From Corporate Social Opportunity to Corporate Social Responsibility

Abstract

During the early 2020s, business leaders have been faced with the confluence of multiple challenges, the likes of which they had never seen before: the Covid-19 pandemic, systemic racism and the continued escalation of the climate crisis. These challenges forced companies to search for new ways to create value for their investors and other stakeholders; these challenges forced business leaders to think differently about the role that their companies play in the broader society. As we think about how business leaders balance these short-term opportunities and long-term strategies, it is critical that they realize that he level of social responsibility expected by society has risen significantly in recent years. Companies need to move beyond seeing social dynamics as short-term opportunities and incorporate them into long-term strategies. In this study, we offer 6 rules for moving forward and for turning short-term social opportunities into long-term strategic value creations. Business leaders need to focus on offering products, services and relationships that help their stakeholders improve their lives. In doing this, we rely on both academic studies and case studies to show how moving beyond corporate social opportunity and towards value creation through social responsibility is the key to long-term corporate success.

1. Introduction

During the past few years, business leaders have been faced with the confluence of multiple challenges, the likes of which they had never seen before: the Covid-19 pandemic, systemic racism and the continued escalation of the climate crisis. These challenges forced companies to search for new ways to create value for their investors and other stakeholders; these challenges forced business leaders to think differently about the role that their companies play in the broader society.

Of course, corporations will have an enormous impact on what happens in the broader society in the days ahead. The past few years have been very chaotic - but they are in the past. The business opportunities we experienced in the past may or may not be the same opportunities we see in the future. Companies need to develop systems and strategies that are capable of creating economic value in the future, regardless of the societal opportunities and challenges that come their way. Companies need to move beyond seeing social dynamics as short-term opportunities and incorporate them into long-term strategies.

Business leaders are paid to ensure that their companies survive in the short-term while attempting to thrive over the long-term. But getting this balance right, especially in times with enormous social turbulence, is never easy. As we think about how business leaders balance these short-term opportunities and long-term strategies, it is critical that they realize that he level of social responsibility expected by society has risen significantly in recent years. Some companies used to pursue corporate social opportunity (CSO) thinking about how companies engage with significant social shocks over the short-term. These actions are symbolic and empty gestures. The key to creating long-term economic value will be thinking beyond these short-term opportunities and developing strategies that align with what matters to stakeholders. In this study, we offer 6 rules for moving forward and for turning short-term social opportunities into long-term strategic value creation.

Milton Friedman [1] famously said that the only corporate social responsibility any business has is to maximize profits. But how does any business maximize profits? Alex Edmans [2] shows that profits are maximized but connecting a strategy with a what stakeholders are willing to pay for. Bielak et al. [3] show that employees are the stakeholder group that has the greatest influence on how a firm engages with social shocks and societal expectations. Other research, including Schiller [4] and Dai et al. [5], focus on the role that customers play in forcing firms to have more sustainable and socially responsible supply chain. Stakeholders matter, over both the short term and the long term. Anat Admati [6] warns that stakeholder influence can be muted if government regulations and social structures are not conducive to firms addressing such social shocks. And, Gillan et al. [7] provide empirical evidence that firms which have more embedded corporate social responsibility and ESG cultures have lower costs of capital, suggesting that investors and other stakeholders see the value in firms investing in environmental, social and governance imperatives. The challenge for firms is to get the balance right between short-term social opportunities – which may lead to fleeting profitability – and long-term responsibilities – which should lead to long-term and sustainable economic value creation.

This is a conceptual study aimed to help business leaders better understand their role in the decision-making process and what they need to do to ensure their business can survive in the short-term and thrive in the long-term. Doing so requires their business offering products, services and relationships that help their stakeholders improve their lives. We also connect various research streams - from stakeholder theory to resource dependency theory to Milton Friedman’s perspective on social responsibility - to show how academics can think about their own research and where it fits in the broader literatures on social responsibility and value-creation. In doing this, we rely on both academic studies and case studies to show how moving beyond corporate social opportunity and towards value creation through social responsibility is the key to long-term corporate success.

2. Corporate social opportunity vs. corporate social responsibility

Where does economic value come from? That’s not a rhetorical question; but it is a question that we – as both academics and business leaders – frequently take for granted. Yet, through the social and economic tumult of 2020, many business leaders were forced to try to answer that question. The Covid-19 pandemic and related shutdowns put many companies out of business and left many others scrambling for a strategy to survive through the crisis. At the same time, business leaders were working to design strategies to address the Black Lives Matter and other social justice movements around the world, while also dealing with the short-term and long-term effects of a worsening global Climate Crisis. The historic economic shocks of 2020 shed a bright light on where economic value comes from: economic value is created by people working to create a better life, greater wellbeing and greater opportunity for themselves and their loved ones. More simply, economic value is created by people.

Economic and social shocks can present business leaders with short-term opportunities to connect with people and to create economic value. Companies that are agile and able to adapt to these new opportunities will benefit the most. For entrepreneurs, agility and adaptability – or organizational improvisation – can be extremely valuable in being able to quickly turn a short-term shock into the start-up’s long-term strategy [8]. The same mentality applies to companies of all sizes. And when the shocks are so intense, such as the pandemic-related shocks of 2020, business leaders feel like they have to capitalize on every fleeting opportunity. But what if these opportunities do not align with their missions, strategies and resources? What if the businesses cannot strategically improvise? Should the companies still pursue them because they seem good opportunities?

A recent study by the U.S. Federal Reserve studied business closures during the Covid-19 pandemic [9]. In an average year 7.5% of all businesses close. During the first year of the pandemic, business closures were approximately one-quarter to one-third higher than normal. This increase was dominated by “Other Services” (barber shops and yoga studios) and “Leisure & Hospitality.” However, there were some industries that experienced lower than typical closure rates during the pandemic, including grocery stores, take-out restaurants, electronics stores and arts, entertainment and leisure. Why? What did companies in these industries do differently? Perhaps it was as simple as being essential and providing both needs and wants in safe and efficient ways. But maybe it’s not that simple.

We present an approach that business leaders can use to think beyond these short-term opportunities and stay committed to their long-term missions and strategies – which is especially useful in times of turbulence and uncertainty. Since the beginning of 2020, business leaders have seen many chances to take advantage of these windows of opportunity and (perhaps) realize some short-term profits; we know that the time perspective regarding windows of opportunity is particularly critical for entrepreneurs and small businesses [10]. But what happens when those windows close? What happens if the company does not have the resources to effectively leverage those opportunities?

Corporate social responsibility is generally thought of as creating value in ways that satisfy legal obligations and society’s prevailing conventions [11]; we use the term “corporate social opportunity” to refer to these windows where business leaders think they can follow a social movement to create economic value. Corporate social opportunity is distinct from corporate social responsibility because it has a short-term focus and may be disconnected from the strategic intent of any corporate actions. Corporate social opportunities are frequently symbolic and empty gestures, aimed at following moments of economic and social chaos, but are not part of longer-term strategy or movement.

During the summer of 2020, as the Black Lives Matter and anti-racism movements were growing around the world, many businesses announced new initiatives and positions focused on diversity, equity and inclusion. But what has been done since then? The concern, obviously, is not with business leaders wanting to address systemic racism, both within their companies and within society. The concern is with the authenticity of these initiatives [12]. Business leaders know there is a lot to do in this area; but are they genuinely intent on building the infrastructure and developing the strategies necessary to address racism over the long-term [13]? Are they willing the make the necessary financial investments; or are they looking capitalize on short-term emotions? A similar analogy can be made about corporate initiatives to buy carbon offsets, rather than to actually reduce carbon emissions, in order to (appear to) address the Climate Crisis. In environmental circles, we have referred to such actions as greenwashing for decades; our term “corporate social opportunity” includes greenwashing, but also includes empty gestures about fighting racism, investing in essential employees, caring about employees and their mental health and any other fleeting words that do not have the necessary financial and strategic investments behind them.

In scholarly research, we frequently separate financial and strategic investments, even though we innately appreciate how interconnected they are. We explicitly connect financial, strategic, corporate social responsibility, leadership and entrepreneurship perspectives in order to provide more relevant policy and practical lessons. We use the foundations of stakeholder theory to consider the decisions that individuals are constantly making regarding short-term costs and long-term benefits as they work to create better lives. But then we expand on that to show how an inclusive stakeholder theory perspective can help business leaders understand their role in decision-making and what they need to do to ensure their business can survive in the short-term and thrive in the long-term. Where does economic value come from? Economic value comes from people working to improve their lives; for businesses, economic value comes from offering products, services and relationships that help their stakeholders improve their lives.

3. Strategies for creating economic value

In the words of Larry Fink, CEO of BlackRock, one of the world’s largest investment managers, “climate risk is investment risk” [14]. We could say the same about other macro risks: social risk is investment risk, governance risk is investment risk and leadership risk is investment risk. This connects directly to our central argument: that corporate managers need to move beyond capitalizing on short-term corporate social opportunities and focus on embracing their stakeholders’ values and working to create strategies that lead to long-term economic value creation [15]. Financial and economic value are only created when leaders realize the benefits that come from managing climate, social, leadership and other macro risks.

But how do we do that? What are some strategies and best practices that we can employ? We offer the following 6 rules for moving forward and for turning short-term social opportunities into long-term strategic value creations.

1. Create Positive Externalities – Economists frequently talk about externalities in only negative ways, such as the pollution imposed on a community by one single factory; the entire community pays the costs for the factory’s benefits. But positive externalities exist, too. If I invest $1,000 in my home’s front garden, it may increase the value of my home and of my neighbors’ homes by much more than that initial $1,000. Businesses can create positive externalities, too. Think of Starbucks paying for its associates to attend college; think of UPS drivers only making right turns. These are (relatively tiny) short-term investments that can have (relatively large) long-term benefits.

2. Embrace New Stakeholders –At any given time, no company will ever know if they are maximizing economic value. They think they know who their stakeholders are and what their profits are; but could the profits be higher? Can we embrace new stakeholders who will create even greater profits for us? In the United States, fewer than 20% of corporate directors are women and fewer than 5% of CEOs are women. Given that 40–60% of most companies’ stakeholders may be women, what do these leadership demographics say about inclusion and representation? Do the female customers and employees feel respected? Many companies have increased the number of women serving as directors and many companies have created Director of Diversity positions in recent years. These are necessary but not sufficient investments for embracing new stakeholders. The real test will be whether those new stakeholders are integrated with the strategies and operations of the firm over the long-term, instead of extracting value from certain stakeholders.

3. Ignore Sunk Costs – The investments we made in the past are in the past. As we decide what strategies and investments to make for the future, we only care about the incremental, future cash flows associated with any investment. Maybe we have to pay $1 million to shut down a project in order to move forward with a project that will create $5 million. The corollary to ignoring sunk costs is to focus on opportunity costs. What opportunities are we sacrificing by not moving forward? Think of ExxonMobil being one of the last global energy producers to begin investing in non-fossil fuel source of energy. Think of Ford and General Motors ignoring investing in hybrid technology during the early 2000s. Think of any automobile manufacturer not going all-in with electric technology during the 2010s and 2020s as Tesla has. The opportunity costs of avoiding the future can be quite significant.

4. In Business, Nothing is Intangible – In business, everything has economic and financial value. We are either creating value or we are destroying value. Leadership, communication and organizational design may seem intangible but, they all have a significant impact on a company’s finances. So do many other seemingly intangible aspects of business that directly affect that how employees perform their work: morale, respect, trust and culture. Every decision has economic and financial impact and it’s up to each organization’s leadership to ensure that all decisions move the organization towards its mission. Thinking any business issue is intangible is myopic and dangerous.

5. Culture Matters – Culture can be a very powerful positive externality. In business, culture can be defined as programmed behavior. Culture can be influenced and managed (McNulty, 2016). Sometimes this programming is active, sometimes it is passive (e.g., one company may have an explicit dress code, whereas another may not have a dress code but all employees choose to wear a similar outfit anyway). Culture is a function of the people, systems and institutions within any organization or community. The behavior that becomes programmed within any organization is a function of the choices made by the leadership of the organization. And it is the behavior of an organization’s people that will determine how effectively and efficiently it achieves its mission, creates social welfare and maximizes economic value. Economic value is created by culture. And all too often, economic value is destroyed by culture.

6. Profits Only Happen Because of People and the Planet – For years, people, planet and profit have been referred to as “the 3 Ps” that determine a company’s success; these are the three factors we see in triple-bottom line accounting. People and the planet are inputs, resources essential for the company’s operations; profits are the result of how effectively and efficiently the company employs human and natural resources in its operations. No company has ever made a profit without people or the planet. We learned this in 2020: without customers and employees, and with limited ability to employ natural resources during the pandemic lockdowns, many companies lost their profits and had to rely on loans and government subsidies to survive, thus borrowing on a future that may or may not come. The year 2020 gave us a painful reminder that we get to decide how we embrace people and the planet as we move into the future.

The foundation for creating positive externalities and embracing new shareholders represent the company’s impact and operations. These tactics will be closely aligned with the company’s underlying mission. The foundation for ignoring sunk costs and knowing that all investments and actions have tangible economic impact is the firm’s strategy. A SWOT analysis or similar strategic plan can identify the internal resources and external factors that will dictate the cash flows and economic impact of the company’s actions into the future, independent of what may have happened in the past. And the foundation for appreciating that culture matters and that profits happen because of people and the planet is the company’s authenticity [16]. Culture is an evolving dynamic, framed by leadership, that influences stakeholders’ actions; a company’s people and relationship with the environment determine the company’s profits [17]. Myopic greenwashing, propaganda and riding social opportunities are empty gestures that will destroy firm value in the long-term; being authentic with communication, incentives and investments is the only way to align corporate mission with economic value-creation [18].

4. Inspiration for value-creation

4.1 Literature and history: Milton Friedman debates

It may be cliché to have a discussion around corporate social responsibility and aligning strategy with purpose by addressing Milton Friedman’s 1970 position that a company’s only corporate social responsibility is to maximize profits [1]. But, given the multiple economic and social challenges of 2020 – not to mention the 50-year anniversary of Friedman’s article – this perspective needs to be understood. Friedman wrote his article in response to the many calls for businesses to focus on social issues – and not just profits – following the social and environmental challenges that erupted during the 1960s. Friedman contends, that in open and free markets, shareholders can invest in philanthropic or social causes that are important to them individually, but it is not a CEO’s role to make such investment on behalf of the shareholders. Importantly, Friedman does explain that it is perfectly appropriate – or, responsible – for CEOs to make such investments if the shareholders demand such and doing so maximizes profits.

We do not mention Friedman to agree with him or to disagree with him; many brilliant people have disagreed on the appropriateness of Friedman’s perspective over the years. Alex Edmans has generally defended Friedman’s perspective as suggesting that “it is legitimate for a company to focus on increasing profits because the only way it can do so, at least in the long term, is if it treats stakeholders seriously” [2]. Anat Admati argues that allegiance to Friedman’s perspective can produce enormous damage to society because it is built on assumptions that do not exist in reality and Friedman’s rules of the game “become meaningless without effective enforcement, with the ultimate outcomes reflecting little if any ‘social responsibility’” [3].

We will not settle this debate here. We mention Friedman to lay out the foundation for how we believe corporations should address social opportunities and strategies. Directly or indirectly, Friedman’s perspective is a foundation of the agency theory [19]. Agency theory recognizes both the separation of control and the conflicts of interest that arise when principals hire agents to serve the principals’ interests. The key to a successful principal-agent relationship is aligning the interests of the agents with the objectives of the principles. Many critics of agency theory argue that the focus on agents serving the myopic needs of the principals overemphasizes short-term profits at the expense of long-term value creation, because doing so maximizes the rational self-interest of the agents. Hart and Zingales [20] advocate moving from shareholder wealth maximization towards the more shareholder welfare maximization because shareholders are pro-social humans who (may) care about more than just money. In the short-term, there can be a significant difference between shareholder wealth and shareholder welfare, as markets may be slow (or unable) to accurately price-in both the positive and negative externalities that result from corporate actions.

We know that small businesses and entrepreneurs have much higher business failure rates than larger businesses do [9]. On average, approximately 15% of businesses with fewer than 5 employees fail in a given year; the rate is closer to 30% for such small firms that opened during 2020–2021. Many of these firms do not suffer from principal-agent conflicts, as the managers are frequently also the owners. But small businesses are particularly vulnerable to economic whims and may be tempted to capitalize on short-term opportunities. If those opportunities align with their mission, strategy and resources, then those short-term social opportunities can become long-term purpose and profits. But what if they are not so aligned? What is the company sacrificing by chasing fleeting social opportunities? What happens when the current window of opportunity closes and a new issue arises? Resources – human, financial and natural – are limited and using limited resources to chase a fleeting moment is likely to have long-term, negative consequences. The key to turning short-term opportunities into long-term profits is to authentically align their investments in these new opportunities with their long-term mission and strategies [21].

4.2 Examples from the early 2020s

The Covid-19 pandemic obviously created many challenges for businesses of all sizes. We saw the disastrous consequences most vividly with start-ups and small businesses; while some entrepreneurs saw the social and economic shocks as opportunities to create a new venture, creating a sustainable business was particularly challenging during 2020 [22]. But, during 2020 and 2021, we know that business leaders were faced with the confluence of multiple challenges, the likes of which they had never seen before: the Covid-19 pandemic, systemic racism and the continued escalation of the Climate Crisis. As 2021 progresses, we know that the business opportunities we experienced in the recent past may or may not be the same opportunities we see in the future. Companies need to ignore sunk costs. Companies need to develop systems and strategies that are capable of creating economic value in the future, regardless of the societal opportunities and challenges that come their way.

Businesses exist to create economic value. Of course, there are many ways to define economic value. Some companies may view economic value in purely financial terms; some may view economic value as relating to broader social welfare; others may view economic value in more specific and personal terms, such as a third-generation family business owner wanting to pass the business down to the fourth and fifth generations. In competitive markets, the dynamics that lead to financial value, to broader social welfare and to family business succession become the same. Those dynamics relate to people and resources; economics is the science of allocating resources to be used by people. However, many companies are not focused on how to use social dynamics to create value for people. Companies that fail to focus on the social dimension are failing to focus on their future.

For many people around the world, the dominant economic event of 2020 was the Covid-19 pandemic and how it affected health, wealth and relationships. For others, the Black Lives Matter movement and devastating climate crisis were the dominant economic and social events of 2020. These events combined to make 2020 a most unique year. And a unique example can help us understand how these different social issues may be more connected than they at first seem. During the year 2020, American electric vehicle-maker Tesla saw its stock price increase by 743%. Tesla’s market capitalization was more than double the combined market value of Ford, General Motors, Toyota and Honda. Why?

Of course, nobody knows why. But we do know (or assume) that stock prices represent the present value of expected future cash flows and value-creation. Stock prices are a bet on the future of a company. Tesla’s corporate mission is “to accelerate the world’s transition to sustainable energy.” Since becoming a listed company in mid-2010, 2020 was Tesla’s only profitable year; and 2020 gave the company 4 of its 10 profitable quarters since mid-2010. Maybe Tesla’s stock price performance in 2020 was a result of newfound profitability and investors updating their forecasts and narratives about the company’s future.

But perhaps the 743% stock price appreciation was directly a result of the economic, social, governance and environmental challenges the world faced in 2020. Perhaps these events illuminated Tesla’s unique strategies and competitive advantages – and those are the factors that investors were updating in their forecasts and narratives. If we accept that that the Covid-19 pandemic was (at least indirectly) a result of our increasingly globalized business worlds and lifestyles, the narrative of business success in the future may include the costs and benefits of our business relationship with the natural environment. As business encroaches on the natural world, we increase the probability of the natural world fighting back and presenting us with ever more challenges we were not prepared to deal with. In order to prevent another Covid-19 and another 2020, we may need to change our preparedness for dealing with another deadly virus or our relationship with nature. Thus, an investment in Tesla might represent a bet on us changing our relationship with the natural world and how we use our natural resources.

We are not pretending that Tesla’s 2020 stock price appreciation was entirely driven by Covid-19 related enlightened expectations of a changing world. There are many other factors that could have driven investors towards the stock: more effective leadership, more efficient production, greater access to recharging stations. We know that Tesla’s mercurial CEO, Elon Musk, has the potential to affect the company’s stock price negatively or positively with a simple tweet or interview.

But what may have changed in 2020 is investors gaining a greater appreciation for the role that environmental, social, leadership and strategic factors play in each company’s success. During 2020, these factors each became significantly more important to individual stakeholders and the societal institutions entrusted to serve individuals’ values. And some investors expect Tesla to deliver on aligning our values with the world we want in the future. Investors like to talk about ESG investing, looking at the ways that Environmental, Social and Governance issues; but we generally only consider one of the 3 letters at a time when we analyze each company. We rarely consider a company’s combined E, S and G dimensions. Tesla, however, may be one of the few companies and investments where we really see the E, the S and the G in ESG being integrated.

5. Frameworks for value-creation

5.1 ESG principles

As discussed above with respect to Tesla, the events of 2020 increased investors’ focus on ESG – or environmental, social and governance – factors that drive corporate value. The term ESG has been part of the business vernacular for nearly two decades; it was introduced in 2004, in a report titled “Who Cares Wins” by the United Nations’ Global Compact and the International Finance Corporation as an investment strategy for asset managers [23]. Since then, it has evolved from being a filter for investors to being a focal point for corporate strategy, as corporate leaders have worked to integrate the tenets of ESG into their long-term visions. But what does this really mean? And how have ESG principles been put into practice?

The “Who Cares Wins” report stated that its purpose was to “better integrate environmental, social and governance issues” into both investment and corporate strategies. However, this integration has never happened. Investors, managers and leaders see the terms environmental, social, governance as independent ideals. They focus on one at a time. Managers do regularly account for E, S and G issues in their investment decisions, but full integration of the relationships and synergies between the ideals has never happened [24]. Many of us have been expecting a paradigm shift in how leaders think about and invest in ESG, but there is still a long way to go before businesses fully scale and integrate the interconnected elements of ESG to create economic value [25].

The 2000s were the decade of the G in ESG. Following the corporate governance scandals of Enron, Parmalat, WorldCom and others, corporations focused on increasing the transparency and independence of their governance structures. In the U.S., two major pieces of regulatory reform – Sarbanes-Oxley in 2002 and Dodd-Frank in 2010 – provided guidance on improving the G in ESG. And markets responded. The number of independent directors on boards increased considerably (from just over 50% in 2000 to nearly 80% by 2020) and shareholders felt they had greater ability to monitor and influence corporate decisions (such as through “Say on Pay” votes, encouraged by Dodd-Frank).

The 2010s were arguably the decade of the E in ESG. Following the Global Financial Crisis, many governments realized that they needed to envision new drivers of innovation and growth. In the U.S., the American Recovery and Reinvestment Act of 2009 provided substantial subsidies for businesses to invest in renewable energy programs and infrastructure. For this first time since the U.S. government began subsidizing energy in the early 1900s, renewable energy investments were incentivized more than fossil fuel investments. And the markets responded. Walmart became one of the world’s largest buyers of photovoltaic systems. Tesla and its mission “to accelerate the world’s transition to sustainable energy” grew out of this legislation. And companies around the world – including Unilever, Nike, ING, Nestle, Danone and others – became missionaries for connecting customers’ environmental values to corporate profits.

While it is still early in the decade, the multiple challenges of 2020 and 2021 suggest that the 2020s may be the decade of the S in ESG. The Covid-19 outbreak and the many, divergent attitudes that arose regarding how best to address the pandemic, the continued impact of Black Lives Matter, the resurgence of MeToo, the mental health, data privacy, and relationship issues of a locked-down society and many other potential social issues suggest that we will continue to face new and more complex challenges than we have ever seen before. Companies need to find ways understand how social factors drive value-creation.

The challenge is that this idea can quickly become abstract when trying to quantify social value. Estimating the return on investment on the installation of solar panels or understanding how investors value transparency can be measurable aspects of ESG; understanding how respect, empowerment, equity and inclusion create value is far more complicated. But we know that investing in empowerment, equity and inclusion can lead to greater representation, stronger commitment and higher productivity, all examples of positive externalities that lead to improved cash flows and profits.

But that complexity does not mean that corporate leaders should ignore it. Nothing a business does is intangible; everything has economic impact. As we see the social dimension become more prominent in business strategy, we may begin to see the three ESG factors become integrated. Covid-19 has had disproportionate impacts on certain populations – elderly, immuno-compromised, front-line workers – as a result of the G and the S interacting. The climate crisis around the world has exposed inequities, vulnerabilities and environmental racism that has existed for centuries, as a result of the E and S interacting. These dynamics are not going to moderate until we integrate the E, S and G into corporate strategies that extend beyond the current opportunity. People, the S, will always be the source of revenue for every business and will always be the source of executing any corporate strategy. One key to integrating these seemingly disparate dynamics may be to effectively create novel partnerships between stakeholders rather than traditional business transactions [25, 26]. Short-term partnerships can become long-term relationships if the businesses are able to authentically integrate stakeholders’ values into the strategic plans [27]. So far, the 2020s have made it clear that integrating the broader social dynamics with corporate strategy for their unique stakeholders is more essential now than ever.

5.2 Social responsibility and stakeholder welfare

In theory, economic value-creation and financial profits come from the same place, making it unnecessary to settle any debates about the accuracy of Milton Friedman’s arguments. But where do profits come from? Simply, profits are the result of revenue increasing or relative costs decreasing. Revenues come from customers; costs are paid to employees, suppliers, governments, partners and investors. Let us assume that all of these people are rational and they only engage with a business because such engagement makes their life better, however they choose to define ‘better’. Revenues only increase when the company provides products and services that customers choose to buy; costs only decrease because the employees, suppliers, investors or others choose to charge the company less, presumably because the company is making their life better in some way independent of the cash compensation that shows up on the income statement.

• Would customers be willing to pay more for a seemingly inferior product that comes with superior customer service?

• Would suppliers accept less cash in exchange for a long-term contract?

• Would employees accept lower wages in exchange for on-site childcare?

We know the answers to all of these questions: they might. Questions such as these fit within the realm of stakeholder theory (or even social identity theory). Stakeholder theory never attempts to identify which stakeholders are most important; it merely suggests that all stakeholders are important and it’s up to managers to determine which stakeholders create the most value for each firm [28]. Shareholders are certainly important stakeholders; they provide financial capital so the firm can invest in people, projects and growth. If the return on their investment is less than what they require, they will take their money elsewhere; if the return on their investment is greater than what they require, they will invest more. Shareholder capital is a critical resource that can be used to increase profits, which will only happen if the company is improving stakeholder welfare.

Hart and Zingales [20] argue that corporations can scale social investments in ways that individual investors cannot and corporations can be more effective at pursuing pro-social objectives than government entities, in part because corporations are more immediately affected by individuals’ preferences. Where corporate managers may be expert in designing marketing strategy or financial policy, many issues of ethics or social policy are a matter of individual shareholder well-being and not managerial expertise. Zingales and Hart [20] do not address stakeholders other than shareholders, but it’s easy to extend their argument to all other stakeholders. Do managers, directors and owners incorporate the welfare of all stakeholders when setting corporate policy? Of course, they do this all the time. For example, any marketing professional will tell you that their job is to “create customer value.” Could any company maximize shareholder welfare without creating customer value? In the same sense, no company can maximize profits without also optimizing its relationships with people and the planet; all of these dimensions are interconnected and interdependent.

5.3 Stakeholders: The creators of economic value

One lesson that business leaders were reminded of during 2020 is that all stakeholders matter. Many hospitality firms, restaurants and other entertainment companies went bankrupt as their customers stopped giving them money. Employees were classified as “essential” if their work was immediately required for the short-term execution of the company’s business. And the importance of efficient supply chains came into full view as we all worried that we may never have another opportunity to buy toilet paper, hand sanitizer or disinfectant. Amazon’s stock price increased by 117% during 2020. Can we infer that this means Amazon’s stockholders benefited more than Amazon’s customers, employees or suppliers? No, we cannot. What would have happened to these non-shareholder stakeholders if Amazon had not done its job throughout the year? Where would customers have gotten our toilet paper, hand sanitizer and disinfectant? The 117% stock price appreciate was the result of Amazon creating economic value for all stakeholders, not just the measure of creating financial value for shareholders. For Amazon, and many other companies, embracing new stakeholders was the key to their ability to survive and thrive and 2020.

In the context of CSR or CSO, maximizing profits is only possible if companies satisfy the values and needs of their stakeholders. Society’s values represent the economic decisions that individuals make based on what they value, on what is important to them. Government institutions are responsible for taking care of the most basic of these values; but governments can be slow, inefficient and too easily influenced [18]. During 2020, the role that businesses served in helping individuals satisfy their values and needs became ever more important. Companies in certain industries, such as travel and hospitality, were devastated by the pandemic and related restrictions. Others that were able to satisfy our most basic values (like Amazon), our needs (like Zoom) and our wants (Etsy) created enormous amounts of financial value – because they created enormous amounts of value for individual people. Amazon’s stock price rose 117% during 2020; Zoom’s stock price rose 396% during 2020; Etsy’s stock price rose 302% during 2020. Are these examples of companies capitalizing on short-term social opportunities created by the pandemic? Perhaps. But, while they aren’t perfect, stock prices should be forward-looking. Stock prices should not reflect what any company was able to do in the past, but rather they should reflect what the companies are expected to do in the future. Stock prices will always ignore sunk costs; business leaders need to do the same.

6. Creating economic value

6.1 The business case for integrating the E, the S and the G in ESG

The 6 strategies provided in Section 2 above provide some general perspective on turning short-term social opportunities into long-term strategic value creation. Each of these rules or perspectives can be incorporated into the aforementioned ESG framework for deriving value through environmental, social and governance dimensions. But frameworks and ideals may not be enough to convince your CFO and investors that investing in ESG will improve firm value. The story you tell and how you justify investing in ESG is critical. We have identified 6 drivers of economic value that may help corporate leaders make the business case for investing in environmental, social and governance initiatives.

1. Market Access – Clearly identifying new product, geographic or labor markets that can generate new revenues or lead to lower relative expenses.

2. Operating Efficiency – Making investments that can lower operating expenses is perhaps the most quantifiable driver of the business case for ESG. But investing in people and culture can also lower turnover, increase inclusion and increase productivity.

3. Innovation – How can we utilize new technologies to create economic value? Can we create those new technologies ourselves? External forces and evolving stakeholder preferences will always present opportunities to innovate; businesses must have the courage to invest in those opportunities.

4. Risk Management – People, safety and other risk management tools can be enormous sources of value creation through ESG. Think of opportunity costs: what are the costs of not making certain investments? Avoiding many costs creates economic value.

5. Regulatory Mandate – In 2020, we saw the devastating confluence of public health, social inclusion and environmental factors. In response, we have seen, and may continue to see, increased regulatory pressures on companies to invest in ESG. This is not new (such as quotas on the number of women serving on boards of directors, incentivized investments in renewable energy, and adopting the United Nations’ Sustainable Development Goals as country-specific goals). Companies that align their strategies with such regulatory initiatives are likely to benefit the most over the long-term.

6. Reputation Enhancement – As customer and stakeholder preferences evolve, they will look to businesses to provide value in different ways. Companies that align strategies with stakeholder preferences will improve their brand and reputations the most. When Walmart invests in solar energy, is cost reduction the only goal? Surely these investments improve many people’s perception of Walmart’s values as a company – which can directly create economic value for Walmart. And there’s nothing wrong with that.

These 6 drivers of economic value are key to turning a short-term opportunity into a long-term movement. The examples in Table 1 show how we can use these business case drivers to tell the economic story of the social events that dominated 2020 – and will continue to dominate economic growth throughout the 2020s.

	#BLM black live matter & social justice	#MeToo gender inclusion & gender equity	#ClimateAction natural resources & the environment
Market access	Selling products and services in communities and regions that you have previously ignored; inclusive leadership teams provide innovative vision and perspectives; new investors; flexible work arrangements.	Selling products and services in communities and regions that you have previously ignored; inclusive leadership teams provide innovative vision and perspectives; new investors; flexible work arrangements; on-site childcare.	Creating products and platforms that will shape the future of natural resource relationships; new partnerships lead to new product and geographic markets; new investors.
Operating efficiency	Broader and more inclusive supply chains lead to lower costs; enhanced corporate culture decreases employee turnover costs and improves productivity.	Broader and more inclusive supply chains lead to lower costs; enhanced corporate culture decreases employee turnover costs and improves productivity.	Natural resource scarcity will increase energy costs from traditional sources; pivoting to innovation and renewables lowers costs over the long-term; enhanced corporate culture decreases employee turnover costs and improves productivity.
Innovation	New products, services, marketing, partnerships, leadership & corporate culture.	New products, services, marketing, partnerships, leadership & corporate culture, flexible; on-site childcare.	New products, services, marketing, partnerships, leadership & corporate culture.
Risk Mitigation	Inclusive vision is less likely to be myopic; value chain becomes more resilient to shocks.	Inclusive leadership focuses on the long-term, taking fewer short-term risks.	Resilient supply chains lead to fewer price shocks.
Regulatory mandate	Board diversity goals, equal employment requirements, stakeholder preferences.	Board diversity goals & quotas, equal employment requirements, stakeholder preferences.	Lower taxes, higher subsidies, greater grants & partnerships.
Reputation enhancement	Diverse representation in management and leadership builds long-term trust; long-term trust among all stakeholders grows brand, revenues and opportunity.	Diverse representation in management and leadership builds long-term trust; long-term trust among all stakeholders grows brand, revenues and opportunity.	Visionary leadership & diverse investments build long-term trust; long-term trust among all stakeholders grows brand, revenues and opportunity.
Example companies	Lowe’s, Apple, Nike	Nestle, Danone, Natura	Unilever, ING, Tesla, Ford, Firmenich

Table 1.

This table shows how the six business case drivers can be applied to three of the most significant social movements. Guidance is provided as to how managers can implement these drivers and how other stakeholders can benefit from these drivers. Examples of companies using these drivers to address these social movements are provided.

6.2 Economics, wellbeing and 2020

It is worth remembering that “economics” is not about money; economics is about resources and allocating society’s natural and human resources in optimal ways. Money is merely a currency that helps us to establish an exchange rate for trading different resources. Having 100 luxury vehicles does not matter if we cannot trade them for dinner, housing or some type of utility. We like money because it enables acquiring resources that are important to us; but it should be those resources that we ultimately want, not the pile of money.

When Covid-19 became a pandemic in early-2020, many societies around the world went into lockdown to limit the possible spread of the virus. And when the societies went into lockdown, much economic activity stopped. For a few months, most developed economies were in an odd stage of suspension; we were not producing much, individually or collectively. We had become completely dependent on integrated economies that relied on trading resources with others to meet our daily needs. Economic growth, or an increase in the resources we have to allocate among society’s citizens, depends on coordination between different people to trade resources. But economic growth also depends on production that utilizes natural and human resources to create more valuable and useful resources. All of this stopped when Covid-19 hit. And, just over a year since Covid-19 first changed our lives, societies are still trying to figure out how to adjust our actions to best grow our micro- and macroeconomies.

• When should schools re-open? How should schools re-open?

• Will work-from-anywhere become permanent? Is it safe to return to the office?

• When can I travel again? When can I see my family again?

Figuring out how businesses proceed involves an assessment of the short-term and long-term benefits and consequences of any decision. This is the implicit decision everyone makes every time they make a personal or business decision. When we buy milk or eggs at the market, we are implicitly saying that having those items makes our lives better more than having the money we needed to buy them (and, similarly, more than the labor, effort or other resources we gave up acquiring the money needed for the milk and eggs). This discussion of trade and resource allocation is simple because we think we know the precise costs of such decisions and we know how much we benefit from those decisions. But most decisions in life – especially those involving communities of people – are rarely this simple and easily understandable. We do not want our children and teachers to get sick (or worse), but what is the loss to society over the next 20+ years if we sacrifice 10–20% of our children’s education today? Nobody knows the answer to this question.

Yet this question is typical of the types of economic decisions that business, community and government leaders will be forced to make in the future. Is this an issue of corporate social responsibility? Is this an issue of increasing profits? Is this an issue of creating economic value? Of course, it is all of the above. Every decision any business ever makes is all about people, society, prosperity, well-being and money. Businesses choosing to strategically invest in people and society will continue to determine the prosperity and well-being that we see in the future, just as it always has.

7. From corporate social opportunity to corporate social responsibility

The turmoil of 2020 presented many challenges for companies as they tried to create economic value; but the events of 2020 also presented many corporations with social opportunities that might lead to economic value creation. We refer to this as corporate social opportunity, or how companies respond to economic and social shocks in the short-term. Examples of corporate social opportunity include adding women to a board of directors in response to the #MeToo movement, creating a new Chief Diversity Officer in response to Black Lives Matter or football teams around the world paying respect to health care workers who led the fight against Covid-19, without a long-term strategy that integrates those actions.

To be sure, capitalizing on corporate social opportunities is not necessarily wrong or bad; that’s not the issue. The issue is more about authenticity, strategy and impact. Do the female directors have the same power, authority and ownership as the longer-serving males or do they just meet a quota? Is the Chief Diversity Officer granted all of the power and resources she needs to exert true change and leadership or is the creation of the position just for public relations? And what message are those football players if, a few hours after paying respects at the beginning of a match, they are posting photos of a house party that is clearly violating all of the Covid-19 protocols that the health care workers want us to follow? What is the message they send when they stop kneeling before matches?

From a strategic perspective, corporate leaders need to anticipate and plan for what they will do when the next social moment impacts their business models. Will they abandon these previous efforts and choose to ride the momentum of this window of opportunity? Doing so may create very short-term profits, but potentially at the expense of long-term strategy and at the expense of many valuable stakeholder relationships. Corporate social opportunity is a more expansive application of greenwashing to a broader universe of environmental, social and governance issues – and it can destroy enormous economic value.

CSO views opportunities through a short-term narrow window, while CSR is more embedded into a company’s long-term strategy, culture and operations. Thus, the crux of our argument is that while it may be tempting for companies to capitalize on short-term opportunities instigated by social shocks, true and sustainable economic value is created over the long-term through a company’s strategy, culture and operations.

Thinking and acting beyond corporate social opportunity is important for all firms, but it most critical for entrepreneurs and small businesses who have severely constrained resources and limited time – where being successful in the short term may be the difference between success and failure of the business. The costs of wasting resources to chase fleeting moments are magnified for small businesses. But so are the benefits of authentically integrating the dynamics of stakeholders and mission into strategic plans. What will these businesses lose if they do not authentically develop strategic plans that integrate the needs and desires of all stakeholders into their strategies? For too long, businesses have ignored the S in ESG as a unique creator of economic value. But we know that all economic value comes from people and how businesses enhance their lives and their wellbeing. Focusing on creating value for stakeholders will continue to be the secret to surviving future economic shocks that arise from social movements.

8. Discussion and conclusion

Corporate social responsibility is not a choice. All economic value ever created by any firm has been generated through its stakeholders. These stakeholders – people – all have individual preferences and values. These stakeholders, including customers, employees, investors and suppliers, only choose to work with any firm because that firm creates value for them or makes their life better. When enormous shocks to the social landscape occur, such as Covid-19, Black Lives Matter or MeToo, every firm is forced to rethink how it engages with stakeholders and how it will create value.

Some business leaders will view these shocks as opportunities to capitalize and extract rents. This is very dangerous; these windows of opportunity will soon close. Business leaders need to focus on long-term strategy and not just short-term opportunity in order to survive, thrive and maximize value. Peloton is the perfect example of a company struggling to see beyond the short-term Covid-19 opportunity; Tesla is an example of a company incorporating the confluence of environmental, social and governance issues into its long-term strategy.

In this chapter, we have offered practical solutions for business leaders to use to develop such a long-term strategy. We have provided six rules that all leaders should follow move beyond short-term opportunities towards long-term social responsibility: ignore sunk costs, embrace new stakeholders, nothing is intangible, culture always matters, focus on creating positive externalities and profit only happens because of people and the planet. To help operationalize these rules, we have provided 6 drivers to the business case for investing long-term that can be directly connect to the firm’s income statement and cash flows: investing in CSR and ESG can create new market access, can improve operating efficiency, can help mitigate cash flow risk, can address regulatory mandate, can lead to innovation and can enhance the firm’s brand and reputation. Following these 6 rules and building a strategy around these business case drivers will be the key to creating value through social dynamics.

So far, the decade of the 2020s has been the decade of the S in ESG; as the Social component of an ESG philosophy becomes more and more important, business leaders will need to think more creatively about how to create value in the future. The key to success will be to focus on the long-term and not be infatuated with short-term windows of opportunities. When these windows close, profits will cease and economic value will go away. By following the frameworks, rules and business case drivers outlined in this chapter, business leaders can move beyond a view of short-term corporate social opportunity and towards a strategy of long-term corporate social responsibility.