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Posted on Tue, Aug 24, 2010 : 11:28 a.m.

University of Michigan prof's WSJ 'case against corporate social responsibility' is 'incomprehensible,' executive says

By Nathan Bomey

A University of Michigan business professor is enduring criticism for an opinion piece in Monday's Wall Street Journal in which he spelled out the "case against corporate social responsibility."

The professor, Aneel Karnani, argued that "the idea that companies have a responsibility to act in the public interest and will profit from doing so is fundamentally flawed."

Aneel Karnani.jpg

University of Michigan Ross School of Business associate professor Aneel Karnani

Photo courtesy of University of Michigan

"Very simply, in cases where private profits and public interests are aligned, the idea of corporate social responsibility is irrelevant: Companies that simply do everything they can to boost profits will end up increasing social welfare," Karnani wrote.

"In circumstances in which profits and social welfare are in direct opposition, an appeal to corporate social responsibility will almost always be ineffective, because executives are unlikely to act voluntarily in the public interest and against shareholder interests."

But Karnani's arguments drew the ire of global business consultant Aron Cramer, who wrote an opinion piece posted last night in the Huffington Post calling Karnani's assertions fundamentally flawed and based on old assumptions.

"The businesses that embrace corporate social responsibility are best positioned to grasp the market opportunities in our fast-changing world," Cramer said. "Karnani does business a disservice by rejecting an idea that has great power and potential."

Cramer said he would be speaking at the U-M Ross School of Business' Net Impact conference in October, where leaders and students will discuss how businesses can make the world better.

"I suspect that the 1,500 business students who attend the conference each year will have something to say about Professor Karnani's 'case' against CSR," he said, referring to corporate social responsibility. "I wonder if the good professor will try to convince these ambitious business students that they should forsake their interest in CSR. Maybe he'll be out of town instead."

For his part, Karnani pointed out that it wasn't until environmentally friendly vehicles and healthy foods were considered profitable that auto companies and food makers started producing them.

"These companies are benefiting society while acting in their own interests; social activists urging them to change their ways had little impact. It is the relentless maximization of profits, not a commitment to social responsibility, that has proved to be a boon to the public in these cases," Karnani said.

To promote corporate social responsibility among companies, Karnani said "the ultimate solution is government regulation."

"Its greatest appeal is that it is binding. Government has the power to enforce regulation. No need to rely on anyone's best intentions," he said.

Karnani acknowledged that corruption and inefficiency can reduce the effectiveness of governmental regulation but said that "with all their faults, governments are a far more effective protector of the public good than any campaign for corporate social responsibility.

Cramer said that companies such as General Electric, Ford and Nike have benefited from a focus on social responsibility.

"It is incomprehensible to me that anyone would still argue that companies considering the economic, social, and environmental impacts of their operations are making a mistake," he said. "Not surprisingly, Karnani could not provide a single example of when corporate responsibility has inflicted harm. The weak support for his arguments may be because there is such considerable evidence to the contrary. Most companies have discovered -- to their benefit and ours -- that considerable opportunity awaits companies that leverage their resources to tackle the world's biggest challenges."

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Carl Duncan

Wed, Aug 25, 2010 : 11:54 a.m.

Ed: I found a water downed version, english translation of course, at a yard sale in Muskegon back in the high school days. It was real dry reading.


Wed, Aug 25, 2010 : 10:16 a.m.

@Veracity, I agree that good old fashioned lending standards used by many smaller, locally owned banks were the socially responsible way of lending money. Where we disagree is the role of the secondary mortgage market and CDS's, CDS's, etc. They were not the primary reason for the collapse of our financial system. Failure of regulation and policy were (ie: The Government). By looking away and letting bad lending and financial practices develop and continue, and in some cases, creating, encouraging, and even rewarding bad practices, the government fiddled while Wall Street (and residential streets) burned. Bottom line: the collateral just wasn't there for all of those ill-advised loans when the the housing bubble burst. Downpayments were too small, and often non-existent. Even before facing any financial adversity, borrowers were allowed to be stretched to their financial limits with no reserve in case something went bad for them. On the Wall Street side, all of those financial tools you mentioned were supposed to protect the lending system like insurance policies by spreading the risk of potential losses. Trouble was, there weren't sufficient reserves there in case a collapse happened. Again, failure of regulation. Everyone behaved like they expected the good times to continue. But when the economy hit a bump in the road, the whole house of cards came tumbling down when the over-inflated underlying real estate prices that backed those mortgages fell. Government let it all happen, althought many in the government and in the corporate world knew the risk of catastrophic failure. They didn't want to be the ones to put a damper on the financial party that was going on. The booming housing market was artificially propping up and masking a fairly weak economy. People were making lots of money throughout the whole real estate and lending system. Rather than bite the bullet and risk slowing the economy by doing what was financially prudent, the politicians let bad and risky practices continue so that they could take credit for a good-appearing economy and get re-elected. Those at the top of Wall Street also knew there would be a bailout when things went down the tubes, so they didn't self-regulate either. Too many at the top are allowed to keep passing back and forth through that revolving door between Washington and the private sector. The foxes are being allowed to guard the henhouse, folks, so don't always expect the government and those at the top of the corporate world to lead the way when it comes to social responsibility. Some are too busy looking out for themselves. It has to come from the ground up, the voters and the stockholders. Become informed and vote at the ballot box and vote with your pocketbook.


Wed, Aug 25, 2010 : 10:13 a.m.

I think that in the end, Corporate Social Responsibility is tied in directly to profitability. Because a company's public image is in may ways directly related to its profitability, these companies have PR departments. They highlight all the "good" that they are doing, but this is in no way related to an actual desire to do the public good. It is a necessary cost to convince the public that the company cares. If PR didn't work, then I highly doubt we'd see any companies participating in much of this goofiness. It's like the hot chick in high school talking about how she is nice even to the nerds. She makes a point to be seen talking to them, but come on, folks, who did she end up going to the prom with?

Jay Thomas

Tue, Aug 24, 2010 : 8:25 p.m.

Orthodoxy is normal in the university today. I imagine many would like to get rid of Karnani.


Tue, Aug 24, 2010 : 6:53 p.m.

Macabre Sunset: Many banks maintained conventional loan policies and escaped the mortgage default crisis. Happily, some of them are in Ann Arbor. Fannie and Freddie certainly participated. Also securitization of mortgages, CDOs and CDSs by Wall Street investment firms contributed most to our economic collapse and the bailouts. If mortgages were required to remain with the originating banks rather than being sold and securitized, then banks would not have taken on the risks associated with unconventional loans. Without being able to purchase mortgages from banks, Wall Street investment houses would not have been able to securitize mortgages or to create CDOs and swaps. The resulting economic crisis would have been avoided. Of course new homes would not have been sold in the same numbers between 2003 and 2007 but that problem would have been limited to the home construction companies and those banks supplying them with capital for speculation. And knowing that cheap loans were not available to marginally qualified home buyers, the home builders will have likely scaled back with their construction.


Tue, Aug 24, 2010 : 6:40 p.m.

@ ThisAintKyle, who rues about teh gubmint makin' More Rules: If you want to smash the state, I suppose that's o.k.... so long as you'll grant the rest of us permission to raid the boardroom.


Tue, Aug 24, 2010 : 5:07 p.m.

@ ThisAintKyle - halarious post! Good job!


Tue, Aug 24, 2010 : 4:28 p.m.

"The businesses that embrace corporate social responsibility are best positioned to grasp the market opportunities in our fast-changing world," Cramer said. That amounts to exactly the same thing that Karnani said: "Very simply, in cases where private profits and public interests are aligned, the idea of corporate social responsibility is irrelevant: Companies that simply do everything they can to boost profits will end up increasing social welfare," Karnani wrote. If embracing social responsibility coincides with the best way to capture market opportunities, then, as Karnani points out, you don't have to worry about it -- businesses can focus on the best opportunities and the social welfare improvements come for free. And that's supposed to be the way it works -- the legal landscape should be such that profits and socially beneficial outcomes are aligned. But where they are NOT aligned, it's just not going to work to expect all companies to consistently choose social responsibility over profits (because the companies that do so will be dominated in the marketplace by firms that don't).


Tue, Aug 24, 2010 : 4:07 p.m.

Reading the comments on this and other stories, I sometimes find it hard to believe that they are coming from real adults. What's scarier is that everyone seems to believe what they write. Eeegh. You've got to be kidding me. Therefore I'll be providing relief by saying exactly the opposite of what i know to be true of the situation, and of the economic climate as a whole. I hope I can live up to the ridiculousness of the mindset which seems to permeate this website. Enjoy! Ahem... First, let me say that government unquestionably a force for good and is our Great Protector. It is the job of the government, and when I say government I mean the Federal Government not State or Local governments, to protect us from all ills and evils that may, or may not, exist in this world. "That government is best which can remove, reduce, and eliminate all risk or perception of risk from life." That's a quote, yes I came up with it but I think it's really intelligent anyway. Furthermore, we would be better off if we lived in a society and economy which was completely free from risk, uncertainty, and general fluctuation. These things screw up everybodys life, and we're not going to stand for it anymore. Especially when we have a Government that can solve all those problems. Second, let me say that all corporations are unquestionably a force for evil. They are all about getting more Profit, and are driven only by Greed. And everyone knows it's bad to be greedy. Also, corporations don't produce anything or provide any wealth whatsoever - instead they steal it from the people who are tricked into buying their products or using their services under their own 'free will', which everyone knows people don't really have anyway. No the idea of free will and the freedom to spend your money wherever you like is dangerous, and must be closely regulated by the Government, which knows better than most people what the best use for their money is. It also knows how to run businesses better than the dummies trying to do it right now - only problem is, there aren't enough regulators right now to help these idiots run their businesses. I wholeheartedly agree with professor Karnai, that companies feel no pressure for CSR, and we need more government regulations to make them behave. Right now, companies simply use CSR as another clever way to trick people into buying their crap. So that means a company that was created for the sole purpose to deliver food at the lowest cost to it's customers (even though they would try to make a big profit off them if they didn't have a competitor across town competing for the same customers) that company won't give a care about providing clean needles to homeless kids downtown or free condoms to teenagers because then it would cut into their profit, and they say they would have to raise their costs and then they would go out of business (or so they say! ha - everyone knows these companies are taking the surplus value and just keeping it for themselves, even though it rightfully belongs to everybody). BUT - companies can't be bothered to 'do good', and everyone knows that just doing their job really well isn't the same thing as 'doing good', so instead we need some RULES for them to follow. Rules like they need to give a certain amount of money to non-profit companies, ones who do the REAL work in society. And Rules like they need to ship their stuff in hybrid vehicles instead of diesel trucks, even if it costs a little more. And Rules like they need to help fund some smaller projects that certain congressmen want paid for, and they better help out with funding or else, because those projects are for the good of everyone. So in general, I like it because it involves calling for More Rules, and everyone knows that rules are never broken, bent, stretched, or used to play favorites. Also, the good guys never suffer from more rules because they are happy to follow them, and the bad guys are the only ones who suffer because they always get caught, certain rules are never overlooked by regulators, and therefore nobody ever gets an unfair advantage because of more rules. And if we find out they somehow do, we can make a rule for that;) Thanks for listening, I love you guys (without breaking the rules about that).

Macabre Sunset

Tue, Aug 24, 2010 : 3:31 p.m.

Veracity, the home crisis is mostly the fault of the government, which put in place programs requiring banks to invest in loans that were very likely to fail. Banks didn't set the Fannie Mae and Freddie Mac guidelines that led to disaster.


Tue, Aug 24, 2010 : 2:38 p.m.

"It's his intolerance and hostility toward views other than his own that give him away. He comes across as a total bully; I'll bet he does this all the time. Typical liberalism: it's all about tolerance as long as it's for someone who either agrees with the liberal agenda or whom they want to tempt into dependency and/or being controlled." As I read the article, these are the reasons I thought he was a conservative, who are sometimes pro-business at any cost. ---- How a company makes its money is more indicative of their corporate social responsibility. Even Al Capone gave much to the community.


Tue, Aug 24, 2010 : 2:36 p.m.

Thank you, speechless! I forgot another prime example of corporate social "irresponsibility": the mortgage debacle and economic collapse. Where was corporate social responsibility when those who could not afford home ownership were enticed by banks to sign their economic lives away for "no down payment," "sub-prime interest rate," and "adjustable rate" mortgages. Banks originating the loans had to know that many will default. However, banks had no risk because as soon as these slick mortgages were signed they were sold to Wall Street investment houses to be chopped up and securitized. And, to protect themselves, the Wall Street investment houses created and sold Credit Default Obligations (CDOs) and Credit Default Swaps (CDSs). Often they sold more CDOs than the value of the underlying securitized mortgages (like selling fire insurance on many of your neighbors' homes). As far as I know there may be $142 trillion of these CDOs and CDSs floating around the world. When the mortgage defaults developed many banks and investment institutions found it hard to collect on the CDOs and CDSs. Personally, I believe that the Wall Street investment firms knew that the dollar size of debt related to failed mortgages would be so big and would endanger so many fiancial institutions that the government would have to bail them out. Maybe some large Wall Street firms knew this as fact before creating the debt. Hmmm. We know what happened to our economy since then. I wonder if Aron Cramer could find corporate social responsibility among the banks that issued mortgages that defaulted, or among the Wall Street investment firms that printed money for themselves in the form of CDOs and CDSs. Do you think the financial world has learned its lesson? Should we give them second, third and fourth chances to regulate themselves so that the best interests of society will be served? Or do we remain distrustful about the financial world's commitment to corporate social responsibility? Congress does not believe that the financial industry is committed to corporate social responsibility or it never would have struggled to produce "FinReg", as inadequate as it may be for protecting society. And yet a large segment of our population does not want "FinReg." They do not want another financial debacle either. Why can't they recall the old adage, "You can not have your cake and eat it too"?

Macabre Sunset

Tue, Aug 24, 2010 : 2:32 p.m.

I agree. Cramer missed the point entirely. Government is useful for setting up ground rules that protect its citizens. But this is a guy hand-picked by Huffpost, so we would expect his position to match theirs.


Tue, Aug 24, 2010 : 2:03 p.m.

Capitalism is about satisfying wants and needs. If, say, people want to buy foods that aren't loaded with toxic petrochemicals they'll shop at retailers who stock such foods at the expense of retailers who don't. Whole Foods Market has benefited greatly from satisfying this want, not to mention all the farmers markets and such that are popping up. A top-down approach via regulation won't be as effective as the bottom-up approach of customer demand, especially given the vulnerability of government to regulatory capture. Simple regs, such as "no synthetic chemicals are allowed in food", have the best chance of being effective. Unfortunately most people are short-sighted and business leaders are no exception. Anyone with a long view and basic understanding of probability would understand that spending an extra $500K here and there on better deep water blow out preventers to lessen the risk of multi-$billion catastrophic failure, not to mention deaths, is money well spent. Would better regulation keep such sociopaths in line? Sure... if you can find such people to write and enforce the regs and if they avoid regulatory capture. The odds are better that they'll go into industry where the money is. Making companies pay for any damage they do, including letting them go bankrupt and be auctioned off to presumably more clueful competitors, is more likely to create a self-correcting system. Goldman Sachs has found a neat way to avoid that: put their people in government. Obama's vouching for them ("Hey, I know these guys!") was particularly sickening. Talk about regulatory capture. So, no easy answers.


Tue, Aug 24, 2010 : 1:55 p.m.

"For his part, Karnani pointed out that it wasn't until environmentally friendly vehicles and healthy foods were considered profitable that auto companies and food makers started producing them." Hmm. Sure I suppose corporations should just go ahead and produce items that will loose money. That makes a lot of sense. For some reason I am thinking that companies look to make profits not losses. Losses then to make you go out of business. I agree that companies have a responsibility to act in the public interest. And many do. Here is a link to corporate foundations and how much they give: Odd to see evil companies high up on this list. At No 2 is Wal-Mart. Some banks and even Exxon Mobil up there at No 7. Well maybe some don't consider corporations socially responsibility but I am glad they give some serious money to charity.

Nathan Bomey

Tue, Aug 24, 2010 : 1:42 p.m.

Fixed the typo --- thanks!


Tue, Aug 24, 2010 : 1:05 p.m.

From above: "the idea that companies have a responsibility to act in the public interest and will profit from doing so is fundamentally flawed."  That is simply a true statement. And that is why various social revolutions have happened in the past, and it's also why social democratic countries in western Europe and elsewhere heavily regulate their economies, so as to better insure social responsibility. Karnani is absolutely right in maintaining that, left to their own devices, companies will pursue profitable exchanges and blithely toss social responsibility into the toilet, where most executives seem to think it belongs. Socially speaking, corporate organizations are like idiot savants in how they act out an obsessive-compulsive pursuit of greater profit. The successful ones show genius at turning a dollar to their benefit, while demonstrating blind stupidity at doing everything else. Social responsibility is something that governments and restive local populations historically have had to force on organized business, usually against its stubborn, child-like will.


Tue, Aug 24, 2010 : 1:02 p.m.

I agree with the comment by Long Time No See and somewhat with that of Scylding, although I do not understand why Scylding would classify Mr. Cramer as a liberal rather than a rank conservative. Liberals will favor corporate social responsibility(CSR) over profits while conservatives put unfettered capitalism ahead of everything else. Dr. Karnani could have supported his position with several recent prominent examples. The most obvious example is the Deep Horizaon explosion and the resulting loss of life, and environmental and economic catastrophe. It appears that British Petroleum (BP) and perhaps related firms may have forsaken safety procedures which could have prevented the tragedy. The motivation was purely profit. BP's greedy action (or perhaps bettered characterized as inaction) proved to be folly as the disaster ruined BP's economic plans along with those of many gulf-bordering states. Had BP showed corporate social responsibility, it would have shunned profit for safety. Evaluation of other notorious events involving loss of life or major damage to the environment will often reveal corporate social irresponsibility. Another example is the Tennessee coal ash pit collapse with resulting environmental contamination. How about a recent Salmonella outbreak due to eggs produced at farms having a history of many safety citations? In all cases the only reason for not complying with safety practices that would have prevented illness or property damage was the cost that would reduce corporate profits. Aron Cramer must be aware of corporate failings. Perhaps his ardent defense of corporations as being socially responsible is just part of his job as President and CEO of "Business for Social Responsibility," which provides advice and counsel on all CSR issues. His job may color his view of social responsibility in the corporate world.


Tue, Aug 24, 2010 : 1 p.m.

This should be a topic for "Talk Radio" since neither side can prove that it is right. Rush Limbuagh is off today, I guess we will have to wait until tomorrow to get an answer.


Tue, Aug 24, 2010 : 12:48 p.m.

Well I'm sure he is correct. The capitalistic society thrives on greed. Corporate America has thumbed it's nose at the taxpayer. They thrive. We continue to suffer.

Carl Duncan

Tue, Aug 24, 2010 : 12:32 p.m.

I had a difficult time understanding Sir Thomas Moore's "Island Of Utopia" as well.


Tue, Aug 24, 2010 : 12:14 p.m.

I've had one of Karnani's classes and he's hands down one of the best strategy professors at UM Business school. The guy is a genius.

Stephen Landes

Tue, Aug 24, 2010 : 12:14 p.m.

Mr. Cramer is a "consultant" and therefore has every interest in being able to sell his marvelous theories to management. Unfortunately management seems to think that consultants are more important than listening to their own people.


Tue, Aug 24, 2010 : 12:14 p.m.

"the idea that companies have a responsibility to act in the public interest and will profit from doing so is fundamentally flawed." That is simply a true statement.


Tue, Aug 24, 2010 : 11:51 a.m.

Isn't it interesting how intolerant Mr. Cramer is with regard to Prof. Karnani's views? He finds Karnani's beliefs absolutely incomprehensible, and is very confident that business school students do not share his views, yet he finds it necessary to create an intolerant narrative for these students that involves an envisioning of Karnani being drummed "out of town." If he really thought the man's views were so pathetic, out-of-date, and irrelevant, he would hardly have felt the need to go to such lengths. He doesn't; he finds them threatening. They threaten his agenda. I would be quite willing to wager that Cramer is a liberal, and not just because he publishes in Huffpo. It's his intolerance and hostility toward views other than his own that give him away. He comes across as a total bully; I'll bet he does this all the time. Typical liberalism: it's all about tolerance as long as it's for someone who either agrees with the liberal agenda or whom they want to tempt into dependency and/or being controlled. Otherwise it's all about encouraging/compelling those already in their camp or control to ostracize the enemy of the collective, or of the Earth, or of some other liberal rallying point, like UN business standards being crafted to be imposed on businesses worldwide, maybe...? Could be... Good show, Dr. Karnani!

Long Time No See

Tue, Aug 24, 2010 : 11:34 a.m.

Cramer doesn't seem to understand what Karnani wrote. My interpretation is that Karnani didn't say "corporate social responsibility is bad", he said "profit has more influence on corporate behavior than corporate social responsibility, and forgetting that important point can lead you in the wrong direction when trying to figure out how to influence corporate behavior". Cramer seems stupid or may just be intentionally misinterpreting what Karnani wrote. Does Cramer *really* think that CSR has *more* influence than profit? None of the examples that Cramer provides in the HP article are evidence of anything other than profits aligning with CSR. Where are Cramer's examples of situations where CSR has overridden a corporations profit motive? Karnani didn't say "corporate social responsibility is dangerous", he said misleading yourself by believing that CSR is a more important motivator than profit can be dangerous because you may then overlook situations where government regulation may be required to counteract the profit motive when CSR would have a negative impact on profits. btw - typo: "Cramer" become "Kramer" near the end of this article