CHAPTER  |  THIRTY-THREE

Social Responsibility Is a Win-Win

Some years ago a publication in Japan asked if I could do a lengthy piece on Peter Drucker's view of the social responsibility of business. This is not always a popular topic among corporate leaders. Let's just say it's not number one on their list. They've got other things to worry about: competition, government regulations, advancing technology, management-worker relations, marketing, innovation, and a lot more. It's not just that they view putting time and resources into social issues as a cost, but they also see it as a distraction from their primary responsibilities.

Drucker on Social Responsibility

Drucker believed that considerations for workers in and outside of the workplace were the responsibility of corporate leaders just as much as the profits, survival, and growth of their businesses or organizations. Social responsibilities were an integral part of doing business. He didn't hide those thoughts under a bush. Today, some would call Drucker a pioneer in the area of business social responsibility, although he probably would have denied this.

Drucker liked to point to the early spirit of responsibility shown by two very wealthy Americans of the nineteenth and twentieth centuries. One was an immigrant to the United States, as was Drucker. Andrew Carnegie, the son of a handloom weaver in Dumferline, Scotland, came to America with nothing and became one of the wealthiest men in U.S. history. Carnegie started working on railroads, but made his money as a steel tycoon. The American-born Julius Rosenwald was the son of Jewish immigrants from Germany who were engaged in what today is known as “the rag business.” Rosenwald started a clothing manufacturing company and eventually became part owner of Sears, Roebuck and Company. He initiated the growth that turned the store into a worldwide colossus.

Both men gave fortunes away to help better society. Peter Drucker singled them out as early examples of how men who made their wealth in society returned the money to society, even as they built their fortunes and their businesses. Among the better known of this type of individual today is Bill Gates. However, being socially responsible means far more than simply giving money away.

Here are five of Drucker's major thoughts regarding what a corporation must do to be socially responsible:

1. Don't leave it to government.
2. The corporate mission comes first.
3. There is an unlimited liability clause.
4. There are unique ethics of social responsibility.
5. There are opportunities for competitive advantage inherent in being socially responsible.

Let's take each, in turn.

Don't Leave It to Government

Drucker found increasing disenchantment with government's ability to successfully initiate or successfully implement social programs. For example, although government coordinates 4-H Club activities in the United States today, it was a businessman, Julius Rosenwald, who originally initiated and developed this concept. It was only after Rosenwald was successful that government stepped in.

Drucker said, “There is now no developed country—whether free enterprise or communist—in which people still expect government programs to succeed.”¹ He gave a number of reasons for the increasing failure of government to assume responsibilities for social problems or to be successful in achieving worthwhile results. However, his overriding reason was that government, by necessity, served too many constituencies. This made it extremely difficult, if not impossible, to set specific goals and objectives, since powerful constituencies have different goals and different values. Frequently, these goals and objectives are mutually exclusive. Yet without agreed goals and objectives, social programs are doomed from the start. Drucker's point was that when corporations see something that needs doing, they should just go ahead and do it.

The Corporate Mission Comes First

If the effort to achieve a positive benefit results in harm to the organization initiating it, this is not socially responsible action, regardless of the good intentions. According to Drucker, the organization's first responsibility must always be to its own mission, regardless of other factors. The first “social responsibility” of a business is to make a profit sufficient to cover its operational costs in the future. If the business fails in its attempt to fulfill a particular social responsibility—possibly because of misallocation of time, resources, or personnel—not only does that prevent it from solving that social problem but it fails society in not meeting its mission and in wasting society's resources.

This point goes back to Drucker's primary purpose of a business: to create a customer, not to create a profit. Customers enable the business to be profitable, while the business fills society's needs and wants. If the organization fails in its primary mission, there is no need for it and it goes out of existence. So if this basic social responsibility of fulfilling the organization's purpose is not met, no other social responsibility can be met, either.²

Unfortunately, advocates for various causes frequently pressure organizations to resolve social issues that are totally outside the organization's area of expertise or its ability to comply. And the actions desired by these groups would hurt the organizations—hence, society as well. Failing to take the action desired, these organizations are sometimes called “greedy” or “unethical.” Drucker would counter that argument by noting that the pressure groups themselves are greedy or unethical, rather than the businesses that refuse to comply.

While nongovernmental organizations must assume responsibilities for solving some social problems, they must, above all, do nothing that impedes their own capacity to fulfill their obligations, which are the rationale for their existence.

Beware the Unlimited Liability Clause

Good intentions of themselves are not necessarily socially responsible, according to Drucker. Moreover, through failure to think through the potential outcomes, many organizations take actions to improve a social condition, only to create significant and unintended negative impacts.

With an “unlimited liability clause” imposed by society, the organization taking the action assumes responsibility for the outcome, no matter what—and not just for the present, but also into the future. Most social advocates, as well as general consumers, view high prices as a social problem that must be addressed. Sam Walton recognized this and built his company, Walmart, into the world's largest retailer by selling quality goods at reduced prices. Walton initiated the cost-saving practices and established a new focus on low pricing, which benefited all consumers. Unfortunately, for Walmart, there were unintended results for which it had to be held accountable.

The same strategies that brought profit, success, and cheers from consumers earlier on also brought legal problems, governmental interference, and bad press later on. For example, Walmart was accused of forcing out smaller, local businesses that could not compete with Walmart's low prices. Moreover, Walmart kept its prices down partly by closely controlling and limiting the pay and benefits of its employees. Additionally, suppliers who were obligated to deal with the colossal buyer that Walmart had become accused the company of squeezing them into bankruptcy. Other studies claimed that Walmart's buying practices had forced manufacturing jobs overseas. Thus, to some, Walmart went from corporate “Good Guy” to corporate “Bad Actor.” Yet Walmart had changed nothing.

Drucker taught that the impacts of decisions are inevitable. So, the first step toward being socially responsible is to minimize the bad impacts. Be careful when “doing good,” for there is an “unlimited liability clause” to which—like it or not—corporations are held accountable for their actions, both in the present and into the future.

The Unique Ethics of Social Responsibility

Drucker struggled with the ethics of social responsibility. He did not find a solution that would cover all contingencies. He did feel that several basic Confucian concepts provided general guidelines that could be applied toward determining the ethics of social responsibility. He also believed that one general guideline applied to social responsibility as well: Primum non nocere, or “First, do no harm.”³

Opportunities for Competitive Advantage in Social Responsibility

Today, social responsibility is the “in thing.” Many corporations have entire departments with the purpose of encouraging social responsibility. They look at company actions that might be causing negative reactions, uncover opportunities for good, and develop and run socially responsible programs. It is easy to forget that this was not always so.

Even Alfred P. Sloan, General Motors’ legendary CEO, claimed that social responsibility was not the concern of business and that the two should remain completely and forever separate. In one of his rare disagreements with Sloan's management precepts, Drucker proclaimed that fulfilling social responsibility was not only a duty but could also result in competitive advantage for a company, far beyond mere good public relations with the general public or its customers.

For instance, Julius Rosenwald became first vice president and treasurer, and then president, of an ailing, unprofitable Sears, Roebuck and Company in 1895. Under his leadership, sales increased an astounding 700 percent. While becoming a wealthy man, Rosenwald invested a lot of money during his lifetime for the betterment of society. This investment included $70 million for schools, colleges, and universities. To some, $70 million is peanuts, but in today's dollars this is equivalent to almost $2 billion.

You hear a lot about the Tuskegee Airmen today. These were the first African-American pilots to enter combat during World War II. They trained at Tuskegee Institute, in Alabama. In 1912, when prejudice was more prevalent than equal opportunity for minorities, Rosenwald donated the money to found this famous African-American agricultural school. In short, while Rosenwald implemented many socially responsible policies because it was the right thing to do, he also saw to it that the welfare of his company was based on the knowledge, skill, and well-being of the company's primary customers. In those days, this was American farmers. Rosenwald put a lot of money into agriculture, even though he was a city boy who didn't know a thing about farming. Intended or not, Rosenwald's social responsibility served a dual purpose: It not only helped people, it also built Sears Roebuck's customer base and helped develop its market. Within ten years, the company went from near bankruptcy to being the largest merchant in the world and one of America's most profitable and fastest-growing companies.⁴ Social responsibility is, indeed, a major competitive advantage!

Social Responsibility Takes Many Forms

IBM's original approach to eliminating discrimination was simply to ignore the cultural, racial, and other differences among its worldwide workforce of more than 150,000 employees. When Lou Gerstner became CEO in 1993, he dropped this concept and initiated a diversity task force with a different approach and a different objective. The new objective was to uncover and understand the differences among the groups making up the IBM workforce and the markets they served. Then the task force was to use what was learned to find ways to appeal to a broader set of employees and customers.

This strategy worked. Understanding and using its corporate diversity became a major competitive advantage for IBM. As a result of Gerstner's initiative, the number of female executives in the company grew by 370 percent and the number of ethnic minority executives increased by 233 percent. All of this had a major effect on bottom-line profits. It led to efforts to develop a broader client base among businesses owned by women, Asians, African Americans, Hispanics, senior citizens, and Native Americans. This, in turn, resulted in a dramatic growth in revenue in the company's small- and medium-size business sales, from an earlier $10 million to hundreds of millions of dollars in just five years.⁵

Those who follow Drucker's ideas of social responsibility are not guaranteed success, but the contributions to the organizations of which they are members and to society can be of immense benefit. Somehow there is always significant value in just doing the right thing, which is even more important than any advantage that might accrue to those who perform acts of social responsibility. I think Peter would agree with this sentiment.