These days, corporate America is doing some soul-searching. Are corporations really only accountable to their shareholders? And, if so, should they be? Last week the Kellogg School’s Public-Private Initiative, together with the Aspen Institute, hosted a conference about the purpose of the corporation—hence last week’s special issue on social corporate responsibility. Over the course of the conference, a number of our faculty lent their expertise. I’ve rounded up some of the highlights:
People care more about social corporate responsibility today than ever before—but why? Daniel Diermeier, a professor of managerial economics and decision sciences, traced this upward trajectory back to four sources:
- A dramatic change in the global media environment. Even before the development of 24-hour news cycles, the development of affordable and portable videocameras gave activist groups a startlingly effective tool.
- A dramatic growth in globalization. With the increase in outsourcing, firms now find themselves responsible—at least in the court of public opinion—for decisions made by contract manufacturers in distant countries.
- Changed expectations about what counts as good corporate citizenship. Quite simply, for ideals like diversity and sustainability, the bar is higher now. In Diermeier’s words, companies don’t “get a prize anymore” for adopting socially responsible practices; it’s just what’s expected.
- “You live by the brand, you die by the brand.” Brands want loyal customers—customers who trust them. But trust-based marketing strategies are fragile because they depend so heavily on customers’ perceptions.
In another highlight, Diermeier memorably explained that many companies go through “stages of grieving” upon finding themselves targets of activist campaigns: disbelief, anger and, eventually, negotiation and acceptance. This relatively naïve approach to activist campaigns often prevents companies from reacting fast enough.
Brayden King, an associate professor of management and organizations, peeked inside the playbooks of savvy social activists to give us some idea of what companies are up against. Sometimes, he said, despite a firm’s best efforts, interactions with social activists are bound to go poorly. While it’s fine to engage with activists when they’re willing to engage back, sometimes activists have no intention of engaging back. In these scenarios, King explained, activist groups view corporations not as objects of change, but as platforms for change. As such, so long as their cause is in the limelight, they are already getting what they want. Another caution: working with an activist group is no panacea against future interactions with activists. Indeed, King mentioned, two factors that predict whether or not a firm will be targeted by future activists are the strength of the firm’s reputation and its history of engaging in prosocial activities. For both—at least from an activist’s perspective—the stronger the better. Why waste precious resources on a company with little to lose?
Harry Kraemer, a clinical professor of management and strategy, humorously pointed out that, with a few exceptions, most employees are human beings. If companies want to have unbelievable people working for them, they’d better be doing something people feel good about. The same goes for customers, who are—incidentally—also mostly human beings. If customers disagree with company practices, after all, they will choose a product more in line with their values. “I keep it very simple,” said Kraemer of his advice for corporate leaders (which, as a former CEO of health care company Baxter International, he is uniquely qualified to give): do the right thing; be very open—listening, taking notes, and following up are key; and surround yourself with similar-minded people.
Bernard Black, a professor at Northwestern University Law School and a professor of finance at Kellogg, opined that the morality of complex financial transactions, and the banks that structure them, is worth considering. When is it immoral for a bank to engage in a complex financial transaction? Black put forth a two-pronged test: when a bank comes upon whatever knowledge it has honestly, and it does not attempt to persuade a less-informed counterparty to make the deal. As evidenced by the ongoing Jefferson County, Alabama debacle—in which an overhaul to the sewer system was financed through convoluted transactions that left the county unable to pay its bills—banks often ignore this latter criteria. “If this is the mindset of the commercial banking world today—and I think it is—what do we do about it?” asked Black. One suggestion is to require more disclosure.
So should corporations be beholden to their shareholders and only their shareholders? Plenty of people believe that shifting away from this expectation would benefit society. But Paola Sapienza, a professor of finance, points out that social do-gooders should be careful what they wish for. The status quo is not perfect—it may be unrealistic to expect many shareholders to look beyond their own interests, after all—but at least maximizing shareholder value is a concrete and transparent goal to which firms can be held accountable. Take this away, Sapienza warns, and you may actually weaken corporate governance. How? Consider for instance an entrenched executive sending a lucrative deal his buddy’s way under the vague auspices of supporting local business.
For more takeaways from the conference, check back often. UPDATE (3/26): Visit the conference website, where speaker presentations, panel discussions, and more are all available for viewing.