By all means, pursue virtue in business. But not all ‘good works’ are what they seem.
When it comes to corporate social responsibility (CSR), the principle caveat emptor takes on a special urgency: What we think we are getting and what we actually get are sometimes two very different things. Growing evidence suggests that some companies use CSR efforts to distract from their less savory actions. Corporate social responsibility measures stem from the theory that businesses shouldn’t focus on profit alone. Instead, advocates argue, they should do good for a variety of stakeholders, including employees and those in the general community. Scores calculated by companies such as SASB Standards attempt to capture factors such as sustainability that are not reflected on a balance sheet. But studies show that companies use such CSR scores to prey on the credibility of the public, creating good vibes for their brands while evading true oversight. And companies may be leveraging high scores to project a greater sense of moral achievement especially to members of the public with strong religious convictions. This raises the question of how religious communities should view CSR efforts: Are they in fact a boon to ethical actions or merely a distraction?
A growing number of studies focus on the gap between companies’ self-reported scores and reality. In one extremely revealing example from researchers at Hong Kong University, which I profiled in The Wall Street Journal, a surprising connection was found between firms with high CSR scores and those that had committed fraud. Researchers examined 131 firms that had committed fraud between 1995 and 2016. The study took a natural experiment approach, mimicking a scientific study that featured treatment and control groups. This allowed them to measure the effect of a change in one group compared to another that did not experience the change. In this case, the treatment group was composed of firms that had committed fraud. The study found that firms that had committed financial fraud had higher CSR scores during the time the fraud was committed relative to both the period before the fraud and to similar companies in the same industry.
The results fly in the face of the popular perception of CSR as promoting moral action. In fact, this sentiment might help explain the phenomenon. Firms used the general sense of good deeds accomplished that the scores imply to manage perception and fend off interference. Performative morality, as I’ve argued, can overshadow real wrongdoing by firms.
The study also showed that the connection between high CSR scores and fraud was greater in states with high rates of religious practice. In other words, in more religious areas, firms that had committed fraud had even higher scores compared to non-fraudulent firms. The authors hypothesize that the findings “show that the higher attention and importance religious people attach to socially responsible activities may be exploited by managers who misuse CSR activities to disguise their fraudulent activities.” After all, the thinking goes, shouldn’t we “love our neighbor” through leveraging corporate actions?
But that belief creates an opportunity for companies that want to cover up fraud. And this study shows religious people are the easiest mark. Upholding a moral market is a priority for religious folks, and for good reason. A person with a deep personal faith may see headlines about corporate malfeasance and desire to better align his or her investments and values. But the reality is that CSR actually does the opposite in many cases.
Given that CSR is not an effective method to pursue this goal, what is? Instead of unreflectingly accepting these measures, those who care about morality in the business sphere should look to efforts that encourage integrity and reduce fraud. In other words, we must craft a culture that encourages a morally robust business sector.
Before we examine this culture more carefully, let’s address the chicken in the room. What is the difference between companies such as Chik-fil-A that brand themselves as prioritizing a certain morality and mainstream corporate social responsibility efforts?
Milton Friedman, in his seminal essay on the social responsibility of business, addresses this exact question. One difference, he says, is that managers of publicly traded companies are using other people’s money on causes with which they may or may not agree. If the owner of a privately held business, however, wants to expend energy on some profit-losing activity, “that is his right and I cannot see that there is any objection to his doing so,” Friedman explains. “In the process, he, too, may impose costs on employees and customers.” Chik-fil-A can choose to close on Sundays, but the owners bear the cost of that decision. In contrast, CSR initiatives tend to embrace highly controversial political causes and then impose them on owners without their consent.
So are people with strong religious convictions just hopelessly naïve? Keep in mind, I include myself in that number and am sympathetic to the instinct to pursue the good in business—which got us to this point. But we all must ask whether our preferred policy actually accomplishes that goal. A passage from Matthew 10 comes to mind, where Jesus is sending out his disciples. He warns them to be “as shrewd as serpents and gentle as doves.” He is speaking to the opposition they will receive from both the Jewish religious leaders and the Roman authorities. To apply the verse to our current state of business culture, we should be shrewd as serpents and realize where we are being manipulated while not losing track of true virtue.
Upholding virtue in the marketplace depends on preexisting institutions that inform the culture of business surrounding the decision-making of firms. An example of a harmful business culture is one that celebrates the appearances of success as opposed to celebrating true value creation, as is sometimes the case in the tech space. In short, CSR supports an ineffective, and at times duplicitous, business culture. Corporate social responsibility measures in practice often erode accountability. Shifting away from CSR paradigms would counterintuitively increase real accountability because firms would have fewer tools to evade oversight.
Many mechanisms are already built into the U.S. financial system to do just that. For instance, the IPO process is relatively robust and can reveal shortcomings in a business, as was the case with WeWork in 2019. When WeWork began to file the paperwork for their IPO, the way in which they had overestimated the value of their business was laid bare. That process encourages honesty in business dealings. This is not to say that the entire financial system is without fault or cannot be improved, but to remind that there are safeguards that we should embrace and build upon, rather than remain complacent or embrace forms of ineffective accountability.
A deeper investigation into the fruits of CSR measures reveals that those who care about ethical actions in the business sphere should reject the current framework without forsaking their ideals.
