I happened to learn about a new book by the legendary Charles Handy when I visited him a couple of months back at his home in Norfolk England ‘ the new philanthropists’. True to the title of the Book of probably Britain’s most prolific management thinker (together written with his wife Elizabeth who is a portrait photographer), Charles talks about a new trend of successful young businessmen who don’t only believe in giving money for just causes but by working on the spot with the needy so as to create a sustainable impact. He offers examples from entrepreneurs from South Africa, Ireland and Australia among others.

Actually a lot of entrepreneurs and companies have been engaging in Corporate Social Responsibility in many different ways. Some have been engaged in pure philanthropy (making Milton Friedman spin around in his grave), some in some sort of proactive philanthropy (probably the kind explained in Handy’s Book), others in CSR projects from funding Children education in communities to providing funds in calamities and family planning instruments in regions of Africa.

In fact, there are a myriad of definitions of CSR itself (which is not the focus of my Blog today) and there has been a lot of work in this direction from Michael Jensen talking about enlightened value management to the proponent of the triple bottom line concept- Guru of sustainability John Elkington himself, adding new ‘ dimensions’ to CSR. A lot has been done, published and researched about. Yet when we look at companies CSR programs; either they still offer a lip service of publishing a sustainability report or a variety of projects under the CSR umbrella they have seem to be like a battery of misdirected loosely fired rockets that don’t seem to be landing anywhere.

In my work with Prof Juergen Volkert of Pforzheim University in Germany, we tried to look at the business case for CSR from a company’s perspective (some hope for Friedman!) and eventually how can companies actually use CSR to either build innovative business models or to position their business models better. I will focus in today’s blog on the business case for CSR and next week on the second part. The business case for CSR essentially consists of two components- first impact assessment of the CSR project portfolio vis a vis communitys’ (where the company is spread) goals and the second of  aligning this CSR project portfolio to Business Value drivers ( CSR is not philanthropy!).

Looking at the first aspect, we use Noble prize winning economist Prof. Amartya Sen’s capability concept- which has been central in order to build the framework at the core of UN Millenium goals or even the United Nations Human development index. Essentially it says that development occurs when 5 instrumental freedoms in a society are strengthened- social, economic, political, environmental and transparency guarantees. There exist specific KPIs to assess at least parts of it, impact in all of these sets of instrumental freedoms or capabilities.

A company can (should!) align its CSR project portfolio to these capabilities in communities it is spread and see the marginal impact that its project(s) create. Of course the position of the business model(s), the company and the stakeholder risks associated need to be factored into this assessment. After this, communication is the key. The marginal impact created needs to be communicated in a structured and innovative way to all concerned stakeholders. Taking one instance, in a green country like Denmark, a consumer products company investing in green buildings might be a good thing to do, but it is unlikely that initiatives like this are going to create a marginal impact so great that it’s going to be noticed. The story might be different of course for an oil company operating there.

The second aspect looks at aligning the CSR project portfolio to internal business value drivers of a firm. In my opinion, a CSR project portfolio should be in the same setting of core competencies, the business model(s) of a company are built upon. This said, each project in the portfolio should look at 4 business value enablers- Reputational capital, Innovation, Risk management, Sustainable value creation.

We use Charles Fonbrun’s work on Reputational capital to build the central premise of the first driver. Every project conceived in the CSR portfolio should have a clear proposition and impact on the RC of the company. It’s a no brainer to state that a high RC acts as a lubricant in times of crisis, helps procure capital at lower costs (Socially responsible investments do well as compared to other stocks) and also supports companies to charge higher premiums to the customers.

Similarly Prof. Rosabeth M Kanter of the Harvard Business School’s work on social innovation provides a great deal of light on how social innovation (referring to my earlier blogs- not just downstream- in markets but also upstream in conceptualizing new product ideas) can be critical. This business value driver not only helps companies’ align their portfolio with respect to the social innovation proposition but also opens the CSR premise to this thought if organisations have not been already thinking on those lines. There are numerous examples to this effect of companies using social innovation to drive revenue growth, at the same time communicating the community developmental impact to garner other advantages.

The last two propositions are certainly connected. Enterprise risk management is a lubricant that prepares a business model to work with limiting frictions with various stake holders. Every CSR project in the portfolio should be weighed according to the needs, wants and even more important – perceptions of key stakeholders in different communities a company is based in. Sustainable Value creation, should in the same way look at areas like creation of open domains to work with social entreprenuers, leveraging company capabilities to develop ( or support) sustainable business models in communities which are not developed. This also means that companies take a life cycle view of their customers or potential customers, financers or potential financers, employees or potential employees and suppliers or potential suppliers with a perspective that covers a longer time horizon.

Defining a clear proposition with respect to these business value drivers can leverage a CSR project portfolio as an innovative instrument to drive sustainable and reputable growth through innovation – that is cost effective and has a lower risk profile. This proposition and the impact created has to be weighed down with the costs of the CSR program- of course to create a win-win situation for companies and communities they work in.

Fair-trade shops have been credited for procuring products at fair price from farmers from less developed countries for products like coffee. What really is a fair price and for whom is a different question. However this kind of Not for Profit model rang loud bells among the customers in the western world especially in western European countries. Customers in these markets were ready to pay premiums to buy these products. Eventually companies such as Starbucks started adopting the same ‘Ethical supply chain’ practices and their revenues soared.

Customers today especially in the developed world provide good incentives to products that are procured ethically. Similarly the Indian subsidiary of Unilever and the British American tobacco company also have employed ethical yet innovative procurement practices such as the ITC’s ‘e-choupal’ which helped them position themselves as socially responsible in the Indian market.

Many other companies also engage Not for Profit models at the touch points with respect to procurement or marketing or sales. The ideas envisaged by CK Prahlad in his bottom of the pyramid concept have been seen as not of something aligned to CSR, but something of a business imperative. After all, no company can forget 4 Billion potential customers albeit having presently poor purchasing power.

The rapid progress in some of the less developed countries and the new economic giants- India and China is bringing a lot of people out of poverty. This rising middle class can become a huge loyal customer base in future if companies already today work on the ‘value based’ touch points with them and take a life cycle approach to these customers.

This might mean selling shampoos in smaller sasches, launching local language search engines over the internet, investing in processed food market, but with a solid backing of market and anthropological groundwork in the local markets, investing in R&D centres in local markets, procuring products ethically or giving heavy discounts on products to educational institutes or to support noble causes.

Intel’s has done phenomenal work in this respect in funding labs as well as educational programs in a number of developing countries. One needs to see which touch point needs to be embedded with CSR- in a developed market, it might mean a fair trade model where customers are in masses sometimes better educated or where there is more transparency with respect to important information. On the other hand, in emerging countries and markets with high elasticity, a more market based proactive approach might bring better results.

In terms of innovation, this approach gives a ‘value focus’ as companies tend to focus on the poorest of poor. Most of the ‘Performance overflow’ related features of many western products, for which customers are forced to pay a premium without understanding them or even being able to use them, could be adapted in a very minimalistic value focus. Similarly if R&D projects related to peripheral or auxiliary technology capabilities are envisaged and are related to some public good or cause, they can be funded through public institutions.

Discomforting or even sometimes vulgar it might seem, but the truth is that many companies seek and get funding through institutional mechanisms such as of the European commission for research projects which not only help solve problems of public nature (technology standards, orphan drugs, knowledge platforms, policy tools and technology support etc) but also help gain technological knowhow for furthering product development for business needs as well.

Hence this pure CSR that is embedded in the business model, really helps build credibility and reputation; furthering business performance and innovation.

About Gunjan Bhardwaj

Gunjan Bhardwaj, advisor, senior editor and member of the editorial board. Gunjan is the leader of the Global Business Performance Think-tank of Ernst&Young. He is also the solution champion for Pricing strategy and effectiveness as well as Innovation management in the advisory services of Ernst & Young with a focus on Pharmaceutical and FMCG sector.

Gunjan is also a guest professor for Growth and Innovation management at European Business School (EBS) in Germany and a member of the scientific advisory board of Plexus Institute in the US which researches on complexity in health sciences.

Gunjan has published a number of papers and articles in various Journals and magazines and has been a frequent speaker in conferences on marketing and innovation related topics. He is also the chief editor of the quarterly journal of Ernst & Young’s advisory practice called Performance.