Corporate Social Responsibility: Dealing With Political Exposure

Corporate Social Responsibility: Dealing With Political Exposure An Avenir Suisse Seminar June 10, 2008 Fred L. Smith, Jr., President Competitive Enterprise Institute www.cei.org

CEI’s Values Based Communications Project Our Challenge: Make Good Policy Good Politics Our Question: Just because we’re right, do we have to lose? CEI’s communication work suggests the answer should be a resounding NO!

The Vulnerability of Business Capitalism creates a massive middle class Produces entrepreneurs and intellectuals Intellectuals criticize (envy) and de-legitimize entrepreneurs Culture grows skeptical of business, support for government intervention grows. Wealth creation suffers, individuals suffer.

Corporate Social Responsibility “ Going beyond those steps essential to sustainable profitability – the firm seeks to advance a variety of non-economic goals”

CSR’s Unattainable Goals CSR focuses on areas where society falls short of perfection. Utopian intellectuals want perfection a“Safe” world, rather than “safer” world a “clean world” rather than “cleaner” world a world without income inequalities – rather than world with greater opportunities

CSR’s Key Weakness Fails to understand the moral and intellectual value of the firm: A Specialized Institution to meet some specialized need of mankind. Focused – not diffuse. Not trying to do everything – trying to do something well. Creates wealth – and evolves the knowledge necessary to do that in a sustainable way.

Problems of CSR Approach Metric Loss: Seeking to advance multiple goals means doing nothing very well Weakens ability to acquire the specialized knowledge critical to progress Loss of diversity: CEOs and influential players in the political world—not the citizenry--make the decisions. Weakens democracy: CSR aggregates decision-making and threatens democratic capitalism.

CSR Potential Responses Apologize Legitimize

The-Two Worlds Problem Private World: Business must communicate in the private world. This audience includes customers, suppliers, employees, shareholders, “fence post” neighbors Political World: Business must communicate in the political world. This audience includes the citizens, influential decision-making elites, and media

The Two World Challenge Nexus Community The General Public The General Public The General Public The General Public Fencepost Neighbors Suppliers Employees Customers Shareholders Business

The Two-Worlds Communication Challenge When you talk to those in the private world – what are you saying to those in the political world? Your advertisements and political messages must communicate to both worlds—make sure you know what they are hearing.

Addressing “Joan Consumer” Business already communicates benefits to the private world—“Joan Consumer.” Consumers recognize these benefits and are willing to accept reasonable solutions when something goes wrong. When speaking to the private world, an educational communication strategy can be effective.

Addressing “Joan Citizen” Approaches effective in reaching the private world often are inappropriate in reaching the political world. Education in the political world doesn’t work on a public that is “rationally ignorant.”

Influencing Public Opinion The Rational Ignorance Problem People are busy, spend little time acquiring information about things they can do little about Yet, people will have opinions and these will be important But, these opinions will rarely be based on facts or information Therefore, the rational instinct of business to educate the public will not work

Rational Ignorance In the public policy world, people aren’t stupid because they’re stupid! They’re stupid, because they’re smart! So, when we seek to make people smart, we’re being stupid!

Business’s Dilemma Rationally ignorant people influence important policy issues, which affect businesses’ bottom line. Rather than using “the facts,” these citizens focus on how a how they perceive a decision might serve/hurt their general values.

Values-Based Communications The Political Communications Challenge Businesses need to speak to public values rather than focus on educating rationally ignorant citizens about “the hard facts.” To re-legitimize business, firms must appeal to Joan Citizen on the basis of how their products advances key public values: fairness, justice, freedom, prosperity. An alternative (bad) approach: apologize!

Communication Targets Here’s why you benefit from our products Here’s why society benefits from our product Here’s what happened & what we’re doing about it We’re Sorry! Private World Political World Positive Negative

Apologies Don’t Work! You can’t apologize your way to respect or to profitability Variants of Apologetics Denial - The Pharisee Bribery - The Mafioso Martyrdom - Captain Hook

Examples: Apologetics vs. Legitimization The Chemical Manufacturers Association The American Plastics Council

The Apologetic Approach Addresses the critics and the problems they raise Ignores all benefits Extends approach used to address concerns of private world. Fact-based communication strategy Communicates effectively to CEOs, but not to the targeted citizenry.

The Legitimization Approach Extols benefits of product – JOAN CITIZEN Focuses on safety, health – Shows how products make the world fairer, more egalitarian. Analogous to consumer advertising Values-based communication strategy

CEI Focus Group Findings Apologetic Ads Raise more doubts than they resolve Viewers focus on unrealized risks – not that these risks are being reduced Legitimizing Ads Raise awareness of virtues Makes people concerned about over-regulation and potential harm this sector (and eventually society)

Free-Rider Problem The “Reverse Halo” reality facing business A firm is vulnerable if its competitors are vulnerable.

Attitudes Towards Oil Companies and Oil Industry -60 -40 -20 0 20 40 60 80 100 '81 '82 '83 '84 '85 '86 '87 '88 2Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1990 1991 1992 1993 1994 1995 Net Favorability (Percent favorable minus percent unfavorable) Chevron Exxon Mobil Shell Texaco Industry Chevron Exxon Mobil Shell Texaco Industry 1989 Source: Public Opinion Monitor. Survey of adults in Chevron's major U.S. markets. Sample size for current data is 2,400 telephone interviews per year (1,200 per region) "Total" is weighted by total population.

Three Case Studies CSR in the Biomedical Industries CSR in Financial Services CSR in Consumer Goods Industry

CSR in the Biomedical Industries Regulators and activists place all focus on side effects of drug rather than value of drugs. In the political world, “victims” of new drugs are highly visible, victims of drug lag are invisible. Results Deadly overcaution Drugs with value are being removed from market Incentives for innovation are declining.

Is FDA too fast or too slow? CEI's survey of medical specialists found that: over three-quarters, 76%, believe FDA’s approval process is too slow; 60% believe FDA hinders their use of new therapies; 73% believe FDA approval delays hurt patients; 70% favor changing the law to give physicians access to unapproved therapies if they carry a warning about their unapproved status.

EU Challenges Increasing medical regulation is leading to less research and development in the EU. R&D is moving to the United States and Asia, which harms the EU economy and threatens to deprive its citizens of valuable medical treatments.

UK’s National Institute for Health and Clinical Excellence (NICE) Allows government officials to make the expected cost of a drug a factor in the approval. Means regulators can decide that an incredibly effective life-saving drug is too expensive and should not be approved! Blocking drugs because they are initially expensive, simply prevents them from becoming affordable, life-saving options in the future. This not so NICE idea appears to be spreading in the EU!

Biomedical Firms: Speak Up Biomedical firms need to communicate the essential value they have on public health and quality of life. Ask Joan Citizen to consider what the world would be like without innovation in pharmaceuticals?

Communicating the Risks of Stagnation What cures or new treatments--currently on the verge of discovery--might be blocked? What cures might we forgo? What would the world be like if we had stopped innovation just a couple years ago? How many of the products we use today would not be available?

CSR in Financial Services Foreclosures and Credit Crunch A free-market in financial services is facing all the blame for current problems. Yet significant state interventions are key contributors to the problem. Media ignores the government role and focuses on victims of “an under-regulated market.” Result: re-regulation measures are being proposed that promise to be costly.

Regulatory Distortions Risks were underestimated because government agencies only allowed credit ratings based on measures from two firms (Moody’s and S&P). Government prevented mangers of mutual funds/other saving vehicles from selling short in the sub-prime market, suppressing important market signals. Accounting rules both under and overestimated risk because of government created monopolies on accounting standards.

Defense needed from the Financial Sector Sympathies abound for those in unfortunate situations, and even for irresponsible parties. Industry depicted as greedy and focused on taking advantage of people. The lending industry has not communicated the other side.

Egalitarian Values of Flexible Lending The vast majority of borrowers are better off. Home ownership rates soared in the U.S. and U.K., and foreclosure rates in the U.S are still only around 2 percent. Black and Latino home ownership rates also soared.

Innovative Programs Empowered Many Innovations enabled people to use their homes for wealth-building. Home equity helped pay for kid’s college and business startups. Financial institutions should champion and showcase financially savvy consumers and entrepreneurs who benefit from these innovations. Remember Muhammad Yunus was honored for providing microcredit, while U.S. lenders are bashed for making credit available to the poor

CSR in the Consumer Goods Industry I. Chemicals and Plastics Greens Attacks Based on Irrational Fears Bottled water: Bisphenol A, climate footprint, “too much trash” concerns. Vinyl Shower Curtains: Removed from Target and other stores because of phthalates Plastic Bags : Chemicals allegedly dangerous; also not easily recycled And many, many more.

Growing European Chemical Regulation REACH: Europeans applying precautionary principle to many chemicals and products, which is likely to produce bans and regulations of many valuable products. NanoReach regulation on the horizon

CSR in the Consumer Goods Industry II. Computers and “EWaste” RoHS Directive: Banned lead and other substances that help make computer systems effective. Standards may produce serious computer failures and subsequent economic problems. May have environmental consequences that are negative: bans on computer flame retardants may increase incidence of fires!

Industry Responses On Both Sides of the Atlantic: We are not that bad Most industry groups eventually supported some form of a REACH/ROHS program. Too many businesses concede premises of precautionary principle. Too few point out the serious dangers of undermining innovation and technology. The morally praiseworthy values of chemical products are not conveyed often enough. Too many chemical and chemical related firms do not speak up in their own defense.

Precautionary Principle You are guilty until proven innocent! If you don’t defend yourself—indeed unless you take the offense—you will be automatically considered guilty!

Consumer Goods Industry: Communicate the Value of Goods Need to follow the American Plastics Council Model. Rather than educate, show the utility and necessity of your products. Examples: Bottled water: There in an emergency, convenient, healthy alternative, tastes great, and consumers choose it freely. Vinyl: Saves energy, lasts a long-time, makes energy efficient windows, affordable piping; is both economically and ecologically superior to alternatives.

CSR in the Consumer Goods Industry III. Automobiles under Attack The automobile has long been under attack by environmental groups as “wasteful.” Recent anti-auto criticisms have expanded related to: Energy Efficiency Global Warming Sustainability Resource Use

The Auto Industry Under Attack In a market economy, automobility is offers a critically important form of transportation. For many people, mobility means freedom.

The Auto Industry Under Attack In a market economy, automobility is offers a critically important form of transportation. For many people, mobility means freedom. Yet in the political world, automobiles are seen as a problem.

Times Have Changed THEN “ Mr. Goodwrench” used to say: "It's Not Just Your Car; It's Your Freedom" NOW

Remind Joan Citizen Automobiles offer critically important values for families. They offer quick transportation in an emergency They transport our food They help keep our economy running One of the greatest advancements in human history Automobiles represent the essential freedom of mobility. Allows employment flexibility. Makes rural communities more sustainable.

CEI study: Cars, Women and Minorities Highlights the liberating power of the automobile for traditionally disadvantaged groups. Lower income groups and minorities need automobility because they tend to live in rural areas. As automobility is increasingly attacked, it is we highlight the disproportionate impact on these groups. Ideas in Action: CEI’s Value-Based Communications Products

Corporate Social Responsibility: Dealing With Political Exposure

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