Review of Profits with Principles (Hardcover)

Corporate social responsibility (CSR)-how well businesses behave in the marketplace as citizens and what they contribute, beyond how they actually run their businesses-has been on the corporate agenda for several decades, and served as a proactive way for corporations to demonstrate core `values' beyond the profit incentive. Some companies, such banking institutions, came to table reluctantly, and only after being coerced by the 1977 Community Reinvestment Act, which mandated that banks increase lending broadly in inner-city (and often impoverished) communities where they did business. Other international companies, such as Anita Ruddick's worldwide chain, The Body Shop, took it upon themselves to aggressively do business in a principled, values-defined way.

Not all corporations were so inspired, of course, to do good; and most businesses viewed CSR as being limited to charitable donations and philanthropy, not to a systemic and strategic choice for embracing social values to create core value for stakeholders. In the late 1990s, when American saw their financial wealth increase by $3 trillion a year for the years 1998-2000, at a time when the Dow had rocketed to the11,000 level, stakeholders were less concerned with how well the corporation was doing for society.

But those days are over, at least for the foreseeable future, and businesses now must react to public demands for better governance, transparency, and accountability. They have to do this on their own, building trust from stakeholders, enlarging their reach to fuel economic growth, tapping their `distinctive competencies' to harness innovation for public good, and do so while adding real value (in the form of profits) while they create values, grow stock price, improve employee satisfaction, and enhance their global brands as a fundamental part of doing business.

A new approach for helping corporations to achieve that ambitious task is Profits With Principles: Seven Strategies for Delivering Value With Values, by Ira A. Jackson and Jane Nelson, both fellows at Harvard's Kennedy School of Government, a book that uses case studies of companies that have created incremental value for their firms while bringing values into the way they do business.

They also suggest that companies have to react to a crisis in confidence facing business, that while "two-thirds of Americans think that corporations make good products and compete well in the global economy . . . only one-third feel large corporations have ethical business practices." Those attitudes inevitably affect share price and sustainable competitive advantage, issues that reflect directly on company worth, shareholder return, and brand equity. In fact, Jackson and Nelson suggest that intangible assets-the very kind CSR activities help create-contribute significantly to corporate value, with some 50 to 90 percent of value being based on those assets, depending on industries. "They are often spoken about in terms of different types of capital," they say of these intangible assets, "intellectual capital or human capital; social capital or relationship capital; and environmental capital."

To leverage these assets, businesses have to start thinking in a new way about creating long-term profitability and sustained competitive advantage. In fact, corporations have to begin thinking more like entrepreneurs, who exploit opportunities to create a new way of doing business, and who use what is termed "incongruous situations" to drive growth strategies in innovative, revolutionary ways. For businesses, this will mean fostering an intrapreneurial effort from within the organization, using the techniques and vision of entrepreneurs and driving change from inside existing corporate models.
One important prescription being suggested is external innovations corporations can use to create value while effecting positive social change and benefits. Jackson and Nelson's suggestion, for instance,to "spread economic opportunity," shows how companies can have a profound and direct effect on economic and social systems, not only in the immediate communities in which they do business, but also beyond with a national and global reach.

A salient example the authors provide is the case study of how BankBoston achieved a startling resurgence in profitability and influence "consistent with values and a concern for purpose beyond profits." The case study describes how the Bank established a new paradigm by beginning to address serious societal concerns, among them the difficulty experienced by inner-city minority residents of obtaining credit and mortgages. BankBoston proactively answered that need by setting up First Community Bank, a bank-within-a-bank designed to address the specific needs of the once-marginalized, largely-minority population of urban Boston.

What has now become Fleet Community Bank since the 1999 merger of Fleet and BankBoston, Jackson and Nelson note, "has grown to 157 inner-city branches, with 1,500 employees in five states. It has $5 billion in deposits, a $14.6 billion commitment to mortgage and small business lending-one of the largest by any bank-and an innovative inner-city investment bank."And the value created for shareholders by embracing values? BankBoston's share price, which in the early 1990s had been as low as three dollars a share, by the late 1990s climbed to $118 a share and saw a market capitalization exceeding $15 billion.

Another innovative principle, "engage in new alliances," calls for shifts in thinking about social responsibility and the way businesses impact on the communities where they operate. Here the authors suggest a change in the way corporations make philanthropic contributions, so that instead of the "stand-alone, one-way transactions" common to traditional corporate giving, `strategic partnerships' are established between the business and the recipient. These relationships are much more dynamic, sustainable, and beneficial-both for the recipient nonprofits and for the businesses who become their sponsors.

The core belief here is that companies concerned with both profit making and providing social benefits-creating value and values-outperform businesses that focus exclusively on financial gains. That view is supported by other studies which looked at the relationship between the financial and social performance of ninety-five companies. Reviewing the findings of that research, Lynne Sharp Payne, a professor at Harvard Business School, wrote "that only 4 of the 95 studies found a negative relationship between social and financial performance. Fifty-five studies found a positive correlation between better financial performance and better social performance."

No one suggests that transforming corporations into socially-responsible entities is an easy task. But each time a Ken Lay walks into a Federal courthouse to answer for grave corporate misconduct, it is yet another compelling argument why companies that do not embrace a strategy for delivering value with values do so at the risk of losing competitive advantage, brand equity, and a leadership role in the global marketplace.




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