Originally published in GLOBES
By SETH J. FRANTZMAN
Corporate Social Responsibility is one of the most exciting new trends in the business world. It employs tens of thousands of people, legions of new departments at corporations devoted to helping communities and doling out corporate philanthropy. These slush funds of goodness are making corporate titans and white collar workers feel good about themselves. Academics describe a new view of the corporation that is no longer merely accountable to its customers and shareholders, but now it is accountable to its stakeholders; the community and the environment.
In Israel there is an increasing trend towards CSR. A team of M.A students (HaYisraeli, Keduri, Radai and Schiller, 2008) at Hebrew University recently noted that “under circumstances of shrinking government budgets over the past decade, nonprofit agencies and individuals in Israel have been turning increasingly to businesses for financial support.” Furthermore they noted that in Israel it is increasingly common to find ” the designation ‘giving manager’ (menahel/et kishrei kehilla or menahel/et ahrayut hevratit) in companies. But they also noted that “while a Western country, numerous factors within the Israeli setting may conspire to foil corporate ethical commitment to philanthropic activity in general…[among them] the dominance of both Jewish traditional structures and a centralized state apparatus over philanthropic and civil society activity respectively.”
In this respect Israel theoretically already possesses a healthy charitable and philanthropic base. The Jewish tradition of tzadakah or charitable giving maintained the community when it was in dire circumstances in the Diaspora, and these foundations have been maintained in Israel. In addition, the Labour Zionist ethos of the State of Israel has created a large socialized cradle-to-the-grave style bureaucracy of socialized and subsidized living from health care to national insurance.
Israelis themselves do not give to charity on anything like the scale of American Jewry, whose giving supports numerous Jewish organizations such as the JDC (Joint Distribution Committee) and Hadassah. The Israeli government also supports numerous NGOs and charities, a fact detailed in a recent Haaretz article entitled ‘State to ease NGO guarantee terms’ (December 21, 2008). There is a perception that Israel, while following the trend of CSR, is actually ‘behind’ the West in that its own local managers do not invest ‘enough’ time and money in CSR.
As corporations transform themselves into NGOs and charities, taking up new responsibilities, the communities around them become dependent on the corporation, the way they were once dependant on some NGO or the government for largesse and welfare. But sometimes this newfangled system of corporate welfare fails miserably. What happens when the corporation focuses so much time on cutting ribbons at new community centers and giving out blankets to the homeless that it neglects its underlying raison d’Ãªtre, namely to provide a product for the market, and drives itself into bankruptcy?
This is precisely what has happened with Washington Mutual. Kerry Killinger and his lieutenants at Washington Mutual spent a great deal of time doling out money and caring for the community, but they seem to have spent less time auditing the mortgages they were servicing and underwriting. In 2007, Washington Mutual gave away $48 million. Now, its out of work employees might wish they had saved that money for hard times. WaMu isn’t the only bank to have spent heavily on charities. JPmorgan Chase gave away $114 million. General Motors, which is now begging the U.S government for a taxpayer funded bailout, gives away some $50 million a year.
Business Week, which published details on corporate giving quotes GM’s philanthropic mission statement; “GM’s philanthropic and community relations mission is to ensure that we maintain our position as a valued and responsible corporate citizen through activities that improve the quality of life in our communities and are consistent with our business goals and objectives.” Unfortunately for taxpayers it might have been better if GM had focused on making cars that people wanted to buy rather than on being a “responsible corporate citizen.” GM is now requesting billions of dollars from the US taxpayer, far more money than it ever doled out to charities.
What if these corporations had invested all this largesse and the salaries of their ‘giving managers’ into Research and Development? Imagine WaMu’s $48 million of charitable giving spread out over ten years and invested each year into due diligence at making sure their borrowers were sound and their loans would be repaid? Imagine if GM had invested its $50 million a year over a twenty year period in R&D to develop fuel efficient cars. Wouldn’t that have been more responsible socially, to the taxpayer, than throwing the money at causes where most of the money gets sucked up into administrative expenses of the charities anyway?
The problem with corporations transforming themselves into philanthropies and taking up responsibility for their communities is that this mission creep takes them away from their primary goal: to make a good product and sell it. By making superior products corporations are able to employ more people and those people are part of the community. By making a superior product and being nimble in the marketplace the corporation provides returns for its investors and they in turn provide liquidity to the local marketplace. But when the corporation spreads out, like an octopus, and takes on responsibilities once held by local churches and charities, it does not focus on its business model, it becomes staid and sometimes it goes bankrupt. Then, with tens of thousands of its employees out of works and factory towns transformed into ghost towns, one must ask: ‘how responsible was the corporation that forgot its central reason for existence.’
We don’t want churches going into business and we don’t want NGOs trying to make profits. We realize that this deviation from the central function of these organizations will harm their goals and pervert their message. Yet we feel that it is logical to create a new corporate model where the corporation is ‘responsible’ to the community through becoming a miniature NGO. But the corporation is most responsible when it is profitable and it is employing more and more people year after year, and providing their homes and families with incomes. Corporate Social Responsibility may seem hard to argue with but the recent crisis has shown that sometimes it can be height of irresponsibility.
The author is a fellow at the Jerusalem Institute of Market Studies.