In the early days of capitalism, capitalists did not do much for their employees or for their communities. They believed that their primary economic job was to maximize owners’ profits. They rarely exhibited any social responsibility. Today, a growing number of companies in a capitalist world economy acknowledge and practice some level of social responsibility. But before applauding them, we need to recognize that there are at least five possible levels of social responsibility. A company that simply brags about its social responsibility should not impress you until you hear more about what it is doing.
Let’s start by looking at the company that practices no social responsibility at all. It argues that its fiduciary responsibility is to maximize the profits of the shareholders and owners. The company sees operating efficiently as its primary purpose. In securing resources from labor, suppliers, and channel partners, it pays as little as possible. The idea is that keeping its costs very low will yield the most profits for the owners. The company accepts little or no responsibility for the community in which it is located or for the planet. Milton Friedman, the great free market economist, strongly argued that companies should be free to maximize profits without any other obligations.
Level 1 of social responsibility occurs when companies feel pressure to show some concern beyond making profits. This level usually takes the form of giving charitable gifts to persons asking for help. The company may contribute money to a community drive to feed hungry or injured people. Usually, the charities are chosen somewhat randomly depending on who knocks on the company’s door and asks for a contribution.
Level 2 occurs when pressure is put on the company to pay attention to its impact on the environment. The company is encouraged to reduce its smoke and carbon output, reduce waste, conserve water, and choose materials carefully, keeping the necessity and method of their disposal in mind. Paul Polman, the CEO of Unilever, sees no conflict between being profitable and being environmentally conscious. He said, “Our ambitions are to double our business, but to do that while reducing our environmental impact and footprint.” The CEO of the Hyperion Company, a Business Performance Management software company, believed so much in protecting the environment that he offered to give his employees $5,000 each if they purchased a hybrid car. If all of his 2,500 employees had bought such a car, it would have cost his company $12,500,000. He saw the possible outcome as being well worth the expense.
Level 3 is where the company decides to move from miscellaneous charities to a more focused philanthropy program, sometimes aiming to cure or prevent a major social or medical problem. For example, Avon decided to put its philanthropic energy into raising money to improve research and treatment for breast cancer. Avon has won widespread recognition and applause for its devotion to this cause.
Level 4 occurs when the company takes on a real responsibility to improve the well-being of its stakeholders and its community and the planet as a whole. It decides to give its workers above-average pay. It hires the best suppliers even though they cost more. It tries to attract the best distributors and retailers and reward them appropriately. The company wants every stakeholder group to participate in the productivity gains resulting from their teamwork. Ironically, by rewarding stakeholders more, the company often ends up making higher profits than when focused only on maximizing profits. This level is well illustrated by Howard Schultz, CEO of Starbucks, who not only pays his employees well and gives strong support to the environment but also invests in improving the working conditions of the coffee growers and their communities. The Adidas Group in its shoe and clothing business publishes its “Sustainability Progress Report” each year covering the four pillars, people, products, planet, and partners. In that report, it lists the activities it undertook in each category that year.
Level 5 occurs when a company decides that it is essentially a human enterprise dedicated to improving the lives of its people, its customers, and the planet. Tony Hsieh, CEO of Zappos, the shoe company, sees his task as “happifying” everyone connected with his business. He is in the business of creating happiness, not just profits. Recently, Dan Price, the CEO of Gravity Payments, decided to raise the pay of his 120-person staff to a minimum of $70,000 after having read that people who earn less than $70,000 would gain immeasurably from reaching that pay level. He decided to accomplish this over a three year period. He even cut his own salary from $1,000,000 to $70,000.
So the next time you read that a company really believes in social responsibility, don’t get too excited until you determine at what level they are practicing it. As the stories of the various companies mentioned here show, it is possible for companies to go to much higher levels of social responsibility than simply donating to random causes.
Philip Kotler is the S.C. Johnson & Son Distinguished Professor of International Marketing at the Kellogg School of Management, Northwestern University. Although best known as a marketing guru, Kotler trained as an economist. He received his Master’s in Economics at the University of Chicago under famed Nobel laureate and free-market evangelist Milton Friedman before pursuing his Ph.D. at MIT under Paul Samuelson and Robert Solow, two Nobel Prize–winning Keynesian economists. He is the author of more than 50 books, including CONFRONTING CAPITALISM: Real Solutions for a Troubled Economic System.