Companies that do good also do well

By Laura McKnight
KANSAS CITY, Mo. (MarketWatch) — For decades, many corporate leaders have subscribed to Milton Friedman’s dictum that the one social responsibility of a business is to increase its profits. But for today’s businesses, it appears that the reverse is true — increasing profits is impossible without adopting a strong dose of social responsibility.

A recent Edelman survey of nearly 5,000 members of the “informed public” — which the research firm defined as college-educated folks with incomes in the top quartile for their age — found as much. No longer are corporate social responsibility and corporate profits mutually exclusive. Instead, doing good can help companies do well.

When asked what was most important for a company’s reputation, nearly two-thirds of those Edelman interviewed cited “transparent and honest business practices.” Half said that a highly regarded company needed to be a “good corporate citizen.” Meanwhile, only 39% mentioned financial returns to investors as important to a firm’s reputation.

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Improving society is not just the lot of the dedicated humanitarian — it’s also the charge of the wise CEO. “Business must align profit and purpose for social benefit,” the Edelman report concluded.

But corporate social responsibility doesn’t just generate public goodwill.

The bottom line
Being a good citizen can also shore up the bottom line. A 2010 study published in Texas A&M-Corpus Christi’s SAM Advanced Management Journal found a “statistically significant positive relationship” between companies that do good and those that do well.

Three economists examined 120 U.S. corporations that were members of the Dow Jones Sustainability Index (DJSI) between 1999 and 2007. To constitute the index Dow Jones assesses the opportunities and risks companies face in the economic, environmental, and social realms.

The authors compared the firms’ financial performances with those of 120 companies that were not members of the DJSI. They found that firms that had embraced corporate social responsibility had higher gross profit margins and higher returns on assets than those that didn’t.

To explain the socially conscious businesses’ economic success, the economists cited elevated levels of loyalty and trust among their customers, especially those deemed “morally conscious.”

The case of Starbucks
Companies are increasingly reaching out to these influential consumers, who reward responsible companies with their business. Consider the case of Starbucks /quotes/zigman/20720/quotes/nls/sbux SBUX -1.83% .

Its coffeehouses are adorned with pictures of Central and South American farmers with their hands in bags of coffee beans. The captions next to the prints tout the chain’s ethical practices — such as fair-trade-certified ingredients, community-based development projects, and charitable contributions.

Starbucks also trumpets the many benefits it gives its employees — health care, tuition reimbursement, access to stock options, and retirement savings accounts.

As a result, consumers feel like they’re making a positive impact on the world with their daily coffee purchases. That sort of personal connection to purchases defines Starbucks’ business. As the company’s CEO Howard Schulz has written, consumers “will embrace only the companies and brands they trust and with which they identify. .... The approach Starbucks is committed to is the only one that will enable us to deliver long-term value to shareholders, partners and customers.”

He’s proven right, as Starbucks took in more than $2.5 billion in revenue last year, thanks in no small part to those positive consumer vibes.

Of course, realizing the benefits of corporate social responsibility requires more than simply giving money away haphazardly. As the authors of the Texas A&M study wrote, “corporate responsibility must pass more than the ‘feel-good’ evaluation: it must pass prudent financial value and produce positive economic impact,” if it is to have maximum impact.

A simple inventory of a company’s existing charitable activities can help ensure that businesses are reaping returns on their social investments. And for executives facing pressure to trim costs, such a tally can also identify potential opportunities for savings without straining a company’s reputation.

Profits are as important to American business as they were 40 years ago, when Friedman offered his famous maxim. But in today’s marketplace, business leaders will not be able to increase profits, as Friedman exhorted, unless they embrace a program of corporate social responsibility.

Laura McKnight is president and CEO of Greater Horizons in Kansas City, Mo.