Governance & Compliance
Lesson No. 48

Corporate Social Responsibility (CSR) a Poor Substitute for The Honorable Merchant

by Klaus Demleitner



It is a well-known phenomenon that, as soon as a management deficit is identified, management consultants swiftly appear to offer matching solutions, suitably named and packaged. Yet, these deficits could easily be resolved in-house, through careful analysis and purposeful action. It is the same with the questionable behavior of some firms and many managers: instead of challenging bad behavior and moral deficits at source, big consultancies offer Corporate Social Responsibility (CSR) packages as a cure-all, including CSR diplomas. Some chambers of commerce and business associations have jumped on the bandwagon and are strengthening the trend. Even universities and management schools now teach students that CSR is the modern alternative to the honorable merchant.

CSR does not work

CSR is not a practical substitute for the culture and ethos of the honorable merchant, neither in theory nor in practice. On the contrary, given the many recent cases of dishonest management behavior, you could conclude that CSR reports keep getting bigger not because CSR works but because dishonorable behavior (by managers) is spreading.

Consider the lengthy CSR reports of Deutsche Bank (Corporate Responsibility Report 2014, 98 pages and Corporate Citizenship Report 2014, 27 pages). Yet, Deutsche Bank was sentenced to billion dollar fines in the United States, its executives have appeared in German courts, and it was found guilty of the worldwide manipulation of LIBOR, the interbank interest rate.

Also, consider the CSR report of Volkswagen (Sustainability Report 2014, 156 pages). Despite its CSR program, the moral aberrations of VW include a self-serving inner-circle of managing board, supervisory board and works council members. Then there is the systematic falsification of engine emissions data.

The list goes on: swindling has been widely exposed in the automotive, banking, insurance, telecommunications and retail sectors. It is noticeable, but perhaps not surprising, that incidents of bad behavior seem to increase in-step with the size of the firm. Maybe entrepreneurs and small business owners, who are personally liable, have a different idea of what is proper and acceptable commercial practice, compared to managers of (above all) publicly listed corporations.

So what is an honorable merchant?

For the purpose of this essay, a merchant is not just an historical figure but a contemporary executive director, executive officer, general manager, entrepreneur or small business owner. Honorable refers to their behavior toward subordinates, employees, customers, suppliers and society. In particular toward the tax authorities and legal regulations as well as the natural environment (waste and pollution). This offers a wide field for any manager to practice morally motivated leadership and act honorably and honestly, if they so wish. 

Management is dysfunctional

Behavior by managers that once would have been unacceptable and offensive is now commonplace: customers and employees are anonymized via hot-lines to keep them at distance, employees are fired impersonally by e-mail (legal but despicable behavior), suppliers are blackmailed to accept prices and conditions that may bankrupt them, deliveries are refused for minor infringements of terms, which puts truck drivers under time pressure and creates a road safety risk, products have built-in obsolescence, car makers install 'smart' diagnostic components to secretly track our driving behavior and sell the data to third parties, parts are non-repairable so minor faults mean modules must be replaced, banks introduce new fees and hope customers do not notice or react (small amounts from multiple clients means lots of extra revenue), and customer complaints are handled by 'customer type':

Customer type 1: Naive/gullible client — ignore or reject complaint.
Customer type 2: Possibly informed/competent client — offer compensation.

The main lesson is clear: although this list of pathologies is long and varied, it is precisely here where manager behaviors can and must change.

Corporate Social Responsibility is a swindle

Instead of trying to change bad behavior, managers often take a short cut — and adopt CSR. In fact, CSR is like a devilishly clever strategy to divert attention from deceptive business practices to secondary issues: planting trees in rain forests, staff teams painting kindergartens and donations to charity (of course, all tax-deductable). At the same time, managers continue to break the law and act dishonestly. An example of CSR propaganda can be found in the above-mentioned VW report: fair conditions for suppliers are highlighted (page 75) — although this relates to a few items purchased for VW cafeterias! However, VW still applies the Lopez method to the other 99.99 per cent of suppliers. (Lopez is a VW manager who made a religion out of cost cutting). In its present form, CRS is at best an ancillary marketing tool: propaganda, advertising, sponsoring or a special way of donating to good causes (when something is expected in return, particularly if community facilities are helped, and thus politics is involved).

Managers need to get back to basics

Employees, customers, suppliers and society (local residents, taxpayers, civil servants and citizens) are best served if managers perform their core job in an honest and proper manner. Business enterprises that avoid dishonest practice cause less damage (external costs) to society, so that society has the resources to pay itself for kindergartens to be painted. Business managers should get back to basics, act to create value (not extract value) and honestly respect their employees, suppliers and customers.

If we accept that a culture change is necessary: the best place for it is when managers are being hired. That is where the biggest management deficit is. This is due to a hiring practice that does not consider overall competence, character. It ignores any lack of integrity and ability to provide moral-leadership by so-called business 'leaders'; in fact, if fails to take into account the extremely ruthless career-focused egotism of some 'players'. Instead, businesses need people who have an internal compass of moral values and the backbone to apply them.

One excuse given is that morals have changed; the values of the honest merchant no longer apply. Now we must be slaves to the zeitgeist and act and believe that profit comes before people. But that is not true. Business always was and always will be a human activity in a human context. So what is business really about? The renowned management educator, Peter Drucker, gave the answer in simple words — "It's all about people!"