out with a car from the seventies. A thin young man gets out, cool looking; he looks like a guy who’d be fun to be with. He walks along, and his T-shirt progresses through the years, but the T-shirts always have eco-friendly things on them. He doesn’t age. He’s still in his twenties. Now, he’s getting into a brand-new Civic. There’s a great deal of transference that the company is trying to set up, that being ecofriendly goes along with being cool.”

The industries that need it most

Experts say that certain industries are more susceptible to social-action pressure, whether because their supposed sins seem to stand out, because alternatives are readily available, or because their customer bases are particularly CSR attuned. Among these sectors are clothing, autos, food, and architecture.

“Fashion companies had better be pretty green and socially conscious, because they’re very much about image,” said Arthur Caplan, chair of the University of Pennsylvania’s medical ethics department. “They’re selling products that induce guilt. Who needs all that high-end stuff? You’d better do what you can to make it guilt-free.” Indeed, while couture designers started slathering on more furs around 2010, they are countered by the growing breed of younger, “ethical” designers like Stella McCartney who offer faux-fur choices. Caplan’s logic applies as well to cars: automakers must find trendy and green ways to compensate for their unhip, irresponsible use of fossil fuels, their carbon emissions, and their pollution. (Hello, Prius and Lexus hybrids.)

Meanwhile, food is a key sector because “consumers care about something that goes into your body,” as Gordon Peterson, the former vice president for corporate social responsibility at shoemaker Timberland Co.., pointed out a little enviously. (If only they cared as much about what goes on their feet!) It may be relatively easier for the food and construction industries to be virtuous, suggested Russell Winer, chair of the marketing department at New York University’s Stern School of Business, since organic food and architectural eco-certifications are becoming widely available.

The businesses that most need a CSR patina are probably those with a client base in the teens to early thirties. They’re the Timberland target. They’re fine with Trader Joe’s limited, prepackaged selection, because they don’t have kids and they’re too busy with dual careers (and social activism) to cook an old-fashioned meal. And they basically define the Apple and American Apparel communities. Said Jill Kickul, who teaches this age group as director of the Stewart Satter Program in Social Entrepreneurship at the Stern School, “You have a younger generation in their twenties and thirties that want to see and are expecting business-as-usual to be socially responsible.”

What trumps ethics

For all the history and hip appeal, however, ethical, environmental, political, and other policy concerns are still not—and never will be—the prime reason people buy anything. There are too many other practical factors, like convenience, size, taste, color, fashion, quality, allergies, friends’ recommendations, religious requirements, that spark of joy you can get from the right item, and, most of all, price.

Tom Chappell – founder of natural-toothpaste maker Tom’s of Maine, one of the first CSR companies — asserted that people will accept a higher price for “natural” goods, and there is some evidence to back him up. Starbucks, Timberland, and Apple customers obviously pay more, although it’s not clear how much they’re paying for milieu, gourmet taste, sturdiness, and the Genius Bar and how much for the ethical image. As well, a few weakly supportive surveys are floating around. Michael Markarian, chief operating officer of the Humane Society, mentioned a January 2005 Ohio State University survey in which 43.1 percent of the respondents said they would fork over a 10 percent premium for humane animal products, and 12.4 percent reported that they would pay as much as 25 percent more. On the other hand, 40.6 percent wouldn’t pay extra at all, which comes to a pretty high “unwilling” faction.

Carol Holding — who runs a brand-strategies consulting firm, Holding Associates, in Seattle — cited a different set of analyses, done by Cone, a Boston-based consulting company that specializes in cause branding. This research, she said, found that “an enormous number of people will buy a product that’s socially responsible, assuming the price and quality are equal.” That kind of comparison might seem meaningless, since of course anyone would take a product that came with an extra attribute – ethics– for no extra price. “Consumer-products companies are looking for a hair’s difference,” Holding replied. That tiny preference for ethics could be enough to outsell a non-CSR rival.

In any case, all those calculations go out the window when the economy goes down the tubes. Numerous polls showed that, not surprisingly, outlays on expensive organic food and green products dropped during the 2008–2009 recession. If regular food, clothes, cars, or anything else seemed unaffordable, who is going to pay 10 or 50 percent more to feel virtuous?

And to ethicist Arthur Caplan, these surveys are missing the key part of the affordability problem. “It’s very much a class issue,” he said. “People shopping at Walmart and BJ’s [Wholesale Club] and Sam’s Club are less interested in being green than people buying Volvos and hybrid cars are. I think the rich have a little more room for it than the poor.” In that case, being socially responsible in terms of the environment, working conditions, animal rights, organic and natural ingredients, and other typical standards by definition requires a company to be socially irresponsible in terms of bias against working-class and low-income consumers.

Horrified officials at supposedly progressive companies immediately disavow any thought of class prejudice, enumerating all the ways that discounted versions of their goods are available. “There’s a range of price points” for Timberland shoes, marketing vice president Jim Davey said, from the $300 boots at Saks Fifth Avenue and Nordstrom to $100 and $120 versions at DSW and the Timberland Factory Outlet. Kate Chappell (Tom’s wife and the former co-head of Tom’s of Maine) insisted that “there are plenty of low-income people, like students, that buy our products” and cited Tom’s nearby outlet store. The ultimate example of how Tom’s can be affordable is also the ultimate example of what worries CSR consumers – its acquisition by Colgate-Palmolive in 2006, which put Tom’s on the shelves of Walmart.

In the long term, say optimists like Patricia Werhane, senior fellow at the University of Virginia’s Olsson Center for Applied Ethics, mass production and economies of scale could bring the price down—if only more of us would pay the few extra pennies now.

Catching the phonies

So businesses have discovered that having a socially responsible reputation is a great way to appeal to the public and to differentiate themselves from competitors. Yet that leads to an obvious risk: when is the CSR claim just a marketing gimmick and when is it real, and how well can consumers tell the difference?

With environmental issues, phony marketing is called greenwashing, and the vast majority of companies do it, according to surveys by TerraChoice, an environmental-marketing outfit that’s part of Underwriters Laboratories. Common tactics include assertions that aren’t backed up by respected certifications, vague claims like “all-natural,” and meaningless claims such as touting a product as “CFC-free”—meaningless because all use of chlorofluorocarbons (CFCs), which deplete the Earth’s protective ozone layer, has been banned internationally since the 1990s.

Consultant Jacquelyn Ottman has written an entire book telling companies how to eco-pitch themselves, entitled, appropriately, Green Marketing. “Use highly illustrative visuals to strengthen the upbeat emotional appeal of environmental advertising,” she suggests. And, “Make illustrations big, bright, and beautiful” by showing, for instance, “a close-up shot of a spotted owl looking all feathery and cute or a nest of little owls.” To be fair, Ottman isn’t simply pushing image; she further advises business readers that there has to be genuine green action behind the owls.

Food is another area where questionable marketing abounds. Author Michael Pollan, in his book The Omnivore’s Dilemma, described buying a free-range, organic chicken at Whole Foods, sold by a company called Petaluma Poultry, whose packaging boasted that Petaluma’s “farming methods strive to create harmonious relationships in nature, sustaining the health of all creatures and the natural world.” The label even gave the chicken a name: Rosie. But when Pollan tracked down his chicken, its ostensibly “harmonious” farm “turns out to be more animal factory than farm,” he wrote. “She lives in a shed with twenty thousand other Rosies,” and her supposed free range is a door that “remains firmly shut until the birds are at least five or six weeks old.”

The mass-production chicken giant Perdue Farms ran a TV commercial in 2009 showing company chairman Jim Perdue strolling through a barn with a bunch of happy hens waddling around, while bragging that all Perdue chickens are cage-free. Wow. So Perdue has become, like, organic and stuff ? No. All factory-farmed roasters are technically cage-free. The only time that “cage-free” matters is for egg-laying hens.

Examples like these take their toll. Consumers today are not going to swallow a “green,” “natural,” or “organic” claim easily. Two University of Missouri researchers published a paper in 2011 asserting that shoppers are willing to pay an extra 15 to 20 percent for clothing manufactured via “sustainable and ethical” practices—but these same shoppers were skeptical when manufacturers claimed to be doing exactly what they sought.

To help catch the phonies, alert consumers can turn to scores of “ethical” ratings and guides. (If anything, there are probably too many.)

For instance, the Ecolabel Index has catalogued 365 environmental seals and certifications. Consumer organizations like People for the Ethical Treatment of Animals, the Monterey Bay Aquarium, and Climate Counts have compiled targeted lists of businesses regarding, respectively, testing on animals; sustainable seafood, and carbon emissions.

The Web is a powerful tool for catching the – ahem – “misstatements.” As Myers of Palio Communicatoins points out, “The guy that was standing by the Dumpster ten years ago watching them pour chemicals, now he can take out his BlackBerry with a camera and have it out to the world within minutes, or videotape it and put it on YouTube.”

Unfortunately, if social networking can uncover phony greenwashing, it can equally spread phony green attacking. The Body Shop suffered from that in 2006, brand strategist Holding recalled, after it was bought by French cosmetics giant L’Oréal. While the Body Shop is famous for its policy of not testing on animals, L’Oréal does test, and rumors raced online that the Body Shop would knuckle under to its new owner. Animal rights groups called for a boycott, even as company officials insisted that their policies wouldn’t change. Indeed, the Body Shop ultimately retained its policies and its place on PETA’s list of non-testing companies.

A positive image “is hard to gain and very easy to lose,” warned Richard Honack,, a marketing professor at Northwestern University’s Kellogg Graduate School of Management. “You can lose it with one bad incident. It goes out viral, and [people begin saying,] ‘I’m not using those products anymore.’ ”

Is it worth it?

Well, if customers aren’t going to believe their claims and will ultimately buy the least-expensive brand anyway, businesses may be tempted to throw the whole CSR effort into the (non-recyclable) garbage. Why bother?

The answer is that companies will – and should — be most likely to go green, humane, and squishy only if it makes business sense. And it makes sense a lot more often than they may realize at first.

The growing consumer movement is just part of the reason. If shoppers are skeptical of phonies, they are also fiercely loyal to the genuinely ethical article. “It has to be integrated into the business itself,” Carol Holding said. “That’s when it’s authentic.” She gave the example of Liz Claiborne Inc.’s long-running campaign, ever since the early 1990s, to raise awareness of domestic abuse. “They do it because their customers are women,” Holding explained. “If you have IBM picking up abused women as a cause, it’s totally phony. There is no connection to the business.”

When Timberland made Fortune’s annual ranking of “100 Best Companies to Work For” in 2004, the magazine noted that employees were given paid time off to volunteer “at the Nashville Rescue Mission this December to fit 217 men with shoes and boots.” Timberland presumably donated those 217 pairs of footwear, thus forgoing any upfront profit. However, the Rescue Mission employees and any volunteers from other organizations might want to buy shoes someday, and they would probably remember Timberland fondly because of this event.

CSR ethics can also be reflected in the corporate culture. It shows up in qualities like having an ombudsman or a place where whistle-blowers feel comfortable reporting violations, or quickly recalling faulty products without threats from regulators. In February 2010, Fortune profiled a management consultant, Dov Seidman, who has built an entire business of more than 400 big-name clients on this concept, asserting, as the magazine put it, that “in today’s wired and transparent global economy, companies that ‘outbehave’ their competitors ethically will also tend to outperform them financially.” The classic example dates to 1982 but is still evoked frequently: Johnson & Johnson’s reaction when seven deaths were traced to its Extra Strength Tylenol. The FDA asked J&J to withdraw the four manufacturing lots that the suspect capsules had come from. Of its own volition, J&J went further, recalling all 31 million containers of the pills—the entire production line.

Certainly, companies have an incentive to be socially responsible if it can save hard cash, and sometimes it does. By now, the corporate world is overflowing with environmental money-saving examples, including CFL and LED light bulbs, better insulation, and motion-sensor lights. Timberland officials say they have cut energy costs drastically by installing solar panels at their California distribution center and a reflective white roof and a “new premium-efficiency” heating, air-conditioning, and ventilation system at the New Hampshire headquarters. Moreover, some of the recycled materials used in the firm’s ecological Earthkeeper line are less expensive than standard material.

Even if it’s only image, CSR has now become an integral part of many companies’ brands. Timberland would just be a bunch of sturdy boots without it. American Apparel would have no protection against accusations of sleaze. Starbucks would be another chain selling gourmet coffee, perhaps no better than Dunkin’ Donuts, certainly less cool than a neighborhood café. Trader Joe’s would still be a cute alternative grocer, but it wouldn’t be a cuter version of Whole Foods. Tom’s of Maine wouldn’t exist.

Excerpted from Ethical Chic: The Inside Story of the Companies We Think We Love, by Fran Hawthorne, (Beacon Press, 2012). Reprinted with permission from Beacon Press. www.beacon.org. Ms Hawthorne is a contributing writer to Chief Executive frequently reporting on CEO Essentials.

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