The Case for Corporate Citizenship

A corporate conscience is compatible with profit and other values not so easily measured.

learn more about Igor Makarov

By Igor Makarov

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Is it possible for corporate conscience to coexist with large returns? Or is the idea of a profitable, socially conscious company a contradiction?

This may well be the corporate dilemma of the digital age. Modern corporations are responsible for increasing shareholder returns and maximizing profit during each reporting period. Because of this duty, some may argue that corporations, by necessity, cannot afford to look past their bottom line. Anything else, these advocates often argue, is just extraneous to the mission of profit.

But in all honesty, this way of thinking is not only misguided but also short-sighted and harmful. In an age of social media, where information flows faster than ever before, it's actually the case that being a good corporate citizen pays out dividends --both to the corporation itself as well as society at large.

In short, acting in a socially responsible manner is actually good for business.

Related: Why Should Your Business Care About Social Responsibility?

What is corporate citizenship?

A corporations is, in a legal sense, a person. It can own property and assets, and in the case of wrongdoing, be held accountable in a legal forum. In many nations, the corporations-as-citizens idea was passed to bestow rights on businesspeople. By seeing them as living entities, lawmakers gave them rights from abuses such as unreasonable search and seizure.

Corporate citizenship, on the other hand, is the notion that corporations have obligations to society as a whole, not just to investors, employees or customers. These responsible companies are socially and ethically minded, usually taking on worthy causes from environmental issues to community concerns.

There is a spectrum of corporate citizenship. At the most basic level, companies may comply with health and safety legislation but have little in terms of leadership, vision or meaningful goals. At the next stage, companies develop basic policies that go slightly beyond legislation and task managers with enforcing these rudimentary procedures. At its most integrated, good corporate citizens adopt ethical and social responsibility in every part of their business and model, allowing it to fuel sales growth, expand to new markets and drive revenue.

Related: When Does Being Socially Responsible Hurt Your Business?

Does corporate citizenship help your bottom line?

Most companies are trapped in the first stage, likely due to inflexible mindsets as well as a too-common misperception that social and ethical responsibility will hurt profits.

A recent study by Bank of America yielded mixed results. Researchers found that tech, healthcare and consumer goods companies that scored highly on environmental, social and governance (ESG) underperformed their peers, at least in the short term. At the same time, however, the study also found that companies with high ESG scores were more stable and provided higher future returns in every industry. Yet the study also found that the myth of costly corporate citizenship is still alive: Most investors disregarded ESG criteria when investing, believing that such measures were meaningless.

The BoA study is flawed in one way: It is pointless to judge a company by its ESG score because ESG is fatally flawed. For one, ESG criteria lumps in governance, which refers to how an organization is managed. Why, as one investor writes, is management included in a standard that determines corporate responsibility? This isn't exactly relevant to whether a corporation incorporates sustainability into its business model or outfits its facilities with renewable energy.

Indeed, when studies leave out the governance part of the equation, they conclude that socially minded organizations do perform better. One 2011 study found that there is a significant, positive relationship between ethical behavior and financial performance, including greater profitability, improved efficiency and cheaper capital.

Others have pointed out that in times of crisis, a firm's good reputation can help insulate it from further losses. For instance, in the 1980s bottles of Tylenol, the popular pain reliever, were found to have been tampered with. Johnson and Johnson, the parent company, saved the product from permanent stigma by voluntarily recalling the product. What could have been a disaster actually bolstered J&J's strong ethical reputation.

On the other hand, Nike is known for sweatshop labor and has suffered serious losses due to boycotts and negative publicity. While the backlash originated in the early 2000s, the problem seems to be ongoing. Just last year, Nike faced a series of student-led protests in cities from India to Latin America to the United States.

Related: Politically Charged Boycotts Explained, From Uber to Under Armour

What do consumers say?

Beyond shareholder returns, corporate responsibility has ancillary benefits that can decrease the cost of doing business. For one, a strong, ethical reputation can reduce staff turnover by up to 50 percent, saving money and time that would otherwise be wasted on hiring and training replacements.

The reason for this lies in the millennial psyche. Survey after survey has found that millennials prioritize environmental and social responsibility above other traits. This is true for both employment and consumption: 62 percent of millennials would take a pay cut to work for a socially responsible organization, while 81 percent expected companies to pledge their commitment to corporate citizenship.

But it's not just millennials; polling giant Nielsen found that 72 percent of respondents aged 15-20 (Generation Z) are willing to pay more for products from companies committed to positive social and environmental impacts. This was also true for older populations: 51 percent of those aged 50-64 were willing to pay extra, an increase of seven percentage points from 2014.

Related: Corporate Social Responsibility Can Actually Be a Competitive Advantage, So Where's Your CSR Program?

Case study: Danone

To further dispel any lingering doubts that companies cannot be both responsible and valuable, look no further than Danone, a French multinational food corporation.

First, Danone is profitable. In 2017, the company achieved an impressive 14.2 percent growth and is expected to continue this trend into 2018. Its shares remain a perennial favorite on the "buy lists" of many investment observers, thanks to its impressive dividends and strong, long-term sustainability.

But more than that, Danone remains an impressively ethical organization, especially in terms of how it treats employees. For one, the company has a strong parental policy, allowing birth parents who are primary caregivers to take up to 18 weeks of fully paid leave, while adoptive parents can take 14 weeks. In addition, Danone provides generous parental benefits, including time off for prenatal appointments, lactation rooms for mothers, back-to-work programs and flexible work arrangements.

This spirit extends to their external initiatives as well. In 2017, Danone issued a 300 million euro bond ($352 million) to support projects with positive social impact, including investing in small and medium-sized enterprises (SME) in healthy foods; supporting responsible farming and agriculture; and pledged to avoid GMOs in foods.

Further, Danone purchased WhiteWave Foods in 2016, a large producer of health foods such as soy and organic milk. From this merger, Danone North America was born: As a benefit corporation, Danone North America is dedicated to creating positive impacts on society by design, with progress measured by outside, third-party entities. Today, Danone North America is the largest public benefit corporation in the United States and has undertaken efforts to invest in soil health and sustainable agriculture and helped incubate foodtech startups.

Companies like Danone demonstrate the fallacy of the age-old myth that business is a zero-sum game, where the shareholder's win comes at the expense of everyone else, be they consumers or the environment. In truth, robust corporate citizenship is critical for profit, especially in today's increasingly connected, information-heavy world. To attempt anything else is to risk boycotts, rejection by society and, ultimately, a slumping bottom line.

Igor Makarov

President of ARETI International Group

Igor Makarov is founder and CEO of ARETI Group, one of the largest, privately-owned holding corporations in Europe. Makarov has worked on various projects, including apartment complexes, commercial developments, resorts and stadiums across Europe and the United States.

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