The corporate social responsibility (CSR) and socially responsible investing (SRI) movements have driven large improvements in corporate environmental and social performance. However, human society is still grossly unsustainable, largely because economic and political systems compel firms to be irresponsible and unsustainable by not holding them fully responsible for negative impacts on society. (In a competitive market, any firm attempting to fully mitigate impacts would probably put itself out of business since costs would become too high relative to peers.)
This column summarizes a new form of CSR, called total corporate responsibility (TCR), which is focused on promoting system changes that hold firms fully responsible. Without system change, sustainability cannot be achieved. With it, voluntary CSR efforts ultimately will no longer be needed since being fully responsible and sustainable will be the profit-maximizing path.
System change is the most difficult challenge facing management, in part because no single firm can change the systems within which it operates. To achieve system change, visionary leaders must work proactively with peers and other stakeholders. Being the most difficult management challenge, TCR performance is an excellent indicator of management quality, the primary driver of stock market returns. As a result, it is highly likely that funds comprised of TCR leaders will outperform.
Adopting a Systems Perspective
Economic and political systems fail to hold firms fully responsible largely because it is difficult to quantify impacts and incorporate them into prices. Inability to identify impacts results from a narrow perspective. Nearly all academic knowledge is developed from the perspective of the human mind (since that is the mechanism doing the contemplating). However, the relevant perspective for human survival and prosperity is global, as evidenced by the fact that humans cannot survive apart from the Earth.
Everything on the Earth is part of one interconnected system. This total system is difficult for the human mind to understand. So it is broken down into parts that are studied in isolation rather than in relation to each other (reductionism). Economic, political and social systems developed from this limited perspective are inherently flawed since they do not fully address the total Earth system. This failure to adopt a systems perspective drives environmental and social degradation and causes humanity to be unsustainable.
Studies by the World Resources Institute and many others show that, with some regional exceptions, every life support system on the planet is in decline (i.e.: clean air, clean water, forests, topsoil, aquifers, fisheries, wetlands, biodiversity, etc.). Social pressure and turmoil are increasing around the world, driven by population growth, a widening gap between rich and poor and other factors. Social distress is evident even in prosperous regions. Americans, for example, medicate themselves with food (two thirds are overweight, one third are obese), television (four hours per day on average), and anti-depressant drugs (rapidly growing use).
System Flaws
Economic, political and social system flaws drive humanity’s unsustainability. Economic system flaws include failure to incorporate externalities into prices, consider limits to growth and accurately measure social well being. To illustrate externalities, burning coal causes premature deaths, illness, birth defects and acid-rain damaged forests. These are real costs paid by society but not included in electricity prices. This creates the illusion that coal-fired electricity is cheap and drives overconsumption of coal.
Regarding growth, economic systems encourage firms to always grow. This is unrealistic since growth is always limited in the real world. As a result, firms are not encouraged to seek a sustainable balance with the larger system. Regarding measurement, economic growth (GNP), the primary means of measuring social well being, is an inaccurate indicator since it counts many social negatives as positive (incarceration, etc.). It also fails to count valuable services (parents caring for children, etc.), degradation of critical assets (forests, water, air, etc.) and intangible factors such as happiness.
Political system flaws include the ability of firms to inappropriately influence government through campaign finance and lobbying. This forces government to focus on short-term corporate profits and prevents it from fulfilling its primary obligation – preserving the country for future generations. Another system flaw is the limited liability corporate structure, which often requires taxpayers to bear responsibility for environmental and social problems caused by firms.
Social system flaws include the ability of firms to unfairly influence public opinion and values through media and advertising. With concentrated resources and control of many media outlets, firms often mislead the public on key issues, such as climate change, for the purpose of being held less responsible. Advertising often seeks to prompt purchases by using emotional messages intended to make consumers feel inadequate without the product. This causes a widespread sense of emptiness in society, which drives growing compulsive behavior and depression.
The TCR Approach
Becoming sustainable, in part by fixing the system flaws noted above, is probably the most complex challenge society and business will ever face. Through a practical, incremental profit-enhancing approach, TCR seeks to raise awareness of the need for system change and begin movement in that direction. The TCR model is based on three concepts – interconnectedness, actualization and posterity. These encourage business to adopt a broader perspective. Rather than seeing itself as an isolated entity, business would see itself as part of a larger system (interconnectedness). It would work for the good of the overall system (actualization) over the long-term (posterity). In so doing, business ensures its own success.
The TCR model analyzes many aspects of traditional CSR and system change performance and generates best-in-class ratings. Traditional CSR metric categories include corporate governance, human capital, environment, product safety, and stakeholder relations. The emphasis of TCR analysis is on efforts to promote or block system change. Assessment areas include lobbying, campaign finance, advertising and media campaigns. The TCR approach rewards firms for going to government and asking to be held more responsible for negative impacts on society, rather than less. By supporting this type of regulatory reform firms ensure they have the incentives to act responsibly and sustainably.
TCR also rewards firms for socially-responsible advertising and media strategies. Companies using emotionally false advertising (i.e.: advertising that implies needs for love, self esteem and social acceptance will be met by purchasing a product) receive lower TCR ratings. Firms using media campaigns to mislead the public for the purpose of being held less responsible are also penalized.
Maximizing Financial and Sustainability Performance
TCR ratings can be incorporated into any investment approach to minimize risk and maximize upside potential. Financial performance is enhanced by providing perhaps the best indicator of management quality available and by comprehensively assessing financially relevant environmental and social issues typically not addressed in conventional financial analysis. TCR analysis also can help investors avoid catastrophic losses by strongly indicating the presence of internal unethical practices (i.e.: firms acting irresponsibly and unethically in external areas are much more likely to be engaged in Enron-like internal practices).
TCR takes advantage of the influence investors have over corporate strategy. By engaging the capital markets in promoting system change, TCR protects investors and future generations. Voluntary CSR efforts will never achieve sustainability (because current systems preclude it). By encouraging the adoption of a systems perspective, TCR can bring about system changes that compel sustainability.
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Frank Dixon is a managing director of Innovest Strategic Value Advisors, a financial services firm based in New York, London, Paris and Toronto. His experience includes advising business and government on sustainability, system change and enhancing financial performance through increased corporate responsibility. (A more detailed TCR article is available from the author.)