Companies need to solve social problems not just give away money.

Mark Kramer: We did a conference at the Kennedy School at Harvard about six months ago and it was about the role of private enterprise in global development in developing countries. We had people there from the CSR community, we had people enterprises trying to do business at the bottom of the pyramid. The only thing everybody agreed on is that corporate social responsibility is the wrong term to describe what we’re doing. None of us could agree on what the right term was but we knew it has gone beyond just this idea of responsibility.

There really are tremendous opportunities for companies to make money in solving social problems and in working in developing countries. There are tremendous opportunities to leverage philanthropy to help achieve social impacts that create a more competitive context for business. So when we think of corporate social responsibility or CSR, we really think about the interaction between business and society in all its dimensions and it’s not merely about the company being responsible for its impact on society or what social conditions can do to promote business, but its really that interplay between the two.

Topic: Corporate Social Responsibility vs. Philanthropy

Mark Kramer: We tend to think of corporate social responsibility as the activities that a company performs every day and its consequences on society. So if you have a factory and you have a smokestack and it emits pollution, that’s a corporate social responsibility issue because its part of the value chain of your activities. We tend to think about philanthropy as affecting the external environment so if you’re giving money to a charity or if your employees are doing volunteering work, that is an act of philanthropy.

Where it gets complicated for us is that really, the way companies can be most effective in solving social issues is by using their capabilities, the actual activities that they’re able to perform in their value chain, the skills of their employees. Conversely, where philanthropy is going to be most useful to the business, is going to be things having to do with a trained workforce, a healthy population, a positive regulatory environment, issues that affect the competitiveness of the business. So we really see the two, corporate social responsibility and the corporate philanthropy, as very complementary to each other.

Question: Can companies be moral?

Mark Kramer: We don’t think about corporate social responsibility and even corporate philanthropy in moral terms. Companies have tried to persuade people that they are good companies, that they’re doing the right thing, that they care about people and you’re right, people are skeptical and they’re rightfully skeptical because that’s really not what drives most companies at the end of the day.

But solving social problems isn’t about looking good and it isn’t about being a good company at heart. It’s about actually improving the lives of people in the world today and businesses can do that and their greatest capacity to do that is when they’re using the skills that they have as a business, the networks of suppliers and customers and investors, the technology that they can bring to bear. The issues that they understand best are going to be the issues that they can have the greatest impact on. So if we really think about not just how do we look good, but how do we make a difference in the world; the closer the issues are to our business, the more impact we can have on them.

Question: What do managers need to know about corporate giving?

Mark Kramer: We actually say let’s look at your value chain, at all of the activities you perform as a company, from beginning to end. Each of those activities has some social consequences or impact. They may be good, they may be bad but we need to understand them. Each of those activities really depends on issues in the competitive context where you operate -- again, the training of the workforce, the health of the population, the regulatory environment of government, the research institutions that are out there, the attractiveness of the city you’re in as a place to bring employees to live. All of these things are social issues but they affect your ability to succeed as a company.

So we really apply two lenses. We look inside out and say what are the social consequences of what you’re doing as a company and we look outside in and say what are the contextual issues that affect your success. And then we try and develop a strategy that optimizes both of these, that finds the issues that are most important across all of the divisions of the company, across all of the locations where it operates and figure out how we can really make a difference on those issues.

Question: Why are companies slow to come around?

Mark Kramer: It really does take a shift in thinking, from thinking about CSR and philanthropy as really almost a necessary even. “We’ve got to do it, it costs us money, those damned activists are out there and they’re making us do this.” So there’s a lot of companies that really have built a strong resistance and as soon as a social issue is raised, they become very defensive and they say “We’ve got to silence those activists. It’s going to lead to a consumer boycott. It’s going to lead to regulation. It’s going to lead to things that are terrible for us so we just want to stop it from happening.”

As long as you’ve got that defensive reaction, you’re not going to be able to see the opportunities that are there to really capitalize on and leverage that business. I think a great example is General Motors versus Toyota. General Motors has spent years very successfully lobbying to keep gas mileage regulations low so they don’t have to increase it for their cars because it would cost them more to do that; while Toyota came out with the Prius and has been hugely successful internationally by offering something that had much, much higher mileage.

What happened was the American car companies were so focused for so many years on preventing regulation, that they missed a shift in consumer preference and consumers now want better mileage all the more so in the last few months as gas prices have taken off, but they missed that because they were so focused on the defensive reaction.

Question: Should government play a role?

Mark Kramer: One of the problems with social issues is the costs are often borne by people who are different from those who get the benefits. That’s certainly true of climate change, of pollution but it’s true of many social issues. So there needs to be a way to transfer the costs. There’s a lot of talk about regulating greenhouse gasses and carbon emissions and that’s really necessary because unless there is a cost put on carbon emissions, it’s going to be very hard for industry to address that issue and to spend money to reduce carbon emissions. But as soon as government creates a cost by imposing a tax or some kind of burden, then the whole of US industry has to respond.

Recorded June 4, 2008.