The Idea in Brief
Public demands for business to show a conscience as well as a profit have intensified. But in addition to activists, many consumers, investors, and business leaders have begun demanding that companies do right by employees, communities, and the environment.
Yet civic-minded executives face serious obstacles. If they undertake costly initiatives that rivals avoid, they risk eroding their competitive position. If they invite government oversight, costly regulations may impede them. If they adopt wage standards of wealthy nations, they risk driving jobs to countries with lower standards.
Can businesses overcome these obstacles to corporate responsibility? Yes—if they use the virtue matrix. This new tool helps companies assess socially responsible behavior and become as innovative in enriching society as they are in enriching shareholders.
The Idea in Practice
How to assess socially responsible opportunities? First, differentiate between two categories of corporate virtue:
Virtue’s Civil Foundation
The civil foundation is the “common law” of responsible corporate behavior, housing customs, norms, laws, and regulations. It promotes socially responsible and shareholder-value-enhancing conduct, but goes no further than meeting society’s baseline expectations.
Companies engage in these practices by choice—for example, offering health-care benefits to employees’ dependents—or by compliance—obeying worker-safety laws, for instance.
Virtue’s Frontier
The frontier represents conduct companies engage in because they consider it the right thing to do. Such conduct may have negative or not immediately apparent value to shareholders. The frontier has two components:
- Structural: conduct clearly contrary to shareholders’ interests. The benefits of such behaviors accrue to society, not corporations. For example, by continuing to pay employees after a fire shut down the company, Malden Mills CEO Aaron Feuerstein spared them hardship and relieved the government of unemployment and welfare costs, but decreased shareholders’ wealth.
- Strategic: risky conduct that contributes to companies’ profit-making strategies and that may add to shareholder value by impressing customers, employees, and competitors.
Strategic behaviors generate the most corporate virtue. Why? They migrate to the civil foundation, strengthening it as other companies imitate them until they become the norm. Example:
When Prudential Insurance let customers with AIDS tap their life insurance policies’ death benefits to pay for medical expenses, the move generated so much goodwill that competing insurers followed suit. Behavior that initially seemed radical became business as usual.
Putting the Virtue Matrix to Work
Strengthening a country’s civil foundation generates the most value for society and shareholders. But lack of economic incentive and inertia make it difficult to move behaviors from the frontier to the foundation. Corporate leaders must remove those barriers, using these principles:
- Vision: Opportunities abound to benefit society and shareholders, but the benefits of strategic-frontier innovations are initially speculative. Cultivate the energy and the communication skills needed to undertake bold initiatives and motivate others to do the same. Consumer agitation can help executives weigh the risks of action, but peer pressure is more effective.
- Peer encouragement: Form a coalition of corporations to tackle big social or environmental problems. Publicize your firm’s successes. You’ll stimulate further innovation by other companies—as Prudential did by trumpeting the market’s enthusiasm for AIDS patients’ settlements through newspaper articles and TV spots.
The images from recent meetings concerning globalization in Seattle, Davos, and Genoa might seem to suggest that only the unwashed and the unruly are pressuring business to show a greater sense of social and environmental responsibility. But it’s increasingly clear that the calls are coming from mainstream quarters of society as well. Many consumers and investors, as well as a growing number of business leaders, have added their voices to those urging corporations to remember their obligations to their employees, their communities, and the environment, even as they pursue profits for shareholders.